Vedanta's zinc margins and expansion pipeline support stronger earnings outlook

Investment View and 1QFY27 Summary

Motilal Oswal Financial Services Ltd. (MOFSL) reported that Vedanta’s 1QFY27 consolidated performance was broadly in line with its expectations and maintained its Neutral rating. The broker sees an encouraging earnings outlook from upcoming capacity additions, a favourable pricing environment and a higher value-added-product mix. Guided capital expenditure is progressing and should support further cost savings, while Vedanta’s focus on expansion and deleveraging is supported by higher cash flows.

Revenue growth was driven by higher LME prices, premiums and foreign-exchange gains. EBITDA was broadly in line with MOFSL estimates and was supported by higher volumes, LME prices, premiums and foreign-exchange gains. Adjusted PAT exceeded MOFSL’s Rs 4,700 crore estimate because of lower tax outgo.

Zinc India Delivers Stronger Margins

Hindustan Zinc, Vedanta’s Zinc India business and the largest contributor to MOFSL’s valuation, reported revenue of Rs 13,700 crore, up 77% year on year and 2% sequentially, ahead of MOFSL’s Rs 12,700 crore estimate. EBITDA rose 109% year on year and 5% sequentially to Rs 8,050 crore, above the broker’s Rs 7,650 crore estimate. EBITDA margin was 58.6%, aided by favourable metal prices and a lower cost of production.

Zinc cost of production excluding royalty declined to US$851 per tonne from US$903 per tonne in 4QFY26 and US$1,319 per tonne in 1QFY26. The improvement reflected higher renewable-power consumption and improved mined grades. Mined metal was 268 thousand tonnes, flat year on year but down 15% sequentially. Refined metal production was 260 thousand tonnes, up 4% year on year but down 8% sequentially because of planned lead-smelter maintenance.

Other Segment Performance

Zinc International mined-metal production fell 14% year on year to 48 thousand tonnes as the Deep mine at Black Mountain nears the end of its mine life. Gamsberg contributed 45 thousand tonnes, flat year on year. Zinc International revenue rose 21% to Rs 1,400 crore, but EBITDA declined 41% to Rs 250 crore because of lower volume and higher cost.

Copper production was 53 thousand tonnes, up 3% year on year. Fujairah copper-rod sales fell 51% year on year following the closure of the Strait of Hormuz. Copper revenue was Rs 8,530 crore, and the segment reported an EBITDA profit of Rs 11 crore versus Rs 8 crore in 4QFY26 and an EBITDA loss of Rs 26 crore in 1QFY26.

Expansion Pipeline and Management Outlook

Management reiterated its ambition to become a US$5 billion EBITDA business by FY30, supported by brownfield expansions in zinc, copper and ferroalloys. Gamsberg Phase II production is expected to begin in August 2026, raising concentrator capacity to 450 thousand tonnes per annum. Manganese mining is expected to commence in 2HFY27 following Stage-I forest clearance.

Copper India has completed Phase-I debottlenecking, lifting installed capacity to 222 thousand tonnes per annum. Further expansion to 229 thousand tonnes per annum is under way. Management indicated that growth investment, deleveraging and shareholder distributions would progress simultaneously, supported by free cash flow. It suggested that investors could broadly model a 4% to 5% dividend yield across demerged entities over time, subject to board approval.

MOFSL Estimates

MOFSL largely retained its FY27E and FY28E estimates. FY27E and FY28E adjusted PAT estimates were raised by 4%, while revenue and EBITDA estimates were unchanged.

Valuation and Target Price

At the CMP, the stock traded at 7.6 times FY28E EV/EBITDA. MOFSL’s sum-of-the-parts valuation applies a 7.0 times target EV/EBITDA multiple to FY28E attributable EBITDA, with Hindustan Zinc valued based on Vedanta’s 60.7% holding.

After deducting Rs 37,300 crore of net debt and adding Rs 15,000 crore of investments, MOFSL derives an equity value of Rs 1,14,000 crore and a target price of Rs 290 per share.

Key Operating Concerns

• Exposure to movements in metal prices and premiums.
• Weaker Zinc International volumes and higher costs.
• Mine-life pressure at the Deep mine at Black Mountain.
• Potential effects of planned maintenance on production.
• Disruption to Fujairah copper-rod sales following the closure of the Strait of Hormuz.