Vedanta Limited
Q4 2020 Earnings Call Transcript

Published: 9 Jun 2020

[Operator:]

Ladies and gentlemen, good day, and welcome to Vedanta Limited Full Year FY '20 Results 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. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. James Cartwright from Vedanta Limited. Thank you. And over to you, sir.

[James Cartwright:]

Thank you. Good evening and thank you everybody for joining Vedanta Limited fourth quarter and full year results call. On the call today, we have Sunil Duggal, Group CEO; Arun Kumar, Group CFO; as well as Ajay Kapur, Aluminium CEO. From the start, may I point you all towards our results press release and presentation on our Web site including the disclaimer on Page 2 of the presentation. Likewise, the primary purpose of this call is to discuss earnings and operational performance. But all questions surrounding the delisting proposal, I’d like to refer you to the frequently asked questions posted on Vedanta Limited Web site but also the presentation under the Vedanta Resources Web site that goes into further details of the delisting pram. Myself and the rest of the IR team would be happy to engage in further questions around the delisting post the call. With that, let me turn the call over to Sunil to start today’s presentation.

[Sunil Duggal:]

Thank you, James. Good evening, ladies and gentlemen and welcome to Vedanta fourth quarter FY 2020 earnings conference call. This is my first set of results ever accepting the role of Group CEO of Vedanta Limited and I’m honored to be leading the company which I have been proudly part of for the last 10 years. I must begin by acknowledging Mr. Srinivasan Venkatakrishnan for his leadership to our company for the last two years. Under his guidance, we further strengthened our foundation that will benefit our organization long after his departure. We are grateful for his service. And now coming and starting with the year gone by, to describe FY 2020 as a dynamic year is an understatement. The macro environment has been extremely challenging with impact of COVID-19 pandemic getting the final quarter. The virus outbreak which saw lockdown across geographies has become one of the biggest threats to the global economy disrupting businesses and supply chains world over. During these testing times, our priority is to ensure the health and safety of our employees, contractors and stakeholders while ensuring the business continuity to the extent possible. I will talk more about the direct impact of COVID pandemic, but our responsibility to the communities we work in remains paramount to what we do. With that amongst other measures, Vedanta set up dedicated 201 crore fund catering to three specific areas; livelihood of the daily wage workers across the nation, preventive healthcare, support to all of our employees and contract partners across our plant location as part of its endeavor to join ranks with the government of India to combat the widespread outbreak of COVID-19. Multiple relief measures were taken across the country through initiatives like providing meals to 10 lakh daily wage earners and feeding over 50,000 stray animals daily on an entire month to name a few. We also leveraged our existing community programs like Sakhi, Khushi, et cetera, to create grass-root capabilities at villages to make interventions sustainable and locally owned. In a move aimed at supporting frontline health workers, doctors during COVID-19 times, Vedanta Limited has enabled mass production of personal protective equipment program. The company has imported 23 PPE machines recently in collaboration with the Ministry of Textiles and has teamed up with authorized apparel manufacturers to rollout over 5,000 PPEs per day. During these difficult times, our efforts are aligned to the singular vision of making our communities, the state and nation self reliant and self sufficient. We are committed to extending all help possible to help alleviate the pain which pandemic has caused. We are closely working with the government alongside our people and partners to emerge from these trying times stronger and better. So now moving on to the operational performance, the COVID pandemic has hit the world hard and us in the last quarter of the year. We have taken a proactive approach to keep our assets and people safe while ensuring optimal operations during these difficult times. With respect to our operations, our Zinc India operations were halted from March 22 and most employees were encouraged to work from home barring some employees who attended the call for duty to keep production assets safe, including critical care and maintenance. The operations were restarted on the 8th of April and April itself we ramped up all our mines and smelters to 40% to 80% of capacity, respectively. In our Zinc International business, operations started safety on 17th April with strict compliance to government regulations and SOPs. Our BMM plant and mining and Gamsberg plant is operational supported by our stockpile. In our Oil and Natural Gas business, we have managed to continue our operations at all of our three producing blocks with minimum manpower. Oil production had minimal impact as we continue to supply to our domestic crew oil buyers. Gas sales was impacted by around 50 million scfd due to lower demand during lockdown which has been normalized now. Our growth projects which were the drivers to our near-term volume addition faced some temporary impact. However, our surface facilities contractors for enhancing liquid handling capacity at MPT and constructing new gas terminals have started ramping up manpower now and activity levels while maintaining adequate safety measures. In our Aluminium business, all our facilities have been categorized as essential services and continuous process industries by government authorities and continued to operate at current production levels while largely maintaining flattish volume y-o-y. In Iron Ore, all our plants and mines operations requiring continuous process and in essential services were working with limited operations as currently we are operating at about 75% capacity. With respect to the Steel business, ESL has been operating at two-thirds of the capacity. In order to ensure volume support, ESL tapped the export market largely due to constrains in domestic market. Now moving on to the key operational highlights for the year, Zinc India MIC production was marginally down 2% and metal production down 3% for the year. Major development to take capacity to 1.2 million tonne per annum now is in place. Zinc International overall production was up 63% y-o-y. Gamsberg production ramped up to 108kt. Oil and Gas gross production at 174 kboepd. RDG Early Gas production ramped up to 90 mmscfd. Aluminium production at 1.9 million tonne per annum. Aluminium cost was $1,690, down 14%. Record production at Lanjigarh 1.8 million tonne, up 21%. Lanjigarh cost $275 per tonne, down 15%. Electrosteel record production of 1,231kt, up 3%. Sales 1,179kt almost flat. In Iron Ore business, our sales from Karnataka were up 125% y-o-y at 5.8 million tonnes. Nand Ghar, our flagship CSR initiative has crossed 1,000 Anganwadi mark and is currently standing at a count of 1,250 plus. Continuous improvement as per Golder recommendation is under implementation across all tailing dams. Now coming to our safety records, we began this fiscal year with a strong commitment to improve our safety performance. While there have been significant gains made across all our businesses, I’m deeply saddened by the loss of two lives in the fourth quarter of the year bringing the total loss of lives to seven in this year. Our LTIFR stands at 0.66 in FY 2020. We have completed the incident investigation for every accident and have taken measure to ensure repeats do not occur. Learning from all incidents are being implemented across our businesses. Occupational help and safety are nonnegotiable factor for us and we are determined to achieve absolute zero harm in our operations. As discussed above, the last quarter of FY 2020 has been a time of global crisis as a result of COVID-19 spread. We are fully committed to the safety of our employees. Our strategy has been threefold; practice physical distancing for all essential work streams, rely on early diagnosis for our workforce to prevent an outbreak and share knowledge and best practices across our businesses to ensure safe workplaces. While the average footfall at our plants has been reduced significantly, our employees are actively involved in building homegrown solutions to the challenges created by COVID-19. For example, we now have one touch based hand washing system which was built by our employees. Additional safety measures in terms of sanitizer fogging [ph], social distancing through on-ground marking, et cetera, are also in place to ensure minimum contact. We have also launched a healthcare helpline for our employees in partnership with Apollo Hospital through which they can tele-consult with a general physician or a psychologist. Now turning to sustainability. Our unwavering focus on operating a sustainable and responsible business continued to deliver results in FY 2020 as well as a firm by third party experts work on improving the stability and the management of our tailing dams continues. Business units are implementing the recommendations from the audit conducted by Golder Associates in the previous year. In addition, we have updated the tailing dam performance standard and have added a detailed set of Guidance Note that all of our business units must adhere to when managing their tailing facilities. 2020 also is the end of our cycle for GHG emissions intensity and reduction target. We have managed to reduce our GHG emissions intensity by 13.81%. This is below our target of 16% from a 2012 baseline and indicative of the stretch target we had taken. This reduction is equivalent to 9 million TCO2. We have begun work on setting our net set of long-term GHG reduction target and we’ll be disclosing those numbers in coming quarters. Our highlights for us in 2020 include 7 million meter cubic of water saving over the past three years as well as more than 100% fly-ash utilization for second year running. Now coming to contribution to the communities, with nearly 190 initiatives spanning healthcare, education, community infrastructure, drinking water, sanitation, sports, women’s empowerment, environmental protection and restoration, livelihood, skill development, Vedanta is a force for good in the communities where we impact more than 3.2 million people across 868 villages. At our flagship Nand Ghar program, we crossed the 1,250th Nand Ghar mark and we are rapidly moving forward reaching 4,000 Nand Ghar which is our target. Now coming to business unit reviews. First on Zinc India, mine metal production for the quarter was 2%, up 2% y-o-y to 249kt despite operation shutdown from March 22 onwards in compliance with lockdown to combat COVID-19. Mine metal was higher y-o-y on account of higher ore production and better overall grades. Sequentially, mine metal production was up 6% on account of continued improvement in ore grades across the mines. For the full year, mine metal production was 917kt, down 2% y-o-y primarily on account of fewer days of production in March due to lockdown-related COVID-19 and lower grades at Sindesar Khurd during H1 you may remember and Kayad mine. Integrated metal production was 221kt for the quarter, down 3% y-o-y and up 1% sequentially due to lockdown in March. Integrated zinc production was 172kt, down 2% y-o-y and 4% sequentially. Integrated lead production was 49kt, down 7% y-o-y while it was up 20% sequentially as Dariba lead smelter resumed normal operations during this quarter. Integrated silver production was 168 tonne, down 12% from a year ago due to lower lead production partly offset by better SK silver grades and improving silver recovery rate, while it was 12% up sequentially on account of higher lead production, better grades and higher silver recovery. For the full year, metal production was down 3% to 870kt and silver production was lower by 10% to 610 tonne on account of fewer days of production in March due to lockdown, lower lead production in Q2 and Q3 due to temporary operational issues and lower silver grades. Going forward, we do expect a volume growth at HZL given the completion of 1.2 million tonne per annum mining infrastructure. Now coming to Zinc International. In our Zinc International business, the total production for the year stood at 240kt, 63% higher y-o-y primarily due to ramp up of first phase of Gamsberg expansion plan. The cost of production was $1,665 per tonne, down 13% y-o-y. Gamsberg production volume increased from 17kt in FY '19 to 108kt in FY 2020 at a COP of $1,445 per tonne. We are working towards improving volumes at Gamsberg with more consistent feed grades and recovery percentage. Work is on full earnest there. The operation at Skorpion mine has been suspended on safety grounds and the mine has been put care and maintenance. With respect to demand, the key market for zinc and lead concentrate that is Korea, China is ramping up now post initial COVID-19 setback in February and March. Major smelting groups like Korea Zinc, Nyrstar and Glencore plan to continue normal production at respective facilities in Australia and Europe. Coming to oil and gas, in pursuit of our vision to contribute to 50% of India’s domestic crude oil production, we have increased our block acreage by acquiring 51 blocks in Open Acreage Licensing Policy, OALP, and two blocks in Discovered Small Fields. The acquisition has established us as one of the largest private acreage holder in the country with this tenfold jump in acreage from 6,000 square kilometer in August 2018 to 65,000 square kilometer. The PSC block offers a rich project portfolio comprising of enhanced oil recovery, tight oil, tight gas, facility up-gradation and exploration and appraisal prospects. These projects are being executed under an integrated development strategy involving leading global oilfield services companies and are on track to deliver near-term additional volumes. During the year, 235 wells were drilled and 45 wells were hooked up. Early gas protection facility has been in commission to design capacity of 90 mmscfd. Project execution is the key to focus and bringing some of the gas facilities, EOR and additional wells related projects into fruition will be our key focus and attempting to deliver net of decline volume increase on schedule. We had a planned shutdown at the Mangala Processing Terminal in February as announced in the last quarter call which has enabled us to tie in the key surface facilities and carry out activities to enhance the asset integrity. In October 2018, Rajasthan production sharing contract was granted extension of 10 years with effect from 15th May 2020, subject to certain conditions pursuant to government of India policy on PSC extension. One of the conditions for PSC extension related to audit exception issued as part of routine audits in 2018. The condition stated that if the audit exception results into creation of liability, the same needs to be settled prior to expiry of EAC. These audit exceptions have been replied as per the provisions contained in the PSC and stand disputed now. These were again notified for payment in May 2020 to the tune of US$364 million relating to the group shift, total amount was $522 million. Since the audit exception got disputed, they do not result into creation of liability. As for EAC provision, we have involved dispute resolution as for PSC in November 2019 and now initiated arbitration to resolve this. Due to extenuating circumstances surrounding COVID, MoPNG has permitted continuation of petroleum operations in the RJ Block with effect from 15th May 2020 until extension addendum is signed for – or three months whichever is earlier. In OALP blocks, our objective is to reduce the cycle time from exploration to production. We have implemented the largest onshore full tensor gravity gradiometry airborne survey in India to optimize time and cost intensive seismic data acquisition to fast track drilling. The seismic acquisition program has been initiated in Assam and the mobilization of the crew is underway in Rajasthan. Now coming to the Aluminium business, in our Aluminium business we saw record aluminium production from Lanjigarh refinery at 1,811kt, up 21% y-o-y. Through continued debottlenecking quarter four FY 2020 saw one of the lowest cost of production at Lanjigarh at $250 per tonne due to benefits from increase in locally sourced bauxite, continued debottlenecking, improved plant operating parameters and rupee depreciation. On aluminium hot metal production, we have already achieved an earlier production target announced target of $1,500 per tonne with Q4 FY 2020 cost of production at $14.51 per tonne, 20% lower y-o-y. We expect the cost to be even lower in quarter one. And going forward, given stable OMC bauxite supply and lower alumina and coal cost and the business will make reasonable cash margin even at $1,500 level. In wake of COVID-19 concerns, the outlook for the initial months of FY 2021 was volatile with some aluminium consumers either reducing or shutting production, a trend seen across geographies and LME taking in all drive. Now, however, we see announcements by many industries to resume production in some form at the earliest. The global primary aluminium market is currently at surplus but we also see LME looking upwards at $1,500 per tonne plus in the last few days. We continue to actively monitor the market and we’ll dynamically adopt our product and geography mix to cater to changing market requirement. The Coal Blocks Allocation Amendment Rule 2020 was notified but the comment in line with measures announced to free up coal market over the past few months from intend to auction 50 coal blocks in Finance Minister’s speech and the parliament passing the Mineral Laws Bill 2020 to remove captive and use eligibility for coal mining by private companies. The government is also introducing the revenue sharing base bidding model with no technical or financial eligibility criteria. Being one of the largest captive coal consumers in India for power in our aluminium smelter, we see this as a very welcome move in freeing up the coal market. This will reduce our dependency on Coal India and improve the competitiveness of coal suppliers in addition to transparency. We will actively evaluate all opportunities that these amendments will present to improve our coal security and power cost performance of our aluminum operations. Now coming to iron ore. In our Iron ore --

[Operator:]

Ladies and gentlemen, thanks for patiently waiting. The line is reconnected. Sir, you may go ahead.

[Sunil Duggal:]

So I don’t know where I was disconnected, but I’m coming to iron ore. In our iron ore business, sales at Karnataka at 5.8 million tonnes for the year, up 125% y-o-y due to an increase in production and stock liquidation at Karnataka. Production of pig iron was marginally down by 1% to 681kt in FY 2020. On Goa, we continue to engage with the government and local communities to restart our operations. Coming on steel, our steel business saw healthy margins for the quarter at $127 per tonne, up 132% q-o-q. The full year production was up 3% y-o-y at 1,231kt. With the domestic market showing positive response, we plan to resume our full scale facilities with more focus on value-added product in our product portfolio and continuously work towards reducing costs. Coming on outlook, we are deferring guidance for FY '21 to the end of quarter one after studying the overall situation. And when there is a better clarity, we will come back. Our current focus remains around efficient operations, active management of cost and capital conservation. As we conclude, I would like to emphasize that this call is to discuss the results of the year gone by and we will not be taking questions on the recently announced offer from Vedanta Resources to take the company private in this call. The proposed delisting process will be fair and transparent process in accordance with SEBI regulations. The details and respective timings around the postal ballot up on our Web site are all relating to the transaction. Our Investor Relations team will be able to help with any further questions you may have in this regard. Now, I would like to handover to Arun for the financials.

[Arun Kumar:]

Thanks, Sunil, and good evening, everyone. I’m on the quarter four FY 2020 financial highlights page. In the current situation, as Sunil pointed out, we stayed focused on getting the best out of what we influence, we can volume cost efficiency and clawback as much as possible of the lower LME or Brent. That explains some of these strong performance on cost and efficiency with sequential quarter or versus previous years. Again FY '20 over FY '19 on a constant price basis has been the best performance in the last five years in terms of EBITDA growth obviously driven by cost and volume. More details in the coming pages. The other key focus is on cash preservation or liquidity, curtail capital spend to high return projects thus generating positive and substantial free cash flow. This is similar to 2016 where the low price scenario brought out the best free cash flow post CapEx in the company in the last decade. On this page you see us maintaining a robust EBITDA margin thanks to the cost improvements. ROCE is still in double digits and exiting the year with significant cash results which has served us well in the current quarter as well. The EBITDA at 4,800 crore was better than quarter three on a comparable basis though on an absolute basis was lower. ROCE has followed the past trend. The liquidity of 38,000 crores has helped in the current quarter in choppy money market especially, and as a consequence our net debt stands at roughly around 21,000 crores, down 21% year-on-year with the annualized net debt EBITDA continuing at 1.0x. As usual, we have a detailed income statement in the appendix, pages 24 and 25, however, some key updates on the income statement. Below EBITDA line items, be it depreciation, interest cost, interest income, all are as per expectation and guidance which was reiterated in quarter three as well as well as during the whole year in the earnings calls. On top of it, the tax charge or the ETR for the year is also at 32% which is broadly in line with guidance of 30% to 32% that we’ve been giving for the year, right from the beginning of the year. However, I’d like to help you understand the tax line a bit more. There are three things on the tax line which matter this quarter. I’ll go in that order. Number one, as per accounting standards, the 1,700 crores tax charge on the dividend income or potential dividend income from Hindustan Zinc has been created given the fact that any income from there creates a deferred tax liability for the recipient of the dividend given that it is knocked off against the brought forward or carried forward tax losses as we call during the normal tax computation. And the accounting standards suggest that one has to estimate and hence the charge is 1,700 crores. And you have a better visibility to it given the actual dividend declared by Hindustan Zinc for the year end. Item number two, in quarter two of this year FY '20 if you recollect, we had a deferred tax liability write back of 2,500 crores driven by changes introduced in the tax regime, wherein as per the future earnings model, deferred tax liability would have been released due to the lower rate of tax consequent to shifting to a new tax regime down the line post exhaustion of the current benefits of [indiscernible] several other corporate have taken similar write backs. This deferred tax liability largely pertains to the tax versus stat carrying value, the fixed assets, if I may remind you all. Now based on the trued up model in quarter four which was actually driven by the newly introduced Finance Act 2000 and primarily the way the dividend gets – future dividend streams get taxed, the trued up reversal amount for the year stands at 1,800 crores, still a significantly large sum. However, the quarter four impact would hence have a charge of 700 crores. Removing the impact of the underlying – removing the impact of these two items, the underlying tax is around 700 crores to 800 crores for the quarter. Although from a full year perspective, both of these offset each other. The item number three, which is anyways available as a separate line, tax credit and the impairment charge taken of 6,500 crores is the third item which is clearly classified as exceptional as well. Both the impairment related deferred tax reversal as well as the dividend related tax are shown as separate line items in the Regulation 33 format in early days [ph]. As you know, we were accounting complexities in the deferred tax. Moving on, on the investment income for quarter four FY '20, only point is that versus last year at quarter four it is lower given the one-time income we had last year. Hence the whole portfolio earns around 7% pre-tax income as guided earlier, no surprises there as well. The same trend would be noticed on a full year basis on that line. Now coming to the impairment, we’ve added an extra page as you can see, Page 25, I guess. The net of tax charge is about 10,800 crores. This is two broad components. First is pertaining to the oil and gas which is 9,700 crores and is primarily driven by price assumptions and some owing to exploration related write offs. The policy approach of standard operating procedure for price assumptions and the variety of other assumptions which are largely – price is largely consensus driven is completely unchanged as compared to the earlier years. The impact of the Ind AS account will be higher than IFRS which will come out later given the lower yearly depreciation charge and the depreciation standards of the two accounting standards. On oil for consensus assumed in FY '20, '21 and '22 at the end of FY '18 when the last true-up was done were all in the mid to late 60s in terms of Brent. The current assumptions all indicate about $20 lower on an average on the next three years and the medium term it used to be 70s as per our earlier FY '18 true up is now down to the 50s. This is what the consensus estimates are. VAT is almost same, slightly upward bias. OpEx is lower – OpEx assumptions are lower because we’ve seen better OpEx and certain potential lower NPV given the project delays and the delayed realization on the benefits and some of the litigation items, the lower depreciation of the last few years versus the IFRS based on the contributors to this impairment. On the second item, nearly 70% of the carrying value of the work in progress of the copper expansion for LTP expansion has been taken at about 470 crores after an assessment of the asset recoverability test. These are the two fundamental items. There are a couple of other minor items as well there. And finally on this page and the detailed income statement, the PSC extension and DDH demand are part of the Reg 33 notes and have been very well covered in Sunil’s update that you just heard now. With that, if I move on to the next page dealing with the sequential quarter EBITDA bridge. As can be seen from the bridge, if you remove the LME impact and the base quarter impact of both together around 2,250 crores, 750 crores plus 1,500 crores, then the EBITDA will actually be up around 10%. One could conclude it is largely driven by the aluminium sector, which if you recollect we had highlighted even during the quarter three earnings call is that quarter four costs were tracking lower. We believe this costs performance in aluminum will sustain during the current year, as Sunil highlighted. Again on volumes, while it shows up flat it does not have the impact or rather it has suffered from the impact of the lockdown in March month. Of course, the lockdown was in the second half of the month, but majority of the March sales also happened in the second half of this month. It also confirms that we did exit with higher inventories across which is now being liquidated in quarter one. Moving on to the next page on EBITDA bridge which is the previous year’s fourth quarter, fairly similar story, excluding the price impact, EBITDA is again higher. And in the appendix there is a full year EBITDA bridge as well, probably Slide 29. EBITDA for FY '20 as a whole as I mentioned earlier was around 21,000 crores, lower 12% year-on-year driven by lower commodity prices which contributed to a negative 8,000 crores. But more than 50% of the drop in price was recouped to improve costs, albeit some of them are cost deflation as well. Of course, volume wise they have been better but for the lockdown in the month of March, as I just alluded to a little while ago. Moving on to the next page on net debt. During the year, net debt reduced by 5,600 crores reflecting our long-term trend of positive free cash flow post CapEx. Some of the full year sales contracts and customer advances, typically a 4Q phenomenon, did not materialize given the market disruption in March as well as the financial market segment and is a negative on the full year working capital. These are expected to be a timing issue, should set itself right during the H1 of the current year. Briefly on the CapEx page, two pages down the line, the numbers are well within the guidance as well. We plan to conserve capital as I articulated earlier to do the formal guidance that we share during quarter one call. Moving on to the next page on balance sheet, again a fairly self explanatory page. The liquidity for the group remains strong with cash and cash equivalents of nearly 3,800 crores, albeit the tightness in the domestic capital markets in March due to COVID-19. In the wake of tightening liquidity, the company used its internal cash accrual during Q1 to meet some of the short-term debt obligations, primarily around commercial paper comfortably. We also opted for some selective loan moratoria as applicable given the preference to conserve liquidity and timing. It will confirm and held the rating level in this scenario which is comforting. And our focus on improving the term debt maturity profile we believe we will make meaningful progress this quarter given various discussions in advanced stages with banks and financial sector. Else, the fundamental Vedanta Limited consolidated balance sheet looks fine with net debt EBITDA maintained at 1. Our investment portfolio is being monitored closely in this scenario and we don’t have any new risks during the quarter. It continues to be CRISIL Tier 1 rated largely. Vedanta had indeed declared interim dividend of 3.90 per share earlier in the year. Given the need to preserve and build liquidity around operations in this price scenario, final dividend for FY '20 was not on the agenda of the Board meeting. The Board will evaluate further during FY '21 as this scenario unfolds. Overall, we continue to focus on costs and efficiencies, cash and liquidity in this scenario. Formal volume and cost guidance can be expected in the next earnings call for us. As we conclude, I’d like to emphasize again that this call is to discuss the results of operations. We will not be taking questions on the recently announced offer from Vedanta Resources to take the company private. As Sunil articulated, the details of the process, FAQs, timings around postal ballot are all on the Web site and our Investor Relations team will be more than happy to help with any further questions you have in this regard which will be taken offline. With this, I hand it over to James for the Q&A session.

[James Cartwright:]

Thanks very much, Arun. Operator, over to you to start Q&A. Thank you.

[Operator:]

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Indrajit Agarwal from CLSA. Please go ahead.

[Indrajit Agarwal:]

Hi. Thank you for taking my questions. A couple of questions from my side. One, you have just said that you will again evaluate the dividend distribution for FY '21. We had a dividend distribution policy earlier that whatever dividend we get from Hindustan Zinc will be upstream. Is there a change in that dividend policy or is it still effective?

[Sunil Duggal:]

Arun?

[Arun Kumar:]

Yes. As far as the dividend policy is concerned, there is no change in the dividend policy. The dividend policy states that minimum payouts when profit is available in both the companies as well as a pass-through of Zinc dividend as long as it’s not a special dividend. So to that extent, this policy will be maintained in FY '21. As I mentioned earlier, it will of course be subject to liquidity situations and what the Board decides finally.

[Indrajit Agarwal:]

Sure. And in case this dividend from Hindustan, which is not distributed, the deferred tax of 1,700 crores, does that mean excess cash outflow or it can still be adjusted against the other group income?

[Arun Kumar:]

No, it has nothing to do with whether the dividend gets distributed or not simply because any dividend income is offset with the tax change carried forward post which APM [ph] comes into play after all that gets exhausted. So until such time, this is the normal accounting. It has nothing to do whether you distribute it or not. Thanks.

[Indrajit Agarwal:]

Sure. Second question on your CapEx on Slide 26 of your presentation, the $1.25 billion Cairn CapEx, so how much CapEx do we have to actually incur to maintain production y-o-y and how much of this can be avoided to preserve liquidity?

[Sunil Duggal:]

Sure. I will take this question. So in the current context, it is very clear that the CapEx discipline has to be maintained. So whatever the volume which will be delivered in the near term, only those CapEx will be taken up. And whatever the CapEx which are in the pipeline, like three, four projects are there, tight gas, tight oil, the liquid handling facility, the polymer feeding facility, so these are four, five CapEx which are in pipeline along with Ravva. So these CapEx only are getting completed. And the other CapEx are being reevaluated in the current context of Brent prices and other liabilities.

[Indrajit Agarwal:]

Sure.

[Arun Kumar:]

And if I may just add a line broadly, the unspent that you see on – the unspent you see on Page 26, the biggest project, Sunil said we’ll evaluate it in the course of time and we’ll take it up only if it is absolutely feasible and making a lot of return at low oil prices.

[Sunil Duggal:]

Just five projects are in pipeline; gas, liquid handing facility, tight oil, offshore Ravva and MBA infill and polymer.

[Indrajit Agarwal:]

Sure. Thank you. The last question is on Slide 35 with your aluminium profitability. The power cost over there has dropped sharply by about $140 a tonne q-o-q. So if you can shed some more light in terms of what was the coal cost, how much of this reduction is sustainable? Thank you.

[Sunil Duggal:]

So Ajay will give you the detail, but of course the drop in cost is the basic realization of the linkage coals and better availability of the mix. So these are the basic reasons, but Ajay you may like to add.

[Ajay Kapur:]

Yes, sure. Thank you, Sunil. So basically we’ve had a good mix of both coal, what Sunil was mentioning the coal availability was better at a lower cost also. So that gave us about $55, $60. Additional to that performance, technical parameters including the PLF of the plants, that also gave additional about $25, $30. And the remaining came from RPO where earlier we had a much higher percentage, but after the Orissa government’s notification, after Ministry of Finance – Ministry of Power notification, so now the RPO for Orissa was pegged at 3% and Chattisgarh at 7.5%. So that also gave additional $30, $35. And most of it, the RPO, the technical parameters are sustainable. Coal impact in quarter one we are actually seeing the benefit of even lower procurement prices which I think also Arun mentioned and Sunil also mentioned. We believe that that will help us in a much better cost of production going forward in quarter one and beyond.

[Indrajit Agarwal:]

Thank you. That’s all from my side.

[Operator:]

Thank you. The next question is from the line of Amit Dixit from Edelweiss. Please go ahead.

[Amit Dixit:]

Thanks a lot for taking my question. I have a couple of questions. The first one is on impairment in oil and gas division. While Arun explained in detail that what led to the impairment, just wanted to understand because it is quite peculiar that none of the global payers have taken such kind of impairment, including BHP in their latest production report, they have not indicated anything. In fact, they have said that price outlook will get better as we go ahead. So the question is that how much of this impairment related to price and is there any chance of this getting reversed in subsequent quarters if the outlook improves?

[Sunil Duggal:]

So, Arun, you may --

[Arun Kumar:]

Amit, thanks for the question. So fundamentally let me make a few distinctions. One, global players, there could be multiple assets and multiple headrooms in there. Here it’s broadly – the Rajasthan asset as you know which has the maximum value, also there are few other assets like Cambay and Ravva. And second is that in a language that you would appreciate, it’s almost mark-to-market in a manner of speaking simply because this is the first time in the last six years that you’ve taken an impairment. Twice you’ve taken an impairment charge and one you’ve taken impairment reversal. And hence any sharp movement in price or reserve, you would have higher likelihood of an impairment in Cairn rather than probably other companies which may not be strictly comparable. At the asset level, it might be comparable. Now your second sub question there, how much of it is really price? You realize that the $20 number that I gave you is a lower price assumption on an average compared to the earlier one when [indiscernible] up in March 2018 as pertains FY '21, '22, '23 which is a go-forward period and of course into the future, simply a three-year impact on $20 would itself give you a number of $700 million, $800 million. With that you add the NPV, you add the exploration bit, et cetera, you almost arise at your number. So an overwhelming majority of it is price driven as a point I was trying to make as I explained the impairment. And the third sub question that you had here, of course the possibility of a write back is very well there, but obviously in our accounting world as you know, the threshold for write back is far higher than the threshold for a write down and as in the common language, we call it conservative. And to take you back through the memory lane a couple of years ago, there was a write back but that was very, very clearly led by addition of reserves, physical reserves got added thanks to the EOR programs and the other CapEx which are related to the CapEx question that was raised by Indrajit, all those CapEx items created reserves. So we wrote it back actually. It is otherwise possible, but thresholds are definitely normally higher. I hope that helped answer the question.

[Amit Dixit:]

Thanks a lot for this answer, a quite detailed one. The second question is on oil and gas production itself. Despite investing close to $1 billion in last two years, we have seen that oil production has come down from 200 kboepd to 160 kboepd. Of course, this quarter there could be one-off because you had shutdown at Rajasthan block. However, in the last presentation we had given guidance of 225 kboepd of exit capacity and the number of wells hooked at the end of H2 were 90, however, we see just 75 at the end of H2. So long do you think will it take for us to achieve this 225 kboepd that we guided at FY '20 exit?

[Sunil Duggal:]

Sure. The lesser production was a combination of the decline and the new projects and the liquid facility which was to be upgraded. So as the water cut goes up, you have to feed more water and polymer. So the liquid facility is limited, so that means you have to cut down the production. So until the new facility is hooked up, there will not – you will see the decline faster. But as I said that there are five projects which are coming up which are almost nearing completion now and by this time some of the projects might have already got completed if the COVID would not have happened and the labor would not have run away from there. And some of the equipment which were held up in Italy, China, those would have come in time. But there was a bit of a delay. Some of the projects which were to get completed last year go delayed for some reason or the other. Now we are in the process of getting these projects completed. So gas, which was – from where we got the early supply of gas which is contributing to 20k barrel per day, when this project will get commissioned in quarter two, this will contribute additional 20k barrel. Liquid handling facility, as I just said that how this will add. This will add to a volume of around 10k barrel. So this will also get completed in quarter two. Tight oil, another project which is getting hooked up, will get completed in quarter two. This will add around 10k barrel again. Offshore Ravva, this project is about to get completed in a month or two. This will add 5k barrel. And MBA infill and polymer facility which is being done by Halliburton where all the wells are done and the surface facility is about to get completed, this will get completed in the next two to three months’ time, again, early quarter two. And this will also give you 10k barrel. And all this addition, including the base volume, we are confident that the exit volume this time should be definitely between 220k to 240k a barrel.

[Amit Dixit:]

Thanks Mr. Duggal for a detailed answer. That means like Q2 and we should see a tangible increase in oil production. This is what you’re trying to say, right?

[Sunil Duggal:]

So from Q3 you will see the tangible increase in production because the commissioning will happen – project completion will happen in quarter two in stages from month-on-month and then the ramping up of the facility has to happen and stabilization of the facility. But definitely, this volume will start ramping up from Q3 onwards. Some indications will also come in Q2 also.

[Amit Dixit:]

Great. Thanks for the detailed answer. I have a few other questions, but I will get back in the queue. Thank you and all the best.

[Operator:]

Thank you. The next question is from the line of Amit Murarka from Motilal Oswal. Please go ahead.

[Amit Murarka:]

Hi. Good evening, everyone. So I just wanted to understand aluminium cost reduction. So can you help break up that cost reduction in terms of how much is coming from the fuel cost, how much is from the lower cost of alumina just to understand basically what has led to the commodity price deflation and how much is a structural reduction?

[Sunil Duggal:]

So you’re right. The cost reduction is a combination of alumina which is how much of sourcing from local Orissa or the contribution of the Lanjigarh or the purchase of alumina and power also. Ajay said that there are various factors in the carbon. But Ajay, would you like to give the details?

[Ajay Kapur:]

Yes, sure. So Duggal has already mentioned. So essentially, on one hand as Mr. Duggal mentioned in the beginning, Lanjigarh achieved its worst cost of production in the last quarter, close to 258. So that is somewhat one direction. Second, of course, the API index itself, alumina index along with LME which you’ve also seen, so both added together give us a good alumina cost. Coal and power I already handled. I think the answer remains same where there are three levers. RPO was one which is structural. Coal also I would say structural in the midterm because a lot of coal and excess coal is available now. And third, of course, planned reliability also was much better in the last quarter which I think will continue. On top of it, the commodity prices, things like CP coke, CT pitch, they were also on the lower side. So that also helped us. I believe that should also remain more or less in the same range bound. That collectively and we are also running commercial and manufacturing excellence programs which I also spoke last time, they’re also yielding very good results.

[Sunil Duggal:]

Just to clarify one thing that the plant availability reduces the power import which also makes a lot of difference.

[Amit Murarka:]

Okay. Sure. And on Rajasthan asset or block, so the three-month extension has been given now or is in operation now, but how does it resolve itself? Like let’s say if that PSC if the extension signing is not done at the end of these three months, so will you continue to get this extension? Until the time the extension happens, will your production sharing and the investment multiple with the government remain the same as it was in the earlier PSC?

[Sunil Duggal:]

So as we told you that the addendum needs to be signed. The PSC extension – when the PSC extension was given, there was a principal agreement which was reached between us and the government that this extension of PSC will continue. And there will not be any strings attached to this, like – whether the earlier demand has to be settled. So we have principally agreed and based on that they have taken up the approval. And now this is lying with the Law Ministry. If we get approval from Law Ministry any day and my own belief is that in the next one, two, three, four weeks, it should be signed.

[Amit Murarka:]

Sure. And the production sharing is going up to 60% as part of the extension or that is still under discussion?

[Sunil Duggal:]

No, it is – we are signing the PSC as part of the new policy which is 50% and the investment multiple recovery remains same as of here. But that is a separate thing that we are disputing with them that it should remain at 40%.

[Amit Murarka:]

Okay, for sure. Thanks.

[Operator:]

Thank you. The next question is from the line of Ritesh Shah from Investec Capital. Please go ahead.

[Ritesh Shah:]

Hi. Thanks for the opportunity. My first question is for Arun. Sir, how should we look at the debt maturity profile and the cash flows into FY '21? I understand on one of the slides, we have given 9,100 crores. Sir, how much is the outstanding commercial paper? And how should one look at cash flows for this year? It looks like it’s like walking on a tight rope.

[Sunil Duggal:]

Arun?

[Arun Kumar:]

Not really because I think the outstanding commercial paper is probably down to about 3,000 crores, 4,000 crores at this point of time; very, very manageable levels. Even otherwise the credit supports a higher level. And secondly in terms of refinancing broadly, we believe that in the next – with some luck in 30 days, if not 60, 70 days, we should be done with a majority of the refinancing for the year. So we are comfortable of this. And as I alluded to in my talk track, we are in advanced discussions with some of our key banking partners.

[Ritesh Shah:]

Yes. So basically we are looking at refinancing of nearly 12,500 crores this year, that’s not something which is comforting for us despite the tightness in the credit markets. Is there a fair way to understand that or should one look at a significantly lower CapEx? I understand we are not giving guidance, but some color over here would be quite useful.

[Arun Kumar:]

So on CapEx – sorry, go ahead, Sunil.

[Sunil Duggal:]

No, you go ahead.

[Arun Kumar:]

On CapEx of course we have not given guidance, but all I can point you out to the trend chart that we normally play which shows what is the guidance at the beginning of the year and where did we land up. If you see, we’re always much below our budgets. We absolutely conserved and would like to deploy it only when there is an immediate link to the volumes, as Sunil articulated earlier. And broadly if you see, zinc expanding program is almost done for the 1.2 and it’s really only these five or six projects in oil which are at advanced stages, as Sunil said. And anything new we would have to look at and evaluate sharply even though all our projects we have said earlier even at 40 Brent and assuming a higher profit petroleum share are still producing well above 30% from an IRR perspective which as you can appreciate are much higher than our cost of capital. And I expect you may be short of a number of guidance in this call, but I think we have enough comfort in terms of understanding our mines like it will rationed and it will be absolutely closely monitored.

[Ritesh Shah:]

All right. Sir, honestly given your commentary, it looks like we’re in a comfortable position. And as a minority, definitely at Vedanta level, one would be looking at a dividend payout, at least what has transpired through HZL to the parent? Is it something that one can expect during the year going forward? Any commentary over here or is it something – how to look at it at a later stage based on cash flows?

[Arun Kumar:]

Feedback is quite valuable and we will definitely share it in general with the Board when we meet. Thanks.

[Ritesh Shah:]

All right. Sir, my second question is for Mr. Duggal. Sir, any update on the Hindustan Zinc second call option? I understand the CBI file is still pending. Any particular reason over here for the delay and are there any timelines that one should look at?

[Sunil Duggal:]

Well, I would not comment on anything which is going on, but one thing I would like to clarify at this point of time that the CBI file is closed. The closure report has been filed by CBI and it has been handed over to the court.

[Ritesh Shah:]

Okay, fine. That’s helps. Thank you so much.

[Operator:]

Thank you. Ladies and gentlemen, we’ll take the last question from the line of Rajesh Lachhani from HSBC. Please go ahead.

[Rajesh Lachhani:]

Thanks for the opportunity. Sir, my question is with regards to the employee cost. We have seen that in this quarter, the employee cost has reduced substantially compared to prior year as well as sequentially. Just want to understand the reason. And is this the new norm or should we see employee cost rising from the next quarter? That would be question number one.

[Arun Kumar:]

That’s sort of a very technical financial question. Let me quickly address it. We do always true-up certain performance bonuses related simply because we do know the numbers by the time, so you could say it broadly relates to that because more of the component is variable in nature. So with performance comes bonus. With this low price environment where you can understand that some of them may have been deferred.

[Sunil Duggal:]

But just to build on what Arun has said, in the current context actually we have risen to the occasion and we are proud of what we are doing in terms of how we are liquidating our stock, how our capital utilization has gone up. We are almost operating at 100% of volume. But on cost, I may tell you that we have redesigned ourselves and we have divided the total cost into the various buckets, in seven, eight buckets. And we have made the MANCOM [ph] in each organization where three, four, five people are there who are the key decision makers of who meet on a daily basis to make the decisions. But on the cost, we have divided this into eight, nine buckets and we have given the ownership of that cost bucket to each senior individual in each company and these all costs are reviewed in the war rooms on a daily basis and I’m very proud to tell you that we have decided ourselves that we will try an endeavor to protect our margin what was there in quarter four and quarter three last year even in this close cycle of commodity prices.

[Rajesh Lachhani:]

Understood, sir. And sir, my question to Arun would be, on Slide 21, we have mentioned ROCE of 11%. So I just want to understand, this 11% is after the impairment, right?

[Arun Kumar:]

That’s right. This will be an average capital employed for the year.

[Rajesh Lachhani:]

Right. So this is post impairment. And Arun, if we remove Hindustan Zinc from this, can you let me know what is the ROCE for the remaining businesses?

[Arun Kumar:]

I don’t have the split ready at hand, but we can definitely work it out with you. The good news there really is that aluminium business as you saw in the appendix at post tax let’s say – EBIT post tax as a percentage of capital employed is starting to turn a nice positive for us. So that should – if that sustains, we believe it will, that should help pull the ROCE upwards even in a low price scenario. Of course, as we speak the prices are looking up, that’s a different matter altogether. But I think there’s some good tailwinds out there one should expect especially in light of the commentary that Sunil gave in terms of protecting the margins and pulling the cost down in this scenario.

[Rajesh Lachhani:]

Understood. Arun, but my question was more about a structural thing. So we have been talking about considering only those projects which have high IRR, we talked about 20% and if we remove Hindustan Zinc, then the ROCEs for the remaining business, even in the years when the commodity prices were relatively much better, the ROCEs for the remaining business has been much lower. So just wanted to understand, isn’t there some issue with the capital allocation previously as well as shouldn’t that be a review of the capital allocation strategy going forward?

[Arun Kumar:]

I think it’s a good question, but a lot of it is history as you mentioned. If you look at the last three, five-year scenario and take the CapEx point from an allocation perspective, it has gone into sectors and areas and projects where the IRR is much more than your cost of capital at that point of time. It’s a different matter that prior to that, we may not have got the returns we desired or got the returns a little later than what was planned. So that’s probably where it is. If you look at all the projects of oil which comes into fruition this year, the IRR will be above the cost of capital. Zinc, as you know, is always even at a low Brent price it’s about less 30%. And we have not spent anything in aluminium in the last five years and such. So it’s been a story of making structural corrections to enhance the incremental ROCE or incremental yearly ROCE so that the overall value goes up. So that’s been sort of the efforts in the three big sectors. And then of course if copper comes back and Goa reopens, your numbers will automatically start looking up.

[Rajesh Lachhani:]

Sure. That’s quite an elaborate answer. Thanks a lot.

[Operator:]

Thank you.

[James Cartwright:]

Thank you, everybody. On behalf of the entire Vedanta team, thank you for dialing in today and we’d just like to say any further questions please don’t hesitate to contact myself and the rest of the Investor Relations team. With that, let me pass it back to the operator to close the call. Thank you.

[Operator:]

Thank you very much, sir. Ladies and gentlemen, on behalf of Vedanta Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.