Vedanta Ltd

NSE:VEDL

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to Vedanta Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to take the conference over to Mr. Varun Kapoor from Vedanta Limited. Thank you, and over to you, sir.

[Varun Kapoor]

Thank you. Thank you, operator, and good evening, everyone. This is Varun Kapoor, Head of Investor Relations, and it's my pleasure to welcome you to our third quarter FY '22 earnings call. We have with us today the management team headed by Mr. Sunil Duggal, Group CEO; Mr. Ajay Goel, Group Acting CFO; Mr. Prachur Sah, Deputy CEO Oil and Gas; Mr. Arun Misra, CEO, Hindustan Zinc; Mr. Rahul Sharma, Deputy CEO Aluminium; and Mr. Sauvick Mazumdar, CEO, Iron & Steel. With that, I would like to take over to Mr. Duggal to take us through the presentation.

[Sunil Duggal, CEO & Whole Time Director]

Thank you, Varun. Good evening, ladies and gentlemen, and welcome to Vedanta Limited FY '20 Third Quarter Earnings Conference Call. This quarter, the commodity market witnessed heightened volatility mainly driven by energy crisis, worsening supply situation and concern over rising cost. The global economy has been losing momentum because of the new variant of the COVID, supply chain disruption and elevated inflation level. Change in the expansionary stance of monetary policy by central banks and worse-than-expected impact of Omicron variant with posed pressure on commodity demand and prices going forward.Indian economy has been on a relatively stronger footing as most of high-frequency indicators surpass pre-pandemic level though some showed sign of slowing momentum recently. However, government push on infrastructure spending, reviving capital expenditure by corporate sector, credit availability, less stringent curve on movement of people and material, unlike previous 2 waves of pandemic and mixed sentiment on the lethal impact of the third wave is likely to limit the impact. We expect the demand for mineral metal and energy in India to remain resilient in seasonally a bit quarter 4.Vedanta continued its strong growth momentum this quarter, reporting its highest quarterly and 9 monthly revenue and EBITDA despite macroeconomic and input cost headwinds. We witnessed steady volume performance across all our businesses with aluminium and zinc delivering record quarterly performance. We have become the sole producer of nickel in India post the acquisition of NICOMET, which complements our existing portfolio. All our initiatives on ESG front are progressing well. We are making great strides to stand by the commitment made on renewable energy and decarbonization. We are proud to announce the establishment of our 3,000 Nandghar benefiting 120,000 children and 90,000-plus women. We continued with the strong track record of rewarding shareholders with second interim dividend payout of INR 5,019 crores, taking the YTD dividend to record of INR 32 per share. With a robust balance sheet and liquidity position with net debt EBITDA of 0.7x. We are further committed to delivering consistent growth through capacity expansion, unlocking operational efficiencies through technology and digitization and targeted acquisitions. As announced last quarter, our reformed ESG vision of transforming for good is supported by 3 pillars: transforming community, planet, and workforce.These pillars are indicative of Vedanta's steadfast commitment to become a best-in-class company, and at the same time, ensure that we are future ready to tackle current and emerging risks. These pillars are supported by [indiscernible] that have specific quantifiable targets to track our progress. The aim was arrived at after a comprehensive tier down of material aspects, that was evaluated by ESG rating agencies like MSCI, Sustainalytics and CDP. Aim 1, 2 and 3 under transforming communities commit us to keep community welfare at the core of our business decisions, empowering 2.5 million families with enhanced skill set, uplifting our 100 million women and children through education, nutrition, health care and welfare. Aim 4, 5 and 6 under transforming the planet commit us to net carbon neutrality by 2050 or sooner, achieving net water positivity by 2030, innovating for a greener business model. Aim 7, 8 and 9 under transforming the workplace commit us to prioritizing safety and health of all employees, promote gender parity and diversity and inclusivity. Our pillar 2 global business standards of corporate governance. Some of our forward targets are reduced absolute GHG emission by 25% by 2030, deploy 2.5 gigawatt by FY '30, 500-megawatt RTC by FY '25, convert 100% of LMV fleet to electric by FY '30, 75% of mining fleet by FY '35, increasing diversity at workplace, conserving biodiversity, and working for our communities.For the last 3 months, more than 600 projects have been identified across all the BUs, 70% of the projects are around improvement of our environment practices, 25% to improve social practice, and 5% to improve governance. We are making great strides to stand by the commitment made on renewable energy and decarbonization. We have taken some concrete action and are in the process to take some more further to realize these targets. On renewable power, our Aluminium business is largest industrial consumer of renewable energy in India, who procures over 2 billion units of renewable energy from IEX and PXIL leading to 1.54 million tonnes equivalent of CO2 reduction. We are in the final stages of approval to deploy more than 300-megawatt RTC RE. The RE adoption plan will help reduced actual GHG emission by nearly 25% by 2030. Coming to EV adoption. Our Aluminium business has entered into a pact with GEAR India, to deploy one of the largest fleets of lithium-ion battery powered by electric forklift, substituting diesel-fueled forklift with the green fleet will reduce diesel consumption by more than 2.5 lakh liters annually, thereby ensuring 690 tonnes of prevented GHG emission. Hindustan Zinc has partnered with Normet & Epiroc for supply of battery-power underground mining fleet. The Electrosteel Limited business has also tied up with Tata Motors for EV fleet, replacing LMVs and with Eveez for e-bikes and e-scooter for plant local travel. Similar efforts going on in all our businesses and depending on the mapping availability of such equipments in market and depending on how the market success is there could be opportunity for us to convert our industrial and passenger carrier vehicles to EV in the next few years. We are structurally moving towards cleaner fuels into our operation as the technology advancement are emerging. VAL-Lanjigarh has signed a partnership with gear to supply natural gas. This fuel switch will reduce the emission intensity of alumina by around 10%. We are also looking for opportunities for partnering with the research institutes like TERI, Hatch, , Worley, IIT Bombay to search and evaluate implementation of opportunities for adopting clean fuels like natural gas, hydrogen into our operation. In steelmaking process, zinc concentrator, et cetera, and exploring innovative solutions for energy efficiency, better waste management, water management. TERI is working with us on multiple environmental initiatives for water, climate, and habitant management. Further, Vedanta Jharsuguda has planted 2.5 lakh trees so far with a record of 20,000 trees plantations in a single day. We at Vedanta has taken a target to plan 10 million tonnes or 10 million trees by 2030, out of which our respective businesses have taken their own targets. We have taken a target to become water positive by 2030. We have onboarded an agency on water positivity, road map and accounting across our businesses. 32% of water is recycled across our operations, which was up 2% from last year. 93% of our high-volume low-toxicity waste is recycled. We have taken selection like ash-pond water reuse at Aluminium, rain water harvesting at Cairn, STP water usage at HZL, Zero Liquid Discharge at our various locations to achieve water positivity. Similarly, on waste management, specific projects are underway to utilize 100% water. BALCO has discharged its first fly-ash to Cement industry and has partnered with National Highway Authority of India for off-taking it's 12% to 15% of alone fly-ash. Lanjigarh has also engaged with cement players to utilize red mud. I'm also happy to tell you that we have taken a target to get rid of fully dumped fly-ash in the next 2 to 3 years' time by various means, one of those could be filling out the old dump mines. We have established a diversity, equity and inclusion of council which will independently work towards to oversee and promote and bring more inclusivity, diversity and equity within the organization and bring more women in leadership roles. We have a target to increase diversity at Vedanta to 30% level, women in leadership position to 40% level and to have 50% diversity at our corporate functions. With our ESG efforts, I am glad to share that Vedanta's ESG rating has been -- have seen an upward trend. Sustainalytics has lowered our risk score from 47.3 to 44.2. BDSI ranking has improved from 86 percentile to 89 percentile. MSCI has upgraded us to B in 2021 post CCC rating for more than 5 years. CDP climate change rating is a B in 2021 from B in 2020. We are deeply saddened by the loss of 2 lives in quarter 2 -- quarter 3. One at and one at our Black Mountain mining. The incident investigations have been completed by a senior leadership team. The outcomes of the investigations are immediately shared with all sites of Vedanta for deploying the learnings across our site. Safety stand-down was conducted across all our sites with aim to communicate the learning to all employees and business partners. As an indicator response an engagement section in workshops were conducted with all our CEOs and SFC head for fatality prevention initiatives. To avoid such incidents in future, mechanization of activities such as fast-charging secondary blasting breaking is being implemented in a time-bound manner. Management has also decided to earn standardization of hiring points across all underground mines at Vedanta. To ensure that all employees go back home safe, the programs like critical risk management, cross-business audit program, ICAM quality safety investigation and safety community of practices have been initiative. Now turning to our business verticals. Aluminium yet again witnessed an exceptional quarter with highest driver metal production of 578 Kt, which was up 16% Y-o-Y. The Aluminium production at our Lanjigarh refinery was down 8% Q-o-Q due to planned annual maintenance shutdown but was up 16% Y-o-Y. Aluminium COP was at $2,055 per tonne, going to input commodity headwinds, especially power cost. This quarter saw EBITDA margin of 29%. In our effort to be among the top global leaders in aluminium with sustainable Tier 1 cost structure, we are very focused bringing in end-to-end structural changes in reducing market-induced volatility. The ramping up of Aluminium refinery from 2 million to 5 million tonnes per annum is on track, which will move us towards vision to be vertically integrated across entire value chain. We are confident of significant cost savings post completion of smelter expansion and other growth project. We are also taking all initiatives to operationalize our coal mines, 2 of which could become operational in the next year. Turning to Zinc India. This quarter saw the highest refined metal production of 261 Kt, up 11% Y-o-Y and highest 9-month mined metal production of 722 Kt post the maintenance shutdown taken in quarter 2. Integrated silver production was marginally down 5% Y-o-Y, in line with the lower lead production and up 14% Q-o-Q due to depletion of Silver WIP. The cost of production stood at $1,148 per tonne, up 2% Q-o-Q due to higher coal prices and input commodity inflation partially offset with higher volume and operational efficiency. Zinc International business is well positioned for long-term value creation. This quarter, Gamsberg produced 41 Kt MIC, up 6% Q-o-Q, but down 5% Y-o-Y due to lower zinc recovery. We finished successful commissioning of some of the debottlenecking project in quarter 3, which will give us a headway for increasing our production in quarter 4. This is key to 575 tonne per hour enabler, which will enhance processing capability by 1.5 Kt MIC. We also saw highest 9-month MIC production of 126 Kt, which was up 22% from Gamsberg. The quarter 3 COP was up 8% Y-o-Y due to input commodity inflation and down 2% Q-o-Q in line with higher MIC production. At Oil & Gas business, quarter 3 gross production was 159 kboepd, taking the YTD average volume to 163 kboepd. The natural decline in the MBA field has been offset by the continued gain realized from polymer injection in Bhagyam, Aishwarya field and new infill wells brought online in Mangala field.In quarter 4 FY '22, we shall continue to focus on infill well drilling in Rajasthan across MBA fields, tight oil, tight gas and Cambay to focus on maximizing near-term volume and arrest the natural decline. In OALP and DSA blocks, early monetization is underway for Cambay and Assam, the large target production start in quarter 4 FY '23. OpEx cost in the current quarter was at $10.3 per barrel compared to $9.1 per barrel in the previous quarter. This increase is primarily due to increase in polymer prices owing to oil price rally. We are looking forward to continuing the exploration work program in OALP and PSC blocks. In addition, we expect to commence share drilling in Rajasthan on a pilot basis for which we have partnered with 2 business partners, Schlumberger, and Halliburton. In Iron ore, Karnataka, sales went up by 24% Y-o-Y and 22% Q-o-Q. VAB production was up 39% Y-o-Y supported by productivity improvement initiative. Our VAB margin was down 49% Q-o-Q due to lower pig iron prices and high coking coal prices. We have begun commercial operation at recently acquired cement plant. We are also proud to announce that with the successful acquisition of nickel and cobalt plant at Goa, Vedanta has become the sole producer of nickel in India. In steel, the hot metal production was up 2% Y-o-Y and 20% Q-o-Q owing to stabilized center plant and blast furnace. The saleable production is up 19% Q-o-Q due to improved furnace performance. The margin was down 35% Y-o-Y and up 125% Q-o-Q, due to planned shutdown expenses and higher commodity prices, partly offset by increased VAB mix to 74%. We have rolled out e-commerce sales for online ordering, we are further upgrading our facility through automation, digitization, and various other productivity improvement initiatives. Coming to FACOR. FACOR is continuing its turnaround journey, achieved highest quarterly ferrochrome production of 20 Kt with plant productivity enhancement by 5%. The ore production was up 37% Y-o-Y through operational enhancement of both the mines. Our EBITDA margin was 5x Y-o-Y, majorly impacted in the last quarter because of high coke prices. At the end, I would like to reiterate Vedanta's unique position to deliver long-term sustainable value to continue focus on our strategic priorities and diversified asset base. I'm confident that with our renewed ESG vision, we'll be able to assure in a new era of sustainability leadership and be among the world's most responsible respected and in all resource companies. With this now, I would like to hand over to our CFO, Mr. Ajay Goel for the financial performance commentary. Over to you, Ajay.

[Ajay Kumar Goel, Acting Chief Financial Officer]

Thank you, Sunil, and good evening, everyone. We continue the momentum of superlative finance performance and have surpassed the outstanding results of previous 3 quarters. This quarter witnessed our record revenue and highest ever EBITDA performance and a very low leverage ratio being net debt to EBITDA. Q3 was benefited by favorable sales realizations on account of lofty prices, zinc and aluminium being at historical high and also vibrant.Operationally, Hindustan Zinc and Aluminium delivered a record quarterly metal production with 11% and 16% growth Y-o-Y. We delivered highest ever ore and ferrochrome production at FACOR. This quarter, we continued with our consistent track record of rewarding shareholders with dividend payout and, at the same time, deleveraging our balance sheet. Some of the key highlights of the quarter are highest ever quarterly EBITDA of INR 10,938 crore, up 42% or Y-o-Y with an underlying margin of 37% being an industry-leading margin. Attributable PAT before any exceptional items at INR 4,189 crores, higher by 27%, which depicts a very strong financial performance. ROCE, return on capital employed, at 25%, which is a double versus last year's number of 12.5%. Gross debt at INR 52,738 crores with cash and cash equivalents of INR 25,207 crores shows a very strong underlying financial liquidity position. Net debt at INR 27,570 crores, down by 22% Y-o-Y, which is almost INR 7,781 crores, more than 1 billion deleveraging with annualized net debt-to-EBITDA ratio of 0.7%, which is maintained at a very low level amongst Indian peers. We have a detailed income statement in the appendix. I want to highlight a couple of areas from that income stream. Depreciation charge for Q3 was INR 2,274 crores, higher 19% Y-o-Y, primarily due to higher overall working interest production and depletion charge at Rajasthan Oil & Gas, higher ore volumes and capitalization of Zinc and Aluminium businesses. Quarter-on-quarter, depreciation increased by 7%, which is in line with the business magnitude change sequentially. The finance cost for Q3 was INR 1,216 crores, down 8% Y-o-Y majorly due to lower average borrowings and up 14% quarter-on-quarter, majorly on account of onetime gain we booked on ASI bonds buyback in the previous quarter. The year-to-date cost stands at 8.1%. Income from investment for Q3 was INR 516 crores, down 33% Y-o-Y, majorly on account of NPA movement and due to onetime income in the previous year. Income is also down by 11% quarter-on-quarter, again due to NPA movement and utilization of funds for payment of dividend in Q3. The YTD income from investment stood at about 4.7% pretax. The normalized ETR is YTD at 27%, which is in the yearly guidance range of 26% to 28%. Normalized ETR, as we know, excludes any tax on exceptional items and tax on intra-group dividends. Now I'll move to EBITDA bridge. Now starting with EBITDA bridge Y-o-Y. EBITDA for the quarter, as you may have seen, is higher by 42% Y-o-Y. As we can see on the chart, in summary, the significant portion of EBITDA increase of INR 3,240 crores from INR 7,700 crores last year to almost INR 11,000 crores in this current year has been market or pricing driven, along with higher volumes at Zinc business and higher ESL FACOR at ESL Steel from 60% last year to more than 90% in the current year, Q3. However, this has been partly offset by higher cost at Aluminium and Zinc businesses. Overall, the absolute EBITDA value is 1.4x of last year same quarter. Moving on to EBITDA bridge sequentially. EBITDA for the quarter is higher by 3% quarter-on-quarter. So as is evident from the bridge, the market and regulatory forces have negatively impacted our margin by INR 337 crores with commodity prices alone showing gain of INR 1,142 crores. This is offset by input inflation of INR 1,655 crores majorly of alumina and coal and aluminium and also at ESL and IOB sector. On the operations front, the higher volumes at Zinc, Iron and ESL businesses, was partly offset by higher cost in Aluminium, Zinc and Oil businesses. Overall, the higher metal prices and inflation on input size remains [indiscernible] for the quarter both Q-o-Q and year-on-year. Those are different bad magnitudes. Moving on to next page on net debt bridge. Net debt as of December 31 stands at INR 27,576 crores, showing an increase on quarter-on-quarter basis, partly due to investment in the working capital which is in line with the revenue growth this quarter and also on payment of dividend in the current quarter. Net debt on a Y-o-Y basis has reduced by INR 7,781 crores, more than 1 billion which is deleveraging. I want to underscore this point that in Q3, as a group, we paid almost 1 billion dividend. At the same time, we deleveraged balance sheet by 1 billion. That I think is quite significant, I think, fee.Moving on to the balance sheet. Long-term focus on balance sheet management is a key improvise priority for Vedanta. The average maturity of term debt is about 3.5 years and YTD borrowing cost at 8.1%. The credit rating has been shown upward momentum with positive outlook by India rating. CRISIL did the same in the previous quarter, Q2. With net debt to EBITDA of 0.7x, we maintain it at a very low level amongst Indian peers. In summary, overall, with an excellent Q3 performance. We delivered both profitability and deleveraging at the same time, staying the course on rewarding shareholders with handsome dividend and leaving a stronger balance sheet. With this, we are very well positioned to close the year strong. Thank you, and back to the operator for any Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Amit Dixit from Edelweiss.

[Amit A. Dixit, Financial Analyst]

Congratulations for a good set of numbers. I have 2 questions. The first one is on your ESG initiatives, and thanks for articulating them in so much detail. What I had observed is that a lot of your peers, particularly the global peers, they are building some kind of a portfolio of low-carbon aluminium, so are also thinking along the same lines? And if so, what is the road map for the same? That is my first question.The second question is on the rationale of acquiring NICOMET. I mean while -- so what is your ultimate strategy for that? Do you plan to increase the capacity at that plant? And since there are no nickel mines, of course, associated with the acquisition, how do you plan to derive value from that?

[Sunil Duggal, CEO & Whole Time Director]

So thank you. I'll go one by one. On ESG in Aluminium, basically, you must have heard in my commentary that there are certain initiatives like converting the forklifts to the EV-driven forklifts, tying up with GAIL. And we also said that the last quarter, we purchased the maximum RE. And amongst all the industrial complexes in the country we were the maximum user of RE. But to give you a comfort of what else we are trying to do. We said that we are trying -- we are tying up and collaborating with the word major like Hatch, Worley, CSIRO, TERI. So we are partnering with them to work on the technology where the carbon footprint could be reduced, which could be -- the example is the [indiscernible] or some people, global players, the aluminium players are working on that. Something similar we are trying to do, partnering with them. But as I -- we also said that we are in discussion, and we are in an advanced stage of signing the PPA for 500-megawatt of around-the-clock renewable power. It is across all our businesses. A major part of it is also there in Aluminium. So the net-net, what we are trying to do is that we are trying to make a strategy, which is a long-term and a rolling strategy for 3 years, 5 years, 10 years, 15 years as to on the complete value chain, how do we want to go about making our operation carbon net zero on our promise of 2050 and or before. So that was, I think, your first question. The second question is on NICOMET, why we have acquired. So this is one area which actually matches with our strategy and our portfolio and in our journey of ESG also. So nickel is one of the key metal apart from its usage in the steel or the coatings or the alloys, one of the application, which is emerging is the batteries. So here, we wanted to put a foot on the ground. And in that direction, we have acquired this asset, and we'll be commissioning this asset in the next 1, 1.5-month time. As of now, we are trying to tie up the -- for the raw material. But ultimately, our objective is to become integrated. And we are looking at the opportunities globally, which -- for which I cannot divulge any information to you at this point in time. But that is what the intention is. But let me also tell you that we have a domestic consumption of around 36, 37 Kt of nickel per annum, of which this operation has a capacity of 7 to 8 Kt. 100% of nickel today is being imported. With this operation starting up, we will be meeting a requirement of 7 to 8 Kt out of a total requirement 36 Kt. But still, there is a huge scope and requirement for India to build its own capacity of the nickel production.

[Amit A. Dixit, Financial Analyst]

Thanks for elaborate answer. Just on NICOMET, I mean, what is the ultimate capacity you're looking at? And what are the returns that we can expect, let us say, in the next 3 years?

[Sunil Duggal, CEO & Whole Time Director]

So it is a strategic decision, which we have taken to commission the smelter and build the technology and understand the technology. Ultimately, if we will be able to acquire some mining asset globally, we should look at sufficiently good margin, which are equivalent to our other businesses of at least 20%, 30% of the EBITDA margin. But as of now, we are just focusing on how we get our hold on the ground and start the operations.

[Operator]

The next question is from the line of Ritesh Shah from Investec.

[Ritesh Shah, Head of Mid]

I have a couple of questions. First, congratulations on a good set of numbers. Sir, first question pertains to VRL. If you could highlight what is the current net debt position, I think we had indicated that we were planning for certain repayments in the second half of the year. And corresponding to this, how much will be the maturity on bonds term loans, and how should one look at the interest outgo say, from now till March, that's on the VRL? That's the first question, sir.

[Sunil Duggal, CEO & Whole Time Director]

Ajay?

[Ajay Kumar Goel, Acting Chief Financial Officer]

Yes, sure. So if you look at the VRL, the net debt position as of December is about $9.3 billion. And additionally, we also have that intercrop loan almost $0.7 billion. So say $9.5 billion to $10 billion is the net debt for the VRL. And as you may have seen in the past, after paying the first dividend at the VRL statement, we spoke about deleveraging of $0.3 billion in the first half and the additional $0.5 billion in the second half. So net-net, $0.8 billion is a deleveraging on a comparable base in the current fiscal. Now so far as maturities are concerned, if I speak of next rolling next 12 months, almost $2.8 billion worth of term debt are falling for maturity. And as I normally speak about, it will be a mix of both repayments and the refinancing. Now so far as interest cost is concerned, I mean, you may have seen the market impact is taking down and you have to wait and watch. But typically, on most refinancing, we look at a lower rate. Net-net, given our current year financials, you may have seen the third quarter and typically in our industry, our company, sequentially, the Q4 is the biggest quarter, both in terms of EBITDA and free cash flow. So refinancing VRL or [ VDF ] should not be a challenge.

[Ritesh Shah, Head of Mid]

Right. Sir, last quarter, you had indicated $600 million of debt maturity for second half at VRL level, would it be possible for you to indicate how much would it be for Jan to March quarter?

[Ajay Kumar Goel, Acting Chief Financial Officer]

Maybe that one we can send the submission to you by quarter. Normally, we look at rolling, as I mentioned next 1 year and $2.8 billion is the number. But March quarter will be a much smaller number.

[Ritesh Shah, Head of Mid]

Okay. My second question is for Duggal-ji. Sir, what is the status on do Videocon, BPCL and third is basically restructuring time lines? And fourth is basically Hindustan Zinc and Zinc International. How should one look at it? Would you go for Hindustan Zinc, Zinc International first or basically would be preferred to go for Hindustan Zinc divestment? So I think put core into 1 basically incremental capital allocation from a structuring standpoint.

[Sunil Duggal, CEO & Whole Time Director]

Very nice. In one voice, you have asked a number of questions. I'll try to answer one by one. So really on BPCL and [ HP ] Corporation. So the government still has not invited the financial bid. So they had invited the UA. We participated in both the UAs. And as of now, we are doing the due diligence. And I feel that the government now should ask for the financial bids anytime in quarter 4. And as it goes, we would -- as we have participated in the UA will definitely be interested in both the assets. Second, you said on the investment. So everybody knows that the court gave a favorable decision and allowed the government to disinvest 29.5% share to the OFS. And the government is taking its own approvals. And I think the OFS should happen any time after they complete their own approvals. We have no role to play in that. As far as ZI and ZL is concerned, I think if the Board matter, I'll not be able to divulge much information on that. But just to let you know that the internal thinking is on, and the regulatory approvals are being sought. As the regulatory approvals will come through, the Board will take its phone decision based on its own merit. And what else you asked?

[Ritesh Shah, Head of Mid]

Restructuring time line, sir?

[Sunil Duggal, CEO & Whole Time Director]

Yes. Ajay, you can.

[Ajay Kumar Goel, Acting Chief Financial Officer]

So maybe just -- the whole area of restructuring that we covered in detail in the last quarter, as you might remember. And one more thing if I call of the rationale. The whole concept of, say conglomeration or deconglomeration for value unlock is subject of corporate finance for sure. The whole idea of any potential demerger, say, for example, Aluminium, Oil & Gas, and Iron sector in different listed companies should lead to value unlock, which already exist. So some of the parts should be more than the current whole. The whole excise is quite comprehensive, and the Board's guidance last time was looked at many, many options. We believe that the current study will get finished by this market. So by the end of the fourth quarter, we'll have more update for you tangibly and we'll go back to the Board. And you will be among the first one to know about this.

[Operator]

The next question is from the line of Vishal Chandak from Motilal Oswal Financial Services.

[Vishal Chandak, Analyst]

So my first question was with regard to the aluminium cost of production. So if you look at FY '19, the cost of production was close to about $1,950-odds which fell to about $1,650-odd in FY '20, and we were talking about a structural reduction in aluminium cost. But the moment we saw coal prices spiking up over the last 3, 4 quarters, the costs have jumped beyond $2,000. So how should we look at the costs going forward? Would it be more related to coal driven? Or it would be -- or we can see some structural reduction going forward?

[Sunil Duggal, CEO & Whole Time Director]

So thanks for that. I agree that the last quarterly cost has gone up majorly because of the coal. A combination of the linkage realization, e-auction prices going up and to mitigate the stock position we had also to import some coal or purchase some coal from the aggregators. And even some power was also purchased to keep our operations on. So as a combination of that, you know the global energy crisis, which has happened. And the -- thanks in one way to the global energy prices because of which the LME also went up and our margins were protected. So the stocks in IPPs have built up not to the level where they should be. So this is more like a dynamic situation. I would say the -- as far as the power cost is concerned, the worst is over. And in this quarter, we should be much better off the reflection of that is already visible in quarter 4 now. In terms of the rate realization, in terms of the premiums on the auctions and in terms of the global prices and in term of the IPP stocks. So as a combination of that, I think we should be much better off in the current quarter. As far as the aluminium cost is concerned, which is a factor of the API. API means the -- as the LME will rise the API will also rise. So this is a factor of that. But you know what we are trying to do, we are trying to structurally reduce the cost. And as the alumina refinery is building up its capacity from 2 million tonnes to 5 million tonnes. But I think in next year, the mechanical completion of Phase 1 will take place in H1. The mechanical completion of Phase 2 will take in H2 and steadily the plant will get commissioned and will be totally insulated as far as the aluminium purchase is concerned. Then we have next question is how shall we source the bauxite. The efforts are on efforts are on to get the bauxite mine as soon as possible. Also to get the EC enhancement out Kodingamali mines. With these 2 factors, I think some insulation will come. Coal, as far as coal is concerned, we are trying to operationalize our mines as soon as possible. We have 3 mines auction, which we've gone through auction, Jamkhani, Kurloi and third is Radhikapur. We are trying to operationalize at least 2 of these mines in the next year and what we want to insulate ourselves from the volatilities of the market. As far as the third and fourth factor as the CP Coke and CP Pitch is concerned, which is also a factor of the market fundamentals. On which we may not have much of a control, but there are certain regulatory issues which we can get resolved by not putting the import restriction by the government of India, and we are trying to work on the advocacy, and we will see that how these issues will get resolved. But this is what the story is there in detail. Rahul, you are also there on the call. Anything you would like to add.

[Rahul Sharma]

No, no. I think you have fairly covered. Only one positive element from the last quarter to this quarter is that you were last -- because we were talking for the last couple of quarters for the Tranche V. I think the positive development, which is happens 15.6 million tonnes of coal through Tranche V, which is almost 60% of our requirement, and that is for 5 years. So this is a positive development which has happened, and which gives us a 100% security for Q4. And going forward also in terms of linkage as well as Mr. Duggal said that the new mine, which we have been focused to start actually Jamkhani next year. So that coal side, we are pretty sure, and we are pretty secure in terms of structural changes. And apart from that, I think Mr. Duggal has already covered in terms of our alumina expansion than the mine side, bauxite, and coal both. So the fact we are looking and surely from Q3 to Q4, we have a reduction plan for 8% to 10% in terms of the cost point of view through structural changes.

[Vishal Chandak, Analyst]

Right. Sir, my second question was with regard to the provisioning, which has been done for the KCM mines and which says that the outstanding as on 31st December, they're still INR 214 crores. And also simultaneously, we have launched a new court of conduct also. So in light of the new code of conduct is that possible to take a complete write-off because we all understand that this particular company, KCM has been under liquidation for quite some time. So should we just take it off? Or should we continue to evaluate that 50% is still really receivable?

[Operator]

[Technical Difficulty] Requesting all the participants to please stay online while we have the management to be connected to the call. We have the management reconnected. Sir, you may please go with the questions. Sir, I would request to please repeat your question.

[Vishal Chandak, Analyst]

Yes, sure. Sir, on the press release, we have mentioned that we have taken a provision of about INR 213 crores for the KCM mines, while still INR 214 crores still remains on the books. Given the fact that this company has been under liquidation for quite some time, and the government of Zambia is obviously not interested in giving the company or the mines to Vedanta, how should we look at this provisioning going forward? Is it just a technical point of writing it off? Or we still really expect this to be recovered because this has been going on for several quarters. And just a linked question to that. We have released a new code of conduct. So you always mentioned that we have the highest standards of the code of conduct for business at Vedanta. So what additional are we looking at when we are releasing this new code of conduct? That would be also nice.

[Ajay Kumar Goel, Acting Chief Financial Officer]

Sure. So let me just address both of them. So starting with the KCM point first, you're right. So first of all, there's no write-off on KCM amount on the Vedanta book, it's only an accounting provision. Total amount outstanding on the books is about INR 650-odd crores and we provided 1/3 in F '20 and another 1/3 last fiscal in the March. And there is no provision, I guess, in the previous quarter. That leads to the remainder, 1/3 about INR 230-odd crores balance on balance sheet as on December end. We think the entire amount is fully recoverable. The valuation for this remainder balance of 1/3 is backed up by evaluation by one of the big fours. Let me add that Vedanta Limited is one operational creator ahead of, in fact, from the VRL side, this amount, we believe, is very much backed up by third-party opinion, fully recoverable.

[Sunil Duggal, CEO & Whole Time Director]

Otherwise also, we are in active talk with the government there and all stakeholders. So it is -- I mean, we still believe and have confidence that we should be able to get the legal support, number one. Number two, the advocacy effort also going on, a combination of this would lead us to restoration of our management there, and we are really excited and committed to this mine. And this mine still has a great future because this is one of the richest copper source in the world.

[Vishal Chandak, Analyst]

So the arbitration is going on in which place for this particular mine right now?

[Sunil Duggal, CEO & Whole Time Director]

So arbitration is going on in [ London ].

[Vishal Chandak, Analyst]

Okay. And we are expecting a decision soon on this?

[Sunil Duggal, CEO & Whole Time Director]

No, the witnesses are going on as we speak.

[Vishal Chandak, Analyst]

Sure. Just on the code of conduct.

[Sunil Duggal, CEO & Whole Time Director]

At this same time, we are in active engagement with the government there.

[Ajay Kumar Goel, Acting Chief Financial Officer]

I'll move to the second part, what you asked about the code of conduct. As you would appreciate, the documents like a code of conduct, they are living documents, they need to be revised at some intervals what we have changed. First of all, we engaged again one of the consulting firms in terms of benchmarking with the best in the country on this field, being governance. 3, 4 areas, some areas have been embellished. Take an example, the law around the anti-bribery, be it UKB or FCPA or the Indian laws. That section has been embellished, made more clearer to the employees. Few areas, for example, the new age laws around the privacy and GDPR has been added. Some guidelines around how to conduct ourselves in social media has also been added. Last one and perhaps one of the more important areas is addition in terms of diversity and inclusion from employee's viewpoint and Vedanta's commitment on renewing that we are an equal opportunity employer has been added. So with this, I think our current COC is at par with the best in the country. This COC will be published on the website late in the evening or tomorrow morning.

[Operator]

The next question is from the line of Pinakin from JPMorgan.

[Pinakin M. Parekh, Associate]

I've got 2 questions. My first question pertains to the aluminium cost of production target. Now over the years, Vedanta has consistently missed the aluminium cost of production target. And again, this time, it is based on higher alumina content and 100% coal. Now sir, can you give us a more granular clarity on the coal production breakup over the next 3 years? What is the total requirement? And how does the company plan to achieve that over F '23, '24 and '25?

[Sunil Duggal, CEO & Whole Time Director]

So ultimately, we want to source the complete coal through our own mines. So as we said that we want to operationalize at least a couple of mines in the next year and ramp up as we go forward. So I mean, the 1 tonne of minimum requires around 10 to 11 tonnes of coal. So say 2.2 million tonne required around 25 million, 26 million tonnes of coal. A part of it -- a major part of it will be met through the operationalization of these mines. Rahul, if you have some more granular details, would you like to tell that?

[Rahul Sharma]

Yes. So I think from the whole point of view, basically, your requirement would be around 25 million tonnes. And what we are looking, as I said, one is that the Tranche V, which gives almost 60% of our volume, which is for 5 years. Apart from that, we have 3 core mines, which is Jamkhani, Radhikapur West, Kurloi. And if I see that these 3 mines have a potential to go up and give us almost 100% requirement for 21 million, which can be suffice for like Jharsuguda. And that's how we are building up in terms of initially, it will be a mix of our Tranche V, which is linkage for 5 years. And also the mine, which is going to start in next year, which will be Jamkhani and then Radhikapur West. And gradually, we want to move to 100% or captive coal mine. That's our plan. And that say we have clear roadmap in terms of when these kind of events will take place.

[Pinakin M. Parekh, Associate]

So is it fair to say that the 26 million tonnes of captive coal would be over a much longer period, end of next 3 years? Would be just about ramping up some of these coal mines and hence, the actual captive coal production would be much lower than the 26 million tonnes?

[Rahul Sharma]

No. Basically, if you see that each mine has like 8 million to 10 million kind of capacity, apart from Jamkhani, it is 2.6, but as a formation to also double. And these 3 mines, which is the PRC level, the top, which is a dormant will almost -- 17 million, 18 million. And I'm talking with maybe the 30% increase, which is really possible 31 million. And total requirement is 25 million. So that's how we are going to manage in the overall portfolio. mine in Odisha which is closer to our plant also.

[Pinakin M. Parekh, Associate]

Sure. And my second question relates to the CapEx program in the various divisions. Now with the Chairman also having commented about the potential demerger into separate entities. Now at this point of time, basically, aluminium and zinc account for more than 85% of the consolidated EBITDA. So given the fact that some of the smaller businesses may not be able to fund growth CapEx on its own, would it be prudent to stop CapEx programs in non-aluminium and non-zinc till the organization structure is clear because if there is a demerger, then will the program be funded via borrowing on those entities?

[Sunil Duggal, CEO & Whole Time Director]

We cannot give you the granular detail, but let me tell you that what is the opportunity? I would give you a couple of examples, which are not aluminium and zinc. One is that unfinished project of Electrosteel. There are hardly any jobs which have to be done, around 30% of jobs have to be done, and this will give us a complete capacity of 3 million tonnes. So there is a question of funding, and this is a very low hanging fruit. Another example is the NICOMET furnace. We have a capacity to produce 80 Kt ferrochrome today. And there is another furnace 60 Kt, which is unfinished furnace. As we speak, we have started doing the engineering and the balanced job completion discussion for this furnace. So this will take our capacity of this from 80 Kt to 60 Kt. Otherwise also is one acquisition, which has given us rich dividends. And the opportunity in the mines and the way the R&R we have raised by doing the drilling at such a faster speed gives us the opportunity even to go beyond 140 Kt. So -- but 140 Kt we should be able to go in the next year itself with raising the mining capacity for which also we are going ahead with the environment clearance. And then commissioning this furnace. So these are a couple of examples. So similarly, there are a lot of opportunities in all our businesses, where we will keep evaluating that in the near term, what could be the low-hanging fruits through which it will add to the EBITDA of the individual entities. Otherwise also, we have not split the company. This was the proposal which was given. We formed the subcommittee of the Board, of which I'm also a member. We are working on various options. And based on various options and the merits we will put up the various options to the Board in the next 2 to 3 months' time. Depending on what we decided at that point of time, we will come back to the market that which way we are going.

[Operator]

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

[Sumangal Nevatia, Senior Vice President]

A couple of questions. First, is there any royalty or what -- if you could just confirm what is the royalty which Vedanta India pays to Vedanta Resources? And how has this changed in the last couple of years? And is there any consideration of any revision in this royalty rate?

[Ajay Kumar Goel, Acting Chief Financial Officer]

Yes, sure, Sumangal. So royalty, this element in fact was first documented in 2017 and got revised in 2020. So the current agreement will expire next year, sometime in Feb, March. As you know, the entire agreement has been actually benchmarked by the big 4. And our rate of royalty for a couple of large businesses is around 1.5% to 2%. If I give you the overall quantum of royalty for the current fiscal, it is about $200 million on a yearly basis. This amount has been mostly paid in fact, as an advance for the current fiscal and basis how the numbers stack up by the fourth quarter will be actualized. So in the current year, there is no upward revision, and this revision is falling due next year. And as and when any revision take place, any terms, and conditions, it will be extra benchmarked, will be arm's length and obviously, will get approved by Audit Committee and Board of Directors.

[Sumangal Nevatia, Senior Vice President]

Understood. So this $200 million is the payment for FY '21. Is that right?

[Ajay Kumar Goel, Acting Chief Financial Officer]

It is for the current fiscal, 2022. It is paid in advance, and it is actualized in March, the fourth quarter basis, the actual is for the fourth quarter. But the actual number will not vary by a significant number.

[Sumangal Nevatia, Senior Vice President]

Understood. Understood. Second question is with respect to our vision in growing the steel business. There are a couple of inorganic or acquisition opportunities in the market which are under various stages. Couple of opportunities excite us and what are the plans with respect to organic growth in the steel business?

[Sunil Duggal, CEO & Whole Time Director]

So we have been evaluating whatever the option comes in the market, and you know Vedanta, that we keep evaluating. As far as ESL is concerned, we are going to commission 3 million tonnes in the next 1 year. And beyond that, whatever the opportunity is there in the market, we will evaluate and see that what best is possible for us.

[Operator]

Excuse me sir, does that answer your questions?

[Sumangal Nevatia, Senior Vice President]

Sorry, I was on mute. I just have one small clarification left. So this entire restructuring exercise, which is under evaluation I mean, is there also a consideration of merging any entity which is outside of Vedanta India and still as Vedanta group into Vedanta India or something of that also being considered or it's just a split of existing Vedanta India?

[Sunil Duggal, CEO & Whole Time Director]

We are exploring various options.

[Ajay Kumar Goel, Acting Chief Financial Officer]

Yes. And if I just maybe go back to Sumangal, to what we spoke in the previous quarter and our 17th November press release. So the intent was to look at restructuring. And I spoke to you also, I guess, when I was in Mumbai last sometimes in November. Right now, the thinking was around Vedanta Limited and potentially looking at 3 large entities, Aluminium, Oil & Gas, and Iron Ore business. Having said that, the Board's mandate to the management is to go for a comprehensive review so all options are on the table, and we'll leave maybe a couple of more months' time. So by sometimes March end, the current quarter end, we'll have more clarity.

[Sumangal Nevatia, Senior Vice President]

Understood. Is it possible to educate us what are the other big businesses which have strategic connections with Vedanta India and the Vedanta Group?

[Operator]

[Technical Difficulty] This is a reminder to all participants present in this conference. We are just trying to reconnect the line for the management.

[Sumangal Nevatia, Senior Vice President]

Yes. So I just was asking a follow-up that what are the other businesses in Vedanta Group, which could be strategic or related to Vedanta India? Is it possible to share the details?

[Ajay Kumar Goel, Acting Chief Financial Officer]

Sumangal, I mean, sorry, we dropped off. Yes, I think right now what we spoke last time again was Aluminium, Oil & Gas and Iron and Zinc. Buying which, as you appreciate, unless we have an intern alignment and go to Board, setting on formation at this point will not be appropriate. Allow us a couple of months' time, and we will be sharing it as soon as possible.

[Operator]

Ladies and gentlemen, 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 very much, operator, to conclude. Thank you all for taking the time to join us this evening. If you have any further questions, please feel to reach either me or the rest of the Investor Relations team. I would like to wish everybody a happy weekend. And with that, I'll pass it back to the operator.

[Operator]

Thank you very much. On behalf of Vedanta Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.