Vedanta Limited
Q2 2022 Earnings Call Transcript

Published: 30 Oct 2021

[Operator:]

Good day, and welcome to the Vedanta Limited Q2 FY22 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes . Please note that this conference is being recorded. I would now like to turn hand the conference over to Mr. Warren Kapoor from Vedanta limited. Thank you and over to you, sir.

[Varun Kapoor:]

Thank you operator and good evening everyone. This is Varun Kapoor and it's my pleasure to welcome you to the Vedanta Limited earnings call for Q2 FY22. So we have with us today the management team represented by Mr. Sunil Duggal, who is our Group CEO, Mr. Ajay Goel, Group Acting CFO; Mr. Arun Misra, CEO of Hindustan Zinc; Mr. Prachur Shah, Deputy CEO

[Operator:]

Excuse me, members of the management, we're unable to hear your audio. Members of the management, are you able to hear me? As there's no response from the management's line, I would request all the participants to stay connected while we try and reconnect the management. Requesting all participants to please stay online while we have the management reconnected to the call.

[Varun Kapoor:]

Yes, Jennifer, can you hear us?

[Operator:]

Go ahead. Yes.

[Varun Kapoor:]

All right. Ladies and gentlemen, sorry for that. I think we had a bad connection. So just again, just like to welcome everybody to the Vedanta Limited earning call for Q2 FY22. So we have with us management team, led by Mr. Sunil Duggal, Group CEO, Mr. Ajay Goel, Group Acting CFO; Mr. Prachur Shah, Deputy CEO of Oil and Gas; Mr. Arun Misra, CEO for Hindustan Zinc; Mr. Rahul Sharma, Deputy CEO, Aluminum; and Mr. Sauvick Mazumdar, CEO for Iron & Steel Business So with that, I would like to hand it over to Mr. Duggal to take us through the presentation.

[Sunil Duggal:]

Thank you, Varun. Good evening, ladies and gentlemen, and welcome to the Vedanta Limited second quarter earnings conference call. This quarter witnessed a recovery in Indian economy backed by increased mobility, declining new COVID cases and scaled up vaccinations. Domestic demand for base metal gains stem from robust CapEx spending by the government. Progressive policies of government will provide further impetus to demand for metals like steel, aluminum, copper, zinc, and lead. We expect economic conditions to improve further during festive season this quarter. Commodity prices continue to surge due to widening demand/supply imbalances. Strong recovery in advanced economies supported by elevated household consumption, public spending and acceleration in mechanized trade, along with persistent energy crisis is likely to keep metal and oil and gas market buoyant in quarter 3. Vedanta continued its strong growth momentum this quarter, reporting its highest quarterly and half yearly revenue and EBITDA. We witnessed steady volume performance across business segments and sustained margins benefiting from strong commodity prices, despite a challenging cost environment. The focus on prudent capital allocation and deleveraging continues to ensure a robust balance sheet and strong liquidity position. We continue with the track record of rewarding shareholders with an interim dividend of INR6,855 crores, amongst the largest in corporate sector. Vedanta is uniquely positioned to benefit from strong commodity prices, to deliver long term sustainable value basis. Our diversified world class natural resource portfolio is supported by compelling thought leadership, long lived assets with exploration upside and strong management team with a track record of delivering growth. Our competitive positioning in India and global markets leaves us well placed to benefit from growing Indian economy and favorable regulatory environment. We are committed to delivering consistent growth, through capacity expansion, unlocking operational efficiencies through technology and digitization and targeted acquisitions. We are very proud to announce our renewed ESG Transformation Program in this call. Over the last decade, Vedanta has been working steadily to improve its performance on various sustainability and ESG metrics. This journey has been -- has seen us achieve a ranking of 12 out of 75 in Dow Jones Sustainability Index. While not leaders yet, these efforts have brought us within line of sight of top global performance. We now aspire to be among the best performers. The last few months we have been working very hard to develop a comprehensive strategy on ESG. For this, we have brought on board various experts to guide the process. We have also created ESG Advisory Board mentored by expert with many years of deep ESG experiences, working with the global natural resource measures. We have created a dedicated ESG structure to ensure this transformation is sustainable. This includes constituting a Board level ESG Committee, multiple ESG Forum at group and BU level for decision making, and communities of practice at the SBU level, to drive implementation. We are building world class enablers to help move the needle now. These include an ESG Academy to train our leaders. This is a globally unique initiative, discussing creation of an ESG venture fund to harness external innovation, discussing diversification opportunities through green business, build program, and creating an ESG Center of Excellence for regular monitoring and continual improvement. The culmination of all these efforts is to develop our new ESG strategy. This strategy follows the purpose-driven approach, that Vedanta has always aspired. Staying close to our roots, we have taken our organization tagline, Transforming Elements and modified it to Transforming For Good. This is the purpose statement for the entire organization, ensuring that ESG is henceforth embedded in the way we do our business. Supporting our purpose, we have created three pillars, transforming communities, transforming planet, transforming the workplace. These pillars are further indicative of Vedanta's steadfast commitment to become the best-in-class company, and at the same time, ensure that our communities and larger society benefit from our existence. These pillars are supported by nine aims that will serve as guideposts and milestones in our journey. These aims have specific quantifiable targets that will keep us on track on our progress. These aims are important, and I would like to go over each one of them. Aim 1, 2 and 3 under transforming community commit us to keep community welfare at the core of our business decisions, empowering over 2.5 million families with enhanced skillsets, uplifting over 100 million women and children through education, nutrition, healthcare and welfare. Aim 4, 5 and 6, under transforming the planet commit to us net carbon neutrality by 2050 or sooner. This is a big commitment. And I will talk about in the next few slides. Achieving net water positivity by 2030. Hazira has already become 2.41 time water positive. Now we want to ensure the rest of the businesses does so soon. Innovating for a greener business model. This encompasses our previous ambition of zero waste, zero discharge and embraces additional concepts such as circular economy, green Business diversification, like renewable power, or hydrogen. Aims 7, 8 and 9 under transforming the workplace permit us to prioritizing safety and health of all our employees. This is our commitment to zero harm, promote gender parity, diversity and inclusivity, and adhere to global business standards of corporate governance. This includes ensuring our senior leadership have KPIs that incorporate ESG performance, participation of the Board in ESG discussion. Lastly, I want to talk about our plans around climate change. With COP 26 round the corner, and the entire world talking about it, it is an opportune time to announce these commitments. Climate change is a real threat to humanity. Every year, we see an increasing number of natural disaster wipe out and destroy the lives of thousands of people. The impact on the larger natural word is equally devastating and no longer be ignored. Scientists tell us that we have to limit global warming between 1.5 to 2 degrees Celsius for the planet to stand a chance to exist. And we want to achieve this in the next 30 years. In this context, large business houses such as ours, have not just a fiduciary responsibility but a moral responsibility to act. I believe our clients made commitment to do so are a step in the right direction. Vedanta is making 10 commitments to stop our impact on the climate. These are, one, net zero carbon by 2050 or sooner. Two, use 2.5 gigawatt round the clock RE and reduce absolute emission by 25% by 2030, from 2021 baseline. Pledging $5 billion over the next 10 years to accelerate transition to Net Zero. This is a big and significant commitment. No addition to coal-based thermal power plant in our portfolio. And we will use coal-based power only till the end of our current power assets. Decarbonize 100% of our light motor vehicles by 2030 and 75% of our mining fleet by 2025. Accelerate adoption of hydrogen as fuel and seek to diversify into hydrogen fuel are related businesses. Account for Scope 3 emission of our businesses by 2025. These are the missions that lie outside our boundary. With our business partners, logistic providers, business travelers, etc. Work with our supply chain and long term Tier 1 suppliers to submit their ESG reduction strategies by 2025, and aligned with our commitment by 2030. Disclose our performance in alignment with the requirements of the task force on climate-related financial disclosure, TCFD, a requirement by the investor community. We have already released our first TCFD report in March 2021. Help communities adapt to the impact of climate change through our social impact and CSR programs. Gentlemen and ladies, these are bold commitments and will transform the company, unlock many business opportunities and prevent the planet from warming to catastrophic levels. You will be hearing a lot more on this subject in the coming days, and look forward to active engagement with all of you on this. Now coming to our HSE performance for quarter 2, it is with sadness that I inform you that three employees of our business partners lost their life while they were at work on -- in ESL location for service related activities. A detailed investigation using ICANN methodology has been carried out and we are strengthening controls to ensure similar incidents are not repeated at any of our sites. In the past, I've spoken about multiple programs and interventions that we have put in place to ensure that we improve our safety performance. To ensure these programs realize their goals, we are expanding our leadership relationship with DuPont Sustainable Solution to help transform the safety culture at ESL, and aluminum and power businesses. We are also engaging with global experts to strengthen our critical risk management system. Now, coming back to our business performance and business verticals, first on aluminum, we have yet again witnessed a record performing quarter with highest quarterly alumina and aluminum production. Alumina production was at 11% up Y-o-Y, 6% Q-o-Q. Aluminum was up 21% Y-o-Y and 4% Q-o-Q. Aluminum cost of production was impacted by higher input commodity prices and power costs. But despite these headwinds, we have achieved high EBITDA margins of $1,100 plus supported by favorable LME prices. In line with the changing market scenario and input cost inflation we are revising the quarter guidance to $1,675 to $1,775 per ton. However, we are confident that $150 to $200 cost saving will come post-completion of expansion at Lanjigarh and Aluminum smelter, which will move us closer to our aim of becoming one of the top global leader in sustainable Tier 1 cost structure. For the Lanjigarh refinery expansion from 2 to 5 billion tons per annum, we have received environment clearance now for 6 million tons and site mobilization is on track, and the project progress is also on track. Turning to Zinc India, this quarter achieved highest MIC production since underground transition, backed by higher ore treatment and improved recovery, partially offset by slight dip in grid. Metal production in Q2 was down due to planned maintenance shutdown, but ensured smelter readiness to deliver higher volumes in coming quarters. Integrated silver production was down 5% Q-o-Q, in line with lead production. With focused dynamic planning, technology-assisted mined plan to improve grades and equipment reliability, we are fully confident of achieving the set targets for the year. COP was at $1,124 per ton in quarter 2, impacted by higher input commodity prices and mine development. Considering higher input costs, we are revising our cost guidance upward to below $1,075 per turn. The zinc international business is well-positioned for long term value creation. This quarter Gamsberg produced 39 kt of MIC, up 10% Y-o-Y, but down 17% Q-o-Q due to challenges in plant equipment. Completion of ongoing projects in October for debottlenecking our concentrate concentrator will ensure that plant capacity ramp-up and improving mill reliability. Project saw recovery enhancement by 5% and MIC improvement in December will start delivering results from quarter 3 onwards. And therefore we are confident of achieving the set targets for the year. COP in Gamberg showed a 10% rise Y-o-Y due to lower production volumes and commodity prices. Basis the changing business scenario we are revising our COP guidance to $1,200 to $1,300 per ton. At oil and gas, gross production for H1 was maintained at 165 kboepd, flat. The volume was impacted by natural reservoir decline in the fields, offset by increase in volume from new wells brought online, continued injection of polymer and gas ramp up. We achieved gas sales of 140 million scuffs per day in quarter 2, 17% up Q-o-Q. OpEx cost in the current quarter was $9.1 per barrel, a rise of 9% due to increase in polymer prices owing to oil price rally. However, crude oil prices further rallied during quarter 2, and touched high of $79 per barrel, which supported our margins. In H2, we'll focus on infill well drilling to maximize near term volumes. In our OALP blocks 15 wells drilling program is ongoing with six wells drilled till date. We have notified a success in LA Block, Jaya-1 discovery in this quarter, which is being evaluated. In line with commodity headwinds, we are revising our OpEx cost guidelines to $9 per barrel, considering the natural reservoir decline, revising the guidance of volume to 165 to 175 kboepd for FY22 Three key projects, ASP, for enhanced oil recovery, exploration and shale will be driving production volume growth, mid to long term and various initiatives are going on in each of these. For ASP, a more modernized approach is being adopted to accelerate injection and first oil, while undertaking end to end contracting for overall execution. On exploration, the focus is on drilling across our OALP and PSC blocks and look for early monetization. For shale we have impaneled global partners to study and execute pilots to establish our shale potential. Now coming to iron ore business, Karnataka saw highest half year production of 2.7 million tons, supported by key operational projects, increasing NSR despite grade barriers in Karnataka. We saw highest quarterly and half year hot metal production and value added business through productivity improvement initiatives, where quarter 2 margin was up 50% Y-o-Y, but down 32% Q-o-Q due to higher coking coal prices and iron ore prices. We are happy to announce the start of commercial production in our recently acquired Gujarat Sesa-Coke plant. We expect ramp up to full capacity by early quarter 4 current year. In steel business, that is Electrosteel, the hot metal production was up 11% Y-o-Y and 1% Q-o-Q. Saleable production was 293 kt for quarter 2, up 12% Y-o-Y and 1% Q-o-Q due to improvement of furnaces post-shutdown. The margin was down due to higher raw material prices, mainly iron ore and change in VAB mix. The VAB mix was at 67% in Q2, compared to 74% in Q1. Recently, as you may know, we have won two iron ore mines in Odisha, which will increase our raw material security and price stability. In H2 improvement in hot metal production is expected post-completion of debottlenecking of blast furnace 3. We are also upgrading our facility through automation and digitalization and various other productivity and effective health measures. Now coming to FACOR, FACOR is continuing its turnaround story and saw highest EBITDA margins in quarter 2 and H1. It achieved record ferrochrome production of 19 kt in quarter 2, in line with plant productivity enhancement by 10%. We also saw a record half year ore production through continuous operation of both the mines. However, quarter 2 ore production was down due to monsoon. FACOR is reviving its project for another furnace to increase production by 60 ktpa. This was a half done furnace. At the end now I would like to reiterate Vedanta's unique position to deliver long term sustainable value, to continue to focus on our strategic priorities and diversified asset base. I'm confident that with our renewed ESG journey, we'll be able to usher in a new era of sustainability leadership and be among the world's most respectable, responsible and renowned resource companies. With this, I would like to hand over to our CFO, Mr. Ajay Goel for the financial performance. Over to you, Ajay.

[Ajay Goel:]

Thank you. Thank you, Sunil, and good evening, everyone. We continued the momentum to better our quarterly best ever performance. And this is our third quarter in a row. This quarter has been our all-time high, revenue and profitability quarter with the lowest net debt-to-EBITDA ratio of 0.5x in recent few years. Operationally Aluminum division has witnessed highest ever quarterly aluminum production, in line with the post ramp up at Jharsuguda. Lanjigarh also delivered record alumina production. We delivered highest ever pig iron production in VAB and ferrochrome at FACOR. Zinc and oil and gas volumes has been though relatively muted. This quarter, we also rewarded shareholders very well with dividends of INR18.5 per share, totaling to INR6,855 crores. Some of the key highlights of the quarter are, highest ever quarterly EBITDA of INR10,582 crores up 62% Y-o-Y with an underlying margin of 40% being an industry leading margin. PAT attributable before exceptional items stands at INR4,644 crores depicting a very strong financial performance. ROC, return on capital employed at 26%. This is up 345 basis points versus last quarter Q-o-Q. Gross debt stands at about INR51,000 crores and with cash and cash equivalents of about INR30,650 crores showed a strong liquidity position on the balance sheet. Our net debt of INR20,389 crores is down by 26% Y-o-Y, which is almost INR7,230 crores, and with annualized net debt-to-EBITDA ratio of 0.5x, we continue to be lowest amongst Indian peers. Finally, robust total shareholder return without 6% dividend yield, plus stock appreciation in the previous quarter. We have the detailed income statement in the appendix. I want to decode a couple of items from that statement for you. Depreciation charge for second quarter was about INR2,118 crores higher by 9% Y-o-Y. Primarily it is due to project capitalization, at couple of businesses and higher ore production at zinc business. Quarter-on-quarter depreciation charge remains flat. The finance cost for the quarter was about $1,066 crores, down 10% -- down 19% Y-o-Y, and down 10% quarter-on-quarter, majorly due to lower average borrowings and gain on ASI bonds buybacks. The average cost for the quarter stood at about 8.2%. Income from investments for the quarter was INR579 crores, down 5% Y-o-Y majorly on account of mark-to-market movement and the change in mix of investments. And down by almost 20% quarter-on-quarter, again due to MTM moment and onetime gains that we recorded the previous quarter. The average investment income for the quarter stood at about 4.8% pretax on current portfolio. The normalized ETR stands at about 26% which is same as the previous quarter and is in line with our guidance. Normalized ETR, as you know, excludes any tax on exceptional items. I'll now move to EBITDA Bridge. EBITDA Bridge, Y-o-Y versus last year. So as you can see on the chart, in summary, the significant portion of EBITDA increase of almost INR4,000 crores from INR6,500 crores last year to about INR10,580 odd crores this year has been market or pricing driven, along with higher volumes at our aluminum business. However, this has been partly offset by higher cost and overall lower volumes primarily at our zinc business. In summary, the absolute EBITDA is almost a 1.6 times of the last year, same quarter. If you look at our EBITDA Bridge sequentially vis-à-vis the previous quarter, EBITDA for the quarter is higher by 5% quarter-on-quarter. As evident from the bridge, the market or the LME and various regulatory factors having positively impacted our EBITDA by almost INR1,600 crores. This is partly offset by input from rating solution majorly at aluminum, ESL and IOB businesses. On the operational sense lower volumes at zinc and iron businesses offset partially by aluminum, along with higher cost has negatively impacted EBITDA by 820 crores. Overall for EBITDA, the higher metal prices and input inflation remains overall themes, both Q-o-Q and Y-o-Y though with different managements, which at overall net margin level remains positive and bottom line accretive. Now, I move to next page on net debt Bridge. Net debt as on September 30, stands at about 20,389 crores. If you see the chart, our operations are very well positioned and generating healthy cash flows from internal accruals. In spite of payment of dividend in the previous quarter, by almost INR6,855 crores, the net debt quarter-on-quarter remains almost flat. And as I mentioned earlier, we have deleveraged by almost a $1 billion by INR7,230 crores Y-o-Y September to September last year. Moving on to the next page on the balance sheet. We remain focused on managing the balance sheet efficiently with a strong position of cash and cash equivalents of INR30,650 crores. The average maturity of term debt is about 3.5 years and with average borrowing costs of 8.2% for the quarter. I'm very happy to report that CRISIL has revised our outlook from stable to positive with double A minus rating. This is again a very welcome uptick. With net debt-to-EBITDA of 0.56, we are lowest amongst Indian peers by a long margin. Now on CapEx side, we continue to focus on organic growth across business portfolio. We reiterate our CapEx guidance of $1.1 billion for the full fiscal, where we are focusing on expanding capacities at Lanjigarh and BALCO and completion of various growth projects at oil and gas. These are key for volume growth in near future. So far as H1 is concerned, we spent about $0.3 billion, and we remain within our guidance range for the full fiscal FY22. Overall, second quarter has been excellent quarter on performance, and also on structural improvements. We delivered both profitability and deleveraging, rewarding shareholders very well, and with a rating outlook augmentation will leave a stronger balance sheet for the quarter. This sets us very well as we usher in the second half of the full fiscal. Thank you very much. And with that, I hand over to operator for Q&A.

[Operator:]

Sir, can we open the call for a Q&A session?

[Sunil Duggal:]

Yes, please go ahead.

[Operator:]

Thank you very much. Ladies and gentlemen, we will now begin the question-answer session. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Amit Dikshit from Edelweiss. Please go ahead.

[Amit Dikshit:]

Yeah, good evening, everyone, and thanks for taking my question sir. Congratulations for good performance. First question is on your ESG initiatives, pretty impressed by your target to reduce emissions, that 2031 baseline. I mean, not many companies in the world have done that. I wanted to ask three quick points over here. One is that how -- what about your aluminum power which is basically powered from thermal. And this is basically the highest kind of coal, I would say footprint that you -- carbon footprint that you have. And there is nothing, no alternative that you have essentially at site. How are you going to reduce that? Second is about bauxite red mud. What about that. Regularly we have seen that they have been, I mean higher than the peers. So what are you going to do on that front? Then we talked about $5 billion of spend which is a huge spend. Are you expecting some government support over there? That is my first question.

[Sunil Duggal:]

So thanks for that. I'll go one by one. I'll go by reverse. So we have made our commitment of $5 billion investment. So it will come in various forms. One of the example I would say is that we would like to either have a company or a standalone Group company. We will definitely work out a structure where we want to go about it. But the intention is that we would like to create a separate vertical who could focus really on the renewables and they could also arrange their own funding. But as we speak, we are in the process of evaluating the different businesses and the models and how shall we be able to feed power, depending on where we will be able to set up this facility. So for setting up the facility also there are various options like of course, the solar wind, but along with that the hydro pump or the battery storage. So that technical study is going on. We have created a group task force who is running this assignment and the discussions are on with the various businesses that which model what, where and this also answers your aluminum question that how we have to feed power to the aluminum and in what form and to what grid and what are the regulatory charges. So that scheme is being built. As we will closer to the reality of the scheme which will come I think in the next few months, and start establishing our facility we'll come back and report to you that what we are doing. However we agree that the fatality record may not be so good but over the years we have improved our record on this.

[Operator:]

Mr. Dikshit, does that answer your question?

[Amit Dikshit:]

Yeah, so that was my first question. I have a second question also. Can I go ahead?

[Operator:]

Sir give me a minute. Members of the management are you're able to hear us?

[Arun Misra:]

Arun Misra here, Hindustan Zinc. We can hear you. I think Mr. Duggal got disconnected.

[Operator:]

Sure sir. Allow me a minute while I just reconnect him. Requesting participants to please stay connected while we just have the speakers reconnected. We all are reconnected. We have the question from the line of Mr. Dikshit.

[Sunil Duggal:]

I'm sorry, madam. Our side I think there is a bad line. So I hope a part of the answer you could hear at least up to the renewable power and our $5 billion commitment. So like that Arun the thought also is to whether we would like to put some facility or do some work on the commercialization of the hydrogen as a fuel, and which entities this fuel could be used. Coming to our facilities, I think we have improved over the years, but so also happens that when we acquire new assets, the governance mechanism, the behavioral aspects and even the infrastructure facilities in those companies are not so good. So we have learned from what we have experienced in the last couple of years. So learning from that, we are partnering now with the global majors like DuPont Sustainable Solution. We engaged DuPont for Hindustan Zinc over the long five years, where they were responsible for transformation of the culture and bringing a zero harm culture. This is how we became almost two years fatality-free. And now we are using DSS, DuPont Sustainable Solution for our ESL and aluminum and power business. So with that, we also want to bring a new framework where -- whenever the new entity is acquired, we do the complete deep dive and the audit to map the risk on all fronts, be it safety, environment, sustainability, governance or whatever the risks are there and take proactive measures, so that we do not get such kind of shocks. This is what it is. And then I think finally, you are asking on the red mud and the other waste. So we have put up the Center of Excellence, and where we have brought some R&D experts, we are partnering with the research institutes, partnering with the universities and the Global Research Institute where we want to partner with them, that how the sustainable solution for these waste could be brought. But in the meantime, let me also tell you that the solution which we have found in the interim is that to partner with the cement industry, where they can use red mud as a replacement of bauxite, which is used as a flux in the cement industry. And we have tied up some quantity with couple of companies, one is Wonder Cement and one more is there, wherein some quantity has been tied up. But some of our bulk waste have -- we see utilization to up to almost about 100%. Like another example in Hindustan Zinc is they are the 100% Jarosite, which we used to dump in the dam is being utilized by the cement industry as a replacement of gypsum. So we are doing all that, mapping all our waste, and making a comprehensive plan that each aspect of ESG, how we have to address going forward?

[Amit Dikshit:]

That's a very comprehensive answer, sir. And the second question is essentially on the transfer of 12,587 crore to retained earnings. So I'm -- why it has been done? Can we expect some more rewards for shareholder from this account?

[Sunil Duggal:]

Ajay?

[Ajay Goel:]

No, sure, say this entire intent of capital restructuring is nothing but a reflection of the moment in the corporate laws, which are evolving with the time. So as you would know, on the balance sheet we will have multiple reserves, be it a general reserve, or something called retained earnings, which is nothing but profit and loss accounts. We intend to unwind our general reserves into retained earnings, amount being a INR12,500 crores. I mean, how it helps. Typically, a general reserve will have some limitations in terms of end use. But once we unwind the balance into profit and loss accounts, in that case, company management and the Board will have higher flexibility in future. So it is an enabling act in that sense. Now the current Companies Act does not require us transferring any amount into general reserve. And if you do a bit of research, many companies, notable ones have done the same in the last few years, the entire process takes about 8, 10 months of multiple approvals, including Stock Exchange, and NCLT. This step will give us, as I mentioned more flexibility, and it is beneficial to all shareholders, including minors.

[Amit Dikshit:]

Sir, if you can just illustrate on flexibility that would be helpful in what areas does it serve flexibility?

[Ajay Goel:]

If I take multiple items quote under and the one for example, in case somebody intend to pay a dividend, in that case that one can do only from retained earnings. So if you don't have sufficient balances, one may get maxed out in terms of ceiling. But once we unwind the balance of general reserve into the profit and loss account, in that case, your headroom will increase. And there can be many more examples.

[Amit Dikshit:]

So that's great sir. I was looking for that. Thank you. Thank you so much, and all the best.

[Ajay Goel:]

Thank you.

[Sunil Duggal:]

Thank you.

[Operator:]

The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.

[Sumangal Nevatia:]

Yeah, good evening. Thank you for the opportunity. First question is with respect to the aluminum business. If you could just share some more details on what is the coal situation there and what is the inventory we have and the cost inflation, we expect. Looking at your cost in 2Q versus your future guidance, it appears that we are not expecting a very significant cost inflation, only to the tune of $5,200 per ton. So if you could just share some more details on this.

[Sunil Duggal:]

So I will go for this and then I will ask my colleague Rahul also to add. So as far as coal situation is there, this has been a global event. Everybody knows that. The global coal crisis came there. 20 mines got submerged in China and their coal production stopped. Then they started importing coal from all over the world. In India, the events took place, not only rain, the power demand going up. Then the crisis coming up and the government diverting the total coal to the IPPs and what the good situation is and the good news is that we have been able to maintain our operation in the current context. It was not about the cost of the coal. In this scenario, it was about sustaining our operation number one. Number two, at this commodity prices, we did not want to lose our opportunity, but we are able to maintain our operation, but the coal stock from where we were, and to where we are, have also gone up and the situation is much better. But Rahul over to you for any addition to the reply you want.

[Rahul Sharma:]

Thanks. Mr. Duggal. I think just to add further, going forward, one is that if you see our Q2 result, I think we have been fairly good performance in terms of our volume cost and also containing our overall cost. And going forward, I can say that the good part is that we have the 100% coal security for the Q3 which is through the linkage and auction and we are working closely with Coal India to metallization. That is the positive side of it. And the second I think, we are all of us, you must have seen that, I think things is improving at the Coal India, because the situation at IPP, the stock level has gone up also from the 7 million to 9 million plus. And now the non-regulated sector, especially aluminum is getting that kind of momentum and we see that. That should not be the challenge. And as of now, we have a stock of two to three days, but we are managing and we see that whatever we have the security for 100% we have to metallize and that's our objective going forward.

[Sumangal Nevatia:]

Okay, just to clarify, our cost of production is close to $1,650 in 2Q and our full year guidance is maintained at 16 -- is slightly increased to $1,635 to $1,775. So given the current situation of coal, where we don't have any inventory or anything for the fourth quarter and also the alumina prices, we still expect the cost inflation to be around $100 from here on, not more than that. Is that the right understanding?

[Sunil Duggal:]

So actually $100 means we are giving the average cost for the year. So if it is average cost per year, we consider the same volume in H2. I think it gives us a headroom of $200 per ton. So you can see that the cost had gone up in quarter 2 compared to quarter 1, by say around 8%. And although the situation was very bad in September, which since has improved as Raul also explained that the number of days of the coal stock have become better. And along with that, this coal security is also there, we are hopeful that this was only a one-off situation which was there for 1, 1.5 months time and the situation will ease out as we will go forward. As far as the aluminum prices are concerned we know the aluminum prices of late have gone very high. But you also know that we have a bauxite security from the domestic Lingamalli mine and we are also hoping that the government may give permission for the additional capacity. One-off permission also given for seven lakh ton. With that the differentiator between the domestic alumina production and the imported aluminum production is higher at this point of time. But having some security up to around 45% from our domestic production, we feel that we should be able to contain cost, but the situation is more dynamic. Let us see what happens going forward.

[Sumangal Nevatia:]

Understood, that's helpful. Second question is with respect to Zinc International, as per media report, there appears to be an evaluation now restructuring the business under HZL to bring all the zinc business under one entity. So if you could just share what could be the thought process, timeline and if at all any transaction mold, in case such a restructuring were to happen?

[Sunil Duggal:]

This is a Board matter actually between two Boards. So what discussion takes place in the Board I may not be able to divulge any information at this point of time. But broadly, I can tell you that this is a natural situation where both the companies can complement and one plus one becomes 11 not two. So this is what I can comment at this point of time.

[Sumangal Nevatia:]

Understood. And just one last clarification, this exercise of converting general reserve to retained earnings, it will take 8 to 10 months for approval, etc. And only then we can have some more flexibility. Is that the right understanding?

[Sunil Duggal:]

That is right. That is right. I mean, it requires multiple approvals, including NCLT shareholders. Of course, the Board would have blessed it. And also by SEBI. It takes about 18 months. In the interim, we don't see any challenges. And as you may have seen, our balance for the profit and loss account is about INR12,000 odd crores. And as we generate profitability, quarter-on-quarter our balance is sufficient for our needs for next couple of years.

[Sumangal Nevatia:]

Understood. Thank you very much and all the best.

[Sunil Duggal:]

Thank you.

[Operator:]

Thank you. We take the next question from the line of Leticia from Investor Capital . Please go ahead.

[Unidentified Analyst:]

Yeah. Hi, sir. Thanks for the opportunity. Sir, I have three questions. First is, would it be possible for you to qualify how much is a VRL level net debt? And how much is the debt maturity for FY22 and FY23? Just a related question over here, what I'm trying to understand is what could be the dividend payout? So sir, if you can help me with the additional data point on the incremental deal that we have to procure money from Oaktree Capital?

[Sunil Duggal:]

Ajay?

[Ajay Goel:]

Yeah, sure. So for the total VRL debt, the external debt is about the $8.75 billion, including the ICL outstanding of about $20 million. Almost $2.2 billion in debt maturity for next one year. And almost similar I would say for the F23, the year next as well. You may have seen announcements by the VRL a couple of months ago, that VRL has deleveraged by almost a $0.3 billion in the first half. And they also intend to further deleverage by point $0.5 billion or so. So almost $0.8 billion odd, is the deleveraging plan for Vedanta Resources. Coming to the point of payment of dividend, I mean, you already have seen in the last month or so, we paid INR18.5 per share, total about INR6,800 crores. In terms of further plans. I mean, as you would appreciate, it will be -- it will not be right to comment as of now. This is a matter of both discretion. On Hindustan Zinc side, typically we pay dividend in the first half. And I think it will not be unreasonable to expect something in the near future. But we have to wait and watch for a couple of more months.

[Unidentified Analyst:]

Thanks. Sir, you said $2.2 billion for FY22 and $2.2 billion for FY23, is that right?

[Ajay Goel:]

$2.2 billion is the debt maturity due over the next 12 months. And there's something similar thereafter.

[Unidentified Analyst:]

Okay, perfect. Sir my second question is on the zinc business. For Mr. Duggal. Sir, you indicated one plus one is 11. I don't have much understanding of the Zinc International business. But I think it seems like a forced marriage, if I have to look at it from outside given the quality of assets that one looks at Hindustan Zinc, be it zinc, lead or silver. So how should one understand this? That's one. And secondly, I think the timing of any potential transaction, if it is, we are looking at zinc prices when it's again, very, very high. So that's one question. And why not to prioritize or work with the government on Hindustan Zinc divestment, the arbitration that we had spoken about earlier? I think that would do more good to the minority, rather than trying to marry Zinc International with Hindustan Zinc.

[Sunil Duggal:]

See as far as zinc is concerned, I think there are very rare common commodities like zinc in the world. And it is very difficult and it will be very difficult to find zinc assets. So it's a very precious thing to have zinc in the portfolio. You see the R&R of both the companies is almost same and with the same R&R Hindustan Zinc having a capacity of 1.2 and we have a capacity of 300 kt, but there also the project is on the drawing board and we are evaluating how the growth will come through putting up the additional concentrator. And we are also evaluating whether the Scorpion refinery could be converted to the sulfide tube for treatment of the sulfide ore. As far as the divestment of Hindustan Zinc is concerned, you must be knowing that the final hearing in the Supreme Court, in the Court of Chandrachud has just been concluded and he has reserved the order. So and you may also be aware that we had given in writing to the government and the court that we are happy with the open auction of these shares. So I think when the order will come, which is reserved now any day, the courts will give no objection, and will give a go ahead to the government. And when this will be auction, it is anybody's guess, that who wants to participate and who doesn't want to participate. But I will still reiterate that any zinc assets in this word are very precious and this marriage is very natural and very precious.

[Unidentified Analyst:]

Sure sir. Sir, last question on capital allocation. Just your quick thoughts on one, where are we on the Gujarat copper smelter? Second, the fertilizer plant in Rajasthan. Third, we had earlier indicated on aluminum downstream assets. And fourth on BPCL refining assets basically. Is there any thought process or how should one understand it. Thank you so much.

[Sunil Duggal:]

Very smartly, you clubbed four or five questions in one question. So BPCL, as far as BPCL is concerned, last year, the UAE was invited and that we participated, two more fee funds participated. So this was just the expression of interest. We are doing the due diligence. SK has not been finalized as yet and then the RFQ will be called -- RFP will be called and then the decision will be taken. So this is where we are at this point of time and I hope government may like to conclude this before March, who gets what, but we want to create a separate fund for this. As far as copper smelter is concerned we are evaluating and we had given an EOI to different state governments and we are at an evaluation stage as to where we could prefer. But this is at a very initial stage of evaluation. Arun Misra is there. I request Arun if you can reply on fertilizer, and Rahul if you can reply on the Aluminum Park.

[Arun Misra:]

So on the -- Arun Misra here. So on the fertilizer process, we are ready with a business case and we are now going through the process of filing for environmental clearances related to there are certain issues between the current existing smelter and the fertilizer plant. Also we are in the process of recruiting CEO who would be the business leader for the fertilizer process. I think work on the ground will start in full swing summer in January for this fertilizer plant.

[Unidentified Analyst:]

Sir, the aluminum downstream

[Rahul Sharma:]

No, last time I think we have talked, am on the BALCO that you know 414 billet project. And as you know that this we are -- this project has already been approved by our Board and we are going ahead with that. But we are expecting the normal clearance in the Q3, then this downstream billet project of 420 will pick up.

[Unidentified Analyst:]

Sure, sir. Thank you so much for the answers. And congratulations for numbers and bold ESG goals. Thank you.

[Sunil Duggal:]

Thank you.

[Operator:]

Thank you. The next question is from the line of Inderjit from CLSA. Please go ahead.

[Indrajit Agarwal:]

Hi, good evening. A couple of questions from my side. First on the Hindustan Zinc and Zinc International marriage that you have discussed, do we need any kind of government approvals for -- in responding to go ahead with the transaction or a simple Board majority approval will do.

[Sunil Duggal:]

I don't want to comment on much on this marriage because you see the parents are different. So on one side the Hindustan Zinc Board is there, another side the Vedanta Board is there. So this is a very initial stage of the discussion, which might have taken place, but it will be very difficult for me to divulge any information on this. But all that process will be followed if anything happens. One is, this is a board matter because we are in a related business. This is not a new line of business. It does not require a specific government approval as such. But ultimately after the board approval, it will require the shareholder approval.

[Indrajit Agarwal:]

Sure, if with the opportunities open to us that is expanding in this Hindustan Zinc from 1.2 to 1.5 and also the opportunity of getting Zinc International, which one will be a priority in terms of our capital allocation process...

[Sunil Duggal:]

These are two different initiatives, if they are. I mean, one is to capitalize the given assets and made this marriage work where I said that it will become one plus one, 11. The other is the evaluation and debottlenecking which does not require much of the CapEx.

[Indrajit Agarwal:]

Yeah, thank you. And lastly, can you illustrate how much ore we are getting from our captive sources currently, the mines that we have and also what was the coal mix for Q2 between the auction linkage imported and captive.

[Sunil Duggal:]

So Rahul, these are specific information you have ready with -- in your hand. Can you give that?

[Rahul Sharma:]

No, I think I have answered on the previous question, but basically today our mines is not been you know operationalized and this is purely on what we are looking through the Coal India, which is linkage and auction. And we have 100% coal security for Q3 which I have already said

[Sunil Duggal:]

Just to add, we are in the process of operationalization of the mines, because the situation which we have faced last quarter or last month and the current quarter, we want to make our business more predictable. As we speak, we are taking fast track action on the Jamkhani coal block and other two mines also we are making and building a strategy. Our own vision is that we want to operationalize Jamkhani coal block in next say one year and Radhikapur and Kuraloi mine block in the next two years time, so that we have a structural reduction in the cost which has a delta of say around $200 per ton from the current level. But we want to insulate and make our business more predictable. One another good news is there that we have got permission for converting one of our 600 megawatt unit at Jharsuguda to CPP So which will become applicable from 1 January, 2022, which will also help us to contain the power cost.

[Indrajit Agarwal:]

That's all from my side. Thank you.

[Sunil Duggal:]

Thanks.

[Operator:]

The next question is from the line of Vishal Chandak from DAM Capital. Please go ahead.

[Vishal Chandak:]

Yeah, hi. Thanks. Sir my first question was with regard to your ten commitments on Net Zero. One of the things that you mentioned is that you will become net water positive. Sir if you could just elaborate on how do you intend to become net water positive, because you mentioned that Hindustan Zinc is already at 2.4 times and given that most of your power plants, in fact all of them are all thermal. So how do you intend to become net positive on water? That's the first question. And related to that is on EV adoption, you mentioned about decarbonizing 100% of your LMV. So, how do you plan to do that if you could just layer lay out some roadmap on that?

[Sunil Duggal:]

Sure. So first on water positive. So you rightly said that we are at 2.41 times water positive on zinc and Arun has made a strategy to go to five times water positive. So they are -- and you might be knowing that we have replaced the freshwater to the dams, which we have given to the community would be sewage treatment plant, water which we took from Udaipur sewage. So we put up the plant and we, as we speak, we have a capacity of treating 60 mld of water per day to feed to our couple of locations. So this is one. So this is a good model. When we evaluated our other entities, we found that Cairn is also water positive as we speak. So these two entities are located in the state which are water deficit. And these similar models we want to replicate in our other businesses. So as we speak, we are on a drawing board building this strategy, because we have the internal benchmarks available with us and best practices available with us. So replicating all these best practices, the initial calculation, which is coming is that it is very much possible to become water positive in the next 10 years. So that is why we have made a public commitment that we want to be water positive. And by doing this commitment, we want to put pressure on ourselves to deliver. So when we have made a commitment to the larger world that we want to be water positive we become -- and back -- we want to come back to all of you to showcase that we have honored our commitment. The second question was on what?

[Vishal Chandak:]

The second question was on EV…

[Sunil Duggal:]

EV fleet. So we have declared that we want to convert all our LMV fleet to the EV fleet and to decarbonize and mining fleet also to EV fleet. Converting LMV fleet to EV is not very difficult proposition as of now. And we were doing our own math. It says that the life time cost per kilometer is 50% of the current cost where we use diesel or petrol. So it makes all the economic sense. Only thing is that we have to take action and we have to become more disciplined. So it is very much possible to tie up with the partners today. We are in discussion with various partners who can partner with us to decarbonize our LMV operation. As far as decarbonization of the mining fleet is concerned, Arun has signed this MOU with the OEMs, major OEMs, like Normet, Sandvik, Epiroc that he wants to partner with them in Hindustan Zinc, to make some pilots underground in some areas, which could be replicated in other areas of the mine. And we know, we all -- of us know that these mining, supply -- mining equipment supply OEMs have already commercialized their -- lot of their machines. So it is not that it is some something like new concept, which we'll have to try. Some minds in the world are already using it. And with the focused effort of Arun, I'm sure after the pilot becomes successful, he'll be able to convert the entire mining fleet of Hindustan Zinc and the learning of which could be replicated in our other entities and other operations.

[Vishal Chandak:]

Sir that's helpful. My next question was with regard to no possible sale of Zinc International assets to Hindustan Zinc. You mentioned that in that case, one plus one would become 11. So as of now, practically speaking, both these two entities are under the same management of Vedanta. How would change of control within one subsidiary to another subsidiary improvise things because I understand like this practices would even be shared today itself and transaction-related party transaction etc., are being taken care of. So how would that now translate into multiple level of savings or improvement in economics by just transferring one asset into another subsidiary?

[Sunil Duggal:]

Actually, this is at a very initial stage if it is. And as I said, this is a Board matter. And I don't want to speak much on this because this is also more like a compliance issue at this point of time. So I will keep my comments more reserved, and not divulge much of my own thoughts and don't want to speak anything which will not be in the best interest of our governance, which is also one of our pillar of ESG.

[Operator:]

Thank you. The next question is from the line of Pinakin Parakh from JPMorgan. Please go ahead.

[Pinakin Parakh:]

Yes, thank you very much, sir. Sir my first question is that if we just take a step back and look at it we have lifetime high commodity prices in many of the base metals, but at the same time parent entity is very, very leveraged. That's always the risk for the minority shareholders of Vedanta Limited. Operationally, also, some of the businesses have not shown great results. So wouldn't the company at these prices want to hedge some of the commodity exposure and bring in cash flow visibility and stability, not fully 100%? Some kind of hedging given where aluminum, zinc and oil prices run.

[Sunil Duggal:]

As a policy, we don't hedge, but we evaluate the options depending on the situation from time to time. So as of now, we have not decided. The situation is quite volatile. And I cannot comment you which direction we will go, but as a policy we do not hedge.

[Pinakin Parakh:]

Understood sir. The second question is on the oil business. We have yet again reduced the production guidance and consistently oil has disappointed over the past few quarters, not delivering on the volume. have started rising. And if you look at this quarter in terms of zinc price at roughly $75 a barrel, there was an EBITDA of INR1,300 crores. There will be you’re your CapEx and . So, how what is the strategy in terms of turning around the oil business or is this something where the volume growth is looking increasingly difficult to achieve?

[Sunil Duggal:]

I get you what you're saying. I -- the volume was more muted. I will have my colleagues Prachur also to add on. But let me tell you that the last quarter along with the decline, the major contribution was to come from gas and tight oil. The desired results were not to the level of initial plan. So we didn't -- we could not get the full advantage which we conceived at some point of time. But now to build the results, some of the billing projects have been initiated and the -- Prachur can give more detail on that. But let me also tell you that we are partnering with the government and asking for their support. And four key things government has given the assurance that they may like to help with. Number one, long term visibility of the agreement, PSA agreement. Number two, our levies are at 70% compared to 30% to 40% with the other oil and gas producing countries. And government is quite favorably inclined to look at it. We have also convinced the government that this kind of business requires the marketing freedom. And then it is a very regulated sector where you require the approval from DG HR, ONGC as a partner whereas in Hindustan Zinc, although government has a share of 30% we only meet in the Boardrooms. So the government is quite favorably disposed for all these and we are evaluating all those options like enhanced oil recovery or shale oil to see that whatever the potential is there, in our assets and beyond in all that, how we can capitalize on each one of them and grow the production. Prachur, anything you want to add from what I said.

[Prachur Shah:]

No, because you heard most of it. I just want to highlight one point here is if you look at the quarter one and quarter two volumes, being at 165, the first positive part I would like to talk about is our MBSCs which are our oil fields. Traditionally these are mature fields. And over the last seven years this were the first two quarters when there was no declines in these fields. So from an oil perspective, I mean, the decline was managed through the volume . Our main surprise came, geological surprise came in the gas business, where we gave you the subsurface performance, some of the wealth did not come as we expected. However, we have taken a project to add more wealth in gas to recover that production. So and as was mentioned, I think from our government support the two projects that potentially has a large upside that we're working on is the tertiary oil recovery the further improving the volume we are planning in , in our MBSCs, and secondly the prospectively of shale in our and the success that we had in oversea in the Gambia, we want to further monetize in the coming months. So that will be my commentary on the volumes.

[Pinakin Parakh:]

Understood. So just to dig deeper on, do you think that Vedanta needs foreign partner to better explore the oil opportunity given that there have been series of disappointments and there are more and more difficult fields?

[Sunil Duggal:]

We are already partnering with the global majors. Who is who in the oil and gas sector is already working with us. So Prachur, you also explained that how many experts we are engaging and depending on where we have to add reserves and where the potential is there all these experts we want to bring on board but let me tell you the likes of Becker Hughes, Halliburton, Schlumberger and everyone whosoever is there in the world, they already work with us. And they look at -- but we are trying to change the contracting and partnership model. So which Prachur you can just explain.

[Prachur Shah:]

Sure, and as you mentioned all these projects that are going through, they have been done through these international majors itself. Secondly, for the forthcoming projects, the way we are working with these partners is where they take a larger level of responsibility from end to end, starting from the technical design till execution of the project. And they're heavily incentivized upon success. So that model, we believe, will further bring them into the picture, right. And secondly, on the expert side, just for your information six months ago, we had the CEO for BP as now a technical advisor, who's full time, who's working with us now on these projects to define how we can make the success. So from an expertise point of view, I think that's not -- in my view, that's not where the bottleneck lies. The bottleneck lies now is to make this recovery shale and exploration programs and success to add the reserves that will be production, because the prospective resources are there. And to make this projects viable, that's what Duggal ji was mentioning. We have a significantly increased support now from the government to make this project viable, which in the current legislature may not have been, but now with that support, we'll go ahead with this.

[Sunil Duggal:]

Let me assure you we are totally committed to produce 300,000 barrels in the midterm and we are evaluating all those opportunities. So the excitement and the motivation within our team is extremely high and we are really committed and with the support of the government and the motivation of the Prime Minister, which has -- he has recently assured in one of the meeting he had with the CEOs, that every -- each and every support will be given because the country also wants the energy security. So in that direction, the shale oil, the enhanced oil recovery, marginal fields, OALP, optimization of recovery, giving the approvals, giving the liberty to us to act without approval of the authorities and take some more risk, all that we want to do because the oil prices are such that it enabled us to take some more risk. But you know that until the risks are taken, the delivery will not be there, but these are some of the assets where the reserves are already lying. Like you see the enhanced oil recovery and some of the other effects like offshore also. But if the pilot becomes successful for shale oil or we will take a quick jump and we will take some big leaps going forward.

[Operator:]

Thank you. We take the last question from the line of Raashi Chopra from Citi Group. Please go ahead.

[Raashi Chopra:]

Thank you. I just wanted to clarify on coal. You indicated that there's 100% coal security for the next quarter. But we have about two to three days of inventory. So just to understand what you mean by that coal security.

[Sunil Duggal:]

Coal security means the coal is tied up, either through the linkage or the auction, the total coal is tied up that is called the security for the quarter. Hello, am I audible?

[Operator:]

Yes. So give me a minute. We just lost the line for the participant. Mr. Raashi, you may go ahead.

[Raashi Chopra:]

Can you hear me?

[Sunil Duggal:]

Yes, we can hear you, ma'am.

[Raashi Chopra:]

Yes. So all I'm saying is that there is no need to panic with this two to three days of inventory whatever?

[Sunil Duggal:]

We could manage with one day stock now with two to three days to four days it is going. I think we are much better there compared to where we were. And now the coal stocks at the IPP are going up and becoming better. And the government is also committed that the holiday which they had given to us, or the coal block supplies which they had locked to us, it is being released steadily.

[Raashi Chopra:]

Thank you. And just to reconfirm the number, the debt at Vedanta Resources is $8.7 5 billion, right?

[Ajay Goel:]

That's correct, Raashi.

[Raashi Chopra:]

Thank you. That's it.

[Sunil Duggal:]

Thank you.

[Operator:]

Thank you. Well, that was the last question for today. I would now like to hand the conference over to Mr. Varun Kapoor for closing comments. Over to you, sir.

[Varun Kapoor:]

Thank you, Janice. In closing thank you all for taking the time to join us this evening. If you have any further questions, feel free to contact either me or the rest of the investor relations team. So here's wishing everybody a very good evening. And with that, I'll pass it back to the operator.

[Operator:]

Thank you very much. On behalf of Vedanta Limited, this concludes this conference. Thank you all for joining. You may now disconnect your lines.