Ladies and gentlemen, good day, and welcome to the Vedanta Limited Q2 FY 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing Star then Zero on your touchtone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Varun Kapoor from Vedanta Limited. Thank you, and over to you, sir.
Thank you, operator, and good evening, everyone. This is Varun Kapoor, and it's my pleasure to welcome you to the Vedanta Limited earnings call for Q2 FY 2022. We have with us today the management team represented by Mr. Sunil Duggal, who is our Group CEO, Mr. Ajay Goel, Group Acting CFO, Mr. Arun Misra, CEO, Hindustan Zinc, Mr. Prachur Sah, Deputy CEO.
Excuse me, members of the management. We're unable to hear your audio. Members of the management, are you able to hear me? As there's no response from the management's line, I would request all the participants to stay connected while we try and reconnect the management. Requesting all participants to please stay online while we have the management reconnected to the call.
Yes, Jennifer, can you hear us?
Go ahead, yes.
All right. Ladies and gentlemen, sorry for that. I think we had a bad connection. Just again, you know, just like to welcome everybody to the Vedanta Limited earnings call for Q2 FY 2022. We have with us the management team, led by Mr. Sunil Duggal, Group CEO, Mr. Ajay Goel, Group Acting CFO, Mr. Prachur Sah, Deputy CEO, Oil & Gas, Mr. Arun Misra, CEO for Hindustan Zinc, Mr. Rahul Sharma, Deputy CEO, Aluminum, and Mr. Sauvick Mazumdar, CEO for Iron and Steel. With that, I would like to hand it over to Mr. Duggal to take us through the presentation.
Thank you, Varun. Good evening, ladies and gentlemen, and welcome to the Vedanta Limited second quarter earnings conference call. This quarter witnessed a recovery in Indian economy backed by increased mobility, declining new COVID cases, and scaled-up vaccination. Domestic demand for base metals gained strength from robust CapEx spending by the government. Progressive policies of government will provide further impetus to demand for metals like steel, aluminum, copper, zinc and lead. We expect economic conditions to improve further during festive season this quarter. Commodity prices continue to surge due to widening demand supply imbalances. Strong recovery in advanced economies supported by elevated household consumption, public spending and acceleration in merchandise trade, along with persistent energy crisis, is likely to keep metals and oil and gas markets buoyant in quarter three. Vedanta continued its strong growth momentum this quarter, reporting its highest quarterly and half-yearly revenue and EBITDA.
We witnessed steady volume performance across business segments and sustained margins benefiting from strong commodity prices despite a challenging cost environment. The focus on prudent capital allocation and de-leveraging continues to ensure a robust balance sheet and strong liquidity position. We continue with the track record of rewarding shareholders with an interim dividend of INR 6,855 crore, among the largest in corporate sector. Vedanta is uniquely positioned to benefit from strong commodity prices, leading to deliver long-term sustainable value basis for diversified world-class natural resource portfolio. It is supported by compelling cost leadership, long life assets with exploration upside and strong management team with track record of delivering growth. Our competitive positioning in India and global markets leaves us well placed to benefit from growing Indian economy and favorable regulatory environment.
We are committed to delivering consistent growth through capacity expansion, unlocking operational efficiencies through technology and digitalization and targeted acquisition. We are very proud to announce our renewed ESG transformation program in this call. For the last decade, Vedanta has been working steadily to improve its performance on various sustainability and ESG metrics. This journey has seen us achieve a ranking of 12 out of 75 in Dow Jones Sustainability Index. While not leaders yet, these efforts have brought us within line of sight of top global performers. We now aspire to be among the best performers. The last few months, we have been working very hard to build a comprehensive strategy on ESG. For this, we have brought on board various experts to guide the process.
We have also created an ESG advisory board mentored by experts with many years of deep ESG experiences, working with the global natural resource majors. We have created a dedicated ESG structure to ensure this transformation is sustainable. This includes constituting a board-level ESG committee, multiple ESG forums at group and BU level for decision-making, and communities of practice at the SBU level to drive implementation. We are building world-class enablers to help move the needle now. These include an ESG academy to train our leaders. This is a globally unique initiative. We are discussing creation of an ESG venture fund to harness external innovation. We are discussing diversification opportunities through green business build program. We are creating an ESG center of excellence for regular monitoring and continual improvement. The culmination of all these efforts is to develop our new ESG strategy. This strategy follows the purpose-driven approach that Vedanta has always aspired.
Staying close to our roots, we have taken our organization tagline, Transforming Elements, and modified it to Transforming for Good. This is the purpose statement for the entire organization, ensuring that ESG is henceforth embedded in the way we do our business. Supporting our purpose, we have created three pillars. Transforming communities, transforming planets, transforming the workplace. These pillars are further indicative of Vedanta's steadfast commitment to become the best-in-class company and at the same time ensure that our communities and larger society benefit from our existence. These pillars are supported by nine aims that will serve as guideposts and milestones in our journey. These aims have specific quantifiable targets that will keep us on track on our progress. These aims are important, and I would like to go over each one of them.
Aim one, two, and three under transforming community commit us to keep community welfare at the core of our business decisions, empowering over 2.5 million families with enhanced skill sets, uplifting over 100 million women and children through education, nutrition, healthcare, and welfare. Aim four, five and six under transforming the planet commit to us net carbon neutrality by 2050 or sooner, which is a big commitment, and I will talk about in the next few slides. Achieving net water positivity by 2030. Vedanta has already become 2.41 times water positive. Now we want to ensure the rest of the businesses does so soon. Innovating for a greener business model. This encompasses our previous ambition of zero waste, zero discharge, and embraces additional concepts such as circular economy, green business diversification, like renewable power or hydrogen.
Aims seven, eight, and nine under transforming the workplace commit us to prioritizing safety and health of all our employees. This is our commitment to zero harm. Promote gender parity, diversity, and inclusivity. Adhere to global business standards of corporate governance. This includes ensuring our senior leadership have KPIs that incorporate ESG performance, participation of the board in ESG discussions. Lastly, I want to talk about our plan around climate change. With COP26 around the corner and the entire world talking about it is an opportune time to announce these commitments. Climate change is a real threat to humanity. Every year, we see an increasing number of natural disasters wipe out and destroy the lives of thousands of people. The impact on the larger natural world is equally devastating and can no longer be ignored.
Scientists tell us that we have to limit global warming between 1.5 to two degrees Celsius for the planet to stand a chance to exist. We want to achieve this in the next 30 years. In this context, large business houses such as ours have not just a fiduciary responsibility, but a moral responsibility to act. I believe our climate commitments to do so are a step in the right direction. Vedanta is making 10 commitments to stop our impact on the climate. These are. One, net zero carbon by 2050 or sooner. Two, use 2.5 GW round the clock RE and reduce absolute emissions by 25% by 2030 from 2021 baseline. Pledging $5 billion over the next 10 years to accelerate transition to net zero. This is a big and significant commitment.
No addition to coal-based thermal power plant in our portfolio, and we will use coal-based power only till the end of our current power assets. Decarbonize 100% of our light motor vehicles by 2030 and 75% of our mining fleet by 2035. Accelerate adoption of hydrogen as fuel and seek to diversify into hydrogen fuel or related businesses. Account for scope three emission of our businesses by 2025. These are emissions that lie outside our boundary with our business partners, logistic providers, business travelers, et cetera. Work with our supply chain and long-term tier one suppliers to submit their GHG reduction strategies by 2025, and align with our commitments by 2030. Disclose our performance in alignment with the requirement of the Task Force on Climate-Related Financial Disclosure, TCFD, a requirement by the investor community.
We have already released our first TCFD report in March 2021. We help communities adapt to the impact of climate change through our social impact and CSR programs. Gentlemen and ladies, these are bold commitments and will transform the company, unlock many business opportunities, and prevent the planet from warming to catastrophic levels. You'll be hearing a lot more on this subject in the coming days, and I look forward to active engagement with all of you on this. Now, coming to our HSE performance for quarter two. It is with sadness that I inform you that three employees of our business partners lost their life while they were at work in ESL location for service-related activities. A detailed investigation using ICAM methodology has been carried out, and we are strengthening controls to ensure similar incidents are not repeated at any of our sites.
In the past, I have spoken about multiple programs and interventions that we have put in place to ensure that we improve our safety performance. To ensure these programs realize their goals, we are expanding our leadership relationship with DuPont Sustainable Solutions to help transform the safety culture at ESL and Aluminum and Power business. We are also engaging with global experts to strengthen our critical risk management system. Now, coming back to our business performance and business verticals. First, on aluminum. We have yet again witnessed a record-performing quarter with highest quarterly alumina and aluminum production. Alumina production was at 11% up year-over-year, 6% quarter-over-quarter. Aluminum was up 21% year-over-year and 4% quarter-over-quarter. Aluminum cost of production was impacted by higher input commodity prices and power costs.
Despite these headwinds, we have achieved high EBITDA margins of $1,100+, supported by favorable LME prices. In line with the changing market scenario and input cost inflation, we are revising the cost guidance to $1,675-$1,775 per ton. However, we are confident that $150-$200 cost saving will come post completion of expansion and at Lanjigarh and aluminum smelter, which will move us closer to our aim of becoming one of the top global leader in sustainable tier-one cost structures. For the Lanjigarh refinery expansion from 2-5 million tons per annum, we have achieved environmental clearance now for 6 million tons, and site mobilization is on track, and the project progress is also on track. Turning to Zinc India.
This quarter achieved highest MIC production since underground transition, backed by higher ore treatment and improved recovery, partially offset by slight dip in grades. Metal production in Q2 was down due to planned maintenance shutdown, but to ensure smelter readiness to deliver higher volumes in coming quarters. Integrated silver production was down 5% quarter-over-quarter, in line with lead production. With focused dynamic planning, technology-assisted mine plan to improve grades, and equipment reliability, we are fully confident of achieving the set targets for the year. COP was at $1,121-$1,124 per ton in quarter two, impacted by higher input commodity prices and mine development. Considering higher input costs, we are revising our COP guidance upward to below $1,075 per ton. Zinc International business is well-positioned for long-term value creation.
This quarter, Gamsberg produced 39 KT of MIC, up 10% YOY, but down 17% QoQ due to challenges in plant equipment. Completion of ongoing projects in October for debottlenecking our concentrate concentrator will ensure that plant capacity ramp up and improving mill reliability. Projects for recovery enhancement by 5% and MIC improvement in December will start delivering results from quarter three onwards. We are confident of achieving the set targets for the year. CoPs in Gamsberg showed a 10% rise YOY due to lower production volumes and commodity prices. Based on the changing business scenario, we are revising our CoP guidance to $1,200-$1,300 per ton. At oil and gas, gross production for H1 was maintained at 165 KBOPD, flat.
The volume was impacted by natural reservoir decline in the fields, offset by increasing volume from new wells brought online. Continued injection of polymer and gas ramp up. We achieved gas sales of 140 million SCFD per day in quarter two, 17% up QoQ. OpEx cost in the current quarter was $9.1 per barrel, a rise of 9% due to increase in polymer prices owing to oil price rally. However, crude oil prices further rallied during quarter two and touched high of $79 per barrel, which supported our margins. In H2, we will focus on infill well drilling to maximize near-term volumes. In our OALP blocks, 15 wells drilling program is ongoing, with six wells drilled till date. We have notified a success in Kemet block JR-1 discovery in this quarter, which is being evaluated.
In line with commodity headwinds, we are revising our OpEx cost guideline to $9 per barrel, considering the natural reservoir decline, revising the guidance of volume to 165-175 KBOPD for FY 2022. Three key projects, ASP for enhanced oil recovery, exploration, and shale will be driving production volume growth mid to long term, and various initiatives are going on in each of these. For ASP, a modularized approach is being adopted to accelerate injection and first oil while undertaking end-to-end contracting for overall execution. On exploration, the focus is on drilling across our OALP and PSC blocks and look for early monetization. For shale, we have empaneled global partners to study and execute pilots to establish our shale potential. Now, coming to iron ore business. Karnataka saw highest half-year production of 2.7 million tons, supported by key operational projects.
Increase in NSR despite trade barriers in Karnataka. We saw highest quarterly and half-year hot metal production and value-added business through productivity improvement initiatives, where quarter two margin was up 50% YOY, but down 32% QoQ due to higher coking coal prices and iron ore prices. We are happy to announce the start of commercial production in our recently acquired Gujarat NRE coke plant. We expect ramp up to full capacity by early quarter four current year. In steel business, that is Electrosteel, the hot metal production was up 11% YOY and 1% QoQ. Saleable production was 293 KT for quarter two, up 12% YOY and 1% QoQ due to improvement of furnaces post-shutdown. The margin was down due to higher raw material prices, mainly iron ore and change in VAP mix.
The VAP mix was at 67% in Q2 compared to 74% in Q1. Recently, as you may know, we have won two iron ore mines in Odisha, which will increase our raw material security and price stability. In H2, improvement in hot metal production is expected post-completion of debottlenecking of blast furnace three. We are also upgrading our facility through automation and digitization and various other productivity and asset health measures. Now coming to FACOR. FACOR is continuing its turnaround story and saw highest EBITDA margin in quarter two and H1. It achieved a record ferrochrome production of 19 KT in quarter two. In line with plant productivity enhancement by 10%. We also saw the record half year ore production through continuous operation of both the mines. However, quarter two ore production was down due to monsoon.
FACOR is reviving its project for another furnace to increase production by 60 KTPA. This was a half done furnace. At the end now, I would like to reiterate Vedanta's unique position to deliver long-term sustainable value through continuous focus on our strategic priorities and diversified asset base. I am confident that with our renewed ESG journey, we'll be able to usher in a new era of sustainability leadership and be among the world's most respectable, responsible and renowned resource company. With this, I would like to hand over to our CFO, Mr. Ajay Goel, for the financial performance. Over to you, Ajay. Thank you.
Thank you, Sunil, and good evening, everyone. We continue the momentum to back our quarterly best ever performance, and this is our third quarter in a row.
This quarter has been our all-time high revenue and profitability quarter with the lowest net debt-to-EBITDA ratio of 0.5x in recent few years. Operationally, aluminum division has witnessed highest ever quarterly aluminum production in line with the smelter ramp-up at Jharsuguda. Lanjigarh also delivered record alumina production. We delivered highest ever titanium production in VAL and ferrochrome at FACOR. Zinc and oil and gas volumes have been both relatively muted. This quarter we also rewarded shareholders very well with a dividend of INR 18.5 per share, totaling to INR 6,855 crores. Some of the key highlights of the quarter are highest ever quarterly EBITDA of INR 10,582 crores, up 62% YOY, with an underlying margin of 40% being an industry-leading margin.
PAT attributable before exceptional items stands at INR 4,644 crores, depicting a very strong financial performance. ROCE, return on capital employed, at 26%. This is up 345 basis points versus last quarter, QoQ. Gross debt stands at about INR 51,000 crores and with cash and cash equivalents of about INR 30,060 crores shows a strong liquidity position on the balance sheet. Our net debt of INR 20,389 crores is down by 26% YoY, which is almost INR 7,230 crores. With adjusted net debt-to-EBITDA ratio of 0.5x, we continue to be lowest amongst Indian peers. Finally, robust total shareholder return with about 6% dividend yield plus stock appreciation in the previous quarter. We have a detailed income statement in the appendix. I want to decode couple of items from that statement for you.
Depreciation charge for the second quarter was about INR 4,118 crores, higher by 9% YOY. Primarily it is due to project capitalization at couple of businesses and higher ore production at zinc business. Quarter-over-quarter, depreciation charge remains flat. The finance cost for the quarter was about INR 1,066 crores, down 19% YOY and down 10% quarter-over-quarter, majorly due to lower average borrowings and gain on ASI bonds buyback. The average cost for the quarter stood at about 8.2%. Income from investment for the quarter was INR 579 crores, down 5% YOY, majorly on account of mark-to-market movement and change in mix of investments, and down by almost 10% quarter-over-quarter, again due to MTM movement and one-time gain that we recorded the previous quarter.
The average investment income for the quarter stood at about 4.8% pre-tax on current portfolio. The normalized EPS stands at about 26%, which is same as the previous quarter and is in line with our guidance. Normalized EPS, as you know, excludes any tax on exceptional items. I'll now move to EBITDA bridge. EBITDA bridge YOY versus last year. As you can see on the chart, in summary, the significant portion of EBITDA increase of almost INR 4,000 crores from INR 6,500 crores last year to about INR 10,530 crores this year has been market or pricing driven along with higher volumes at our aluminum business. However, this has been partly offset by higher costs and overall lower volumes, primarily at our zinc business.
In summary, the absolute EBITDA is almost 1.6 times of the last year same quarter. If you look at our EBITDA bridge sequential vis-à-vis the previous quarter, EBITDA for the quarter is higher by 5% quarter-on-quarter. As evident from the bridge, the market or the LME and various regulatory factors have been positively impacted our EBITDA by almost INR 1,600 crore. This is partly offset by input commodity inflation, majorly at aluminum, ESL and IO businesses. On the operational front, lower volumes at zinc and iron businesses offset partially by aluminum along with higher cost has negatively impacted EBITDA by INR 800 crore. Overall, for EBITDA, the higher metal prices and input inflation remains overall themes both QoQ and YoY, though with different magnitudes, which at overall net margin level remains positive and bottom line accretive.
Now I move to next page on the net debt bridge. Net debt as on September 30 stands at about INR 20,389 crores. If you see the chart, our operations are very well positioned and generating healthy cash flows from internal net revenues. In spite of payment of dividend in the previous quarter by almost INR 6,855 crores, the net debt quarter-on-quarter remains almost flat. As I mentioned earlier, we have deleveraged by almost INR 7,230 crores YOY, September to September last year. Moving on to the next page, the balance sheet. We remain focused on managing the balance sheet efficiently with a strong position of cash and cash equivalents of INR 30,060 crores.
The average maturity of term debt is about 3.5 years and with average borrowing cost of 8.2% for the quarter. I'm very happy to report that CRISIL has revised our outlook from stable to positive with AA- rating. This is again a very welcome uptick. With net debt to EBITDA of 0.56, we are lowest amongst Indian peers by a long margin. Now, on CapEx side, we continue to focus on organic growth across business portfolio. We reiterate our CapEx guidance of $1.1 billion for the full fiscal, where we are focusing on expanding capacities at Lanjigarh and BALCO and completion of various growth projects at oil and gas. These are key for volume growth in near future.
Far as H1 is concerned, we spent about INR 0.3 billion, and we remain within our guidance range for the full fiscal FY 2022. Overall, second quarter has been excellent quarter on performance and also on structural improvements. We delivered both profitability and deleveraging, rewarding shareholders very well, and with rating outlook augmentation, we will leave a stronger balance sheet for the quarter. This bodes very well as we usher into second half of the full fiscal. Thank you very much. With that, I hand over to operator for any Q&A.
Ca``n we open the call for a Q&A session?
Yes, please go ahead.
Thank you very much. Ladies and gentlemen, we will now begin the question answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Amit Dixit from Edelweiss. Please go ahead.
Yeah, good evening, everyone, and thanks for taking my question today. First of all, congratulations for good performance. The first question is on your ESG initiatives. Very impressed by your target to reduce emissions, that is from 2021 baseline. I mean, not many companies in the world have done that. So just wanted to ask three, I mean, quick points over here. One is that, you know, how, what about your aluminum power, which is basically powered from thermal? And this is basically the highest kind of coal, I would say, footprint, that is carbon footprint that you have. And there is nothing, no alternative that you have essentially in sight at present. How are going to reduce that? Second is about bauxite regime review. What about that?
Facilities, we have seen that they have been, I mean, higher than the peers. What are you going to do on that front? You talked about $5 billion of spend, which is a huge spend. Are you expecting some government support over there? That is my first question.
Thanks for that. I'll go one by one. I'll go in reverse. We have made our commitment of $5 billion investment. It will come in the various forms. One of the example I would say is that we may like to hive off a company or a standalone group company. We'll definitely work out a structure where we want to go about it. The intention is that we would like to create a separate vertical who could focus really on the renewables. They could also arrange their own funding. As we speak, we are in the process of evaluating the different businesses and the models and how shall we be able to feed power depending on where we will be able to set up this facility.
For setting up the facility also there are various options like, you know, of course, the solar wind, but along with that the hydro pump or the battery storage. That technical study is going on. We have created a group task force who is running this assignment and the discussions are on with the various businesses that which model, what, where, and this also answers your aluminum question that how we have to feed power to the aluminum and in what format, through what grid, and what are the regulatory charges. That scheme is being built. As we get closer to the reality of the scheme, which will come I think in the next few months, and start establishing our facility, we'll come back and report to you that what we are doing.
We agree that the fatality record may not be so good, but over the years we have improved our record from the-
Mr. Dixit, does that answer your question?
That was my first question. I have a second question also. Can I go ahead?
Give me a minute. Members of the management, are you able to hear us?
Okay.
Arun Misra here, Hindustan Zinc. We can hear you. I think Mr. Duggal got disconnected.
Sure, sir. Allow me a minute while I just reconnect. Requesting participants to please stay connected while we just have the speakers reconnected. Hope you all are reconnected. We have the question from the line of Mr. Dixit.
I'm sorry, on our side, I think there was a bad line. I hope a part of the answer you could hear at least up to the renewable power and our $5 billion commitment. Like that, Anand, the thought also is to whether we would like to put some facility or do some work on the commercialization of the hydrogen as a fuel and in which entities this fuel could be used. Coming to our fatalities, I think we have improved over the years, but it so also happens that when we acquire new assets, the governance mechanism, the behavioral aspects and the even the infrastructure facilities in those companies are not so good. We have learned from what we have experienced in the last couple of years.
Learning from that, we are partnering now with the global majors, like DuPont Sustainable Solutions. We engaged DuPont for Hindustan Zinc over the long five years, where they were responsible for transformation of the culture and bringing a zero-harm culture. This is how we became almost two years fatality-free. Now, we are using DSS, DuPont Sustainable Solutions for our ESL and aluminum and power business. With that, we also want to bring a new framework where whenever the new entity is acquired, we you know, do the complete deep dive and the audit to map the risk on all fronts, be it safety, environment, sustainability, governance, or whatever the risks are there, and take proactive measures so that we do not get such kind of shocks.
This is what it is. I think finally you are asking on the red mud and the other waste. We have put up a center of excellence where we have brought some R&D experts. We are partnering with the research institutes, partnering with the universities and the global research institute where we want to partner with them. That's how the sustainable solution for these waste could be brought. In the meantime, let me also tell you that the solution which we have found in the interim is we have to partner with the cement industry, where they can use red mud as a replacement of bauxite, which is used as a flux in the cement industry. We have tied up some quantity with couple of companies.
One is Ambuja Cements and one more is there, wherein some quantity has been tied up. But some of our bulk waste have reached the utilization up to almost about 100%. Like another example in Hindustan Zinc is where the 100% zerosite which we use to dump in the dam is being utilized by the cement industry as a replacement of gypsum. We are doing all that, mapping all our waste and making a comprehensive plan that each aspect of ESG, how we have to address going forward.
That's a very comprehensive answer, sir. Thanks. The second question is essentially on the transfer of INR 10,587 crores to retained earnings. Why it has been done? Can we expect some more rewards for shareholders on this account?
Yes. No, sure. Yeah, sure. As to this entire intent of capital restructuring is nothing but a reflection of the movement in the corporate laws which are evolving with the times. As you would know, on the balance sheet we'll have multiple reserves, be it general reserve or something called retained earnings, which is nothing but profit and loss account. We intend to unwind our general reserve into retained earnings, amount being at INR 12,500 crore. I mean, how it helps, typically, our general reserve will have some limitation in terms of end use. But once we unwind the balance into profit and loss account, in that case, company management and the board will have higher flexibility in future. It is an enabling act, in that sense. Now, the current company debt does not require us transferring any amount into general reserve.
If you do a bit of research, many companies, notable ones have done the same through the last few years. The entire process takes about 8-10 months of multiple approvals, including the stock exchange and NCLT. This step will give us, as I mentioned, more flexibility, and it is beneficial to all shareholders, including minorities.
Sir, if you can just elaborate on flexibility that it serves, I mean, that would be helpful. In what areas does it serve flexibility?
If I take multiple, I can quote the one for example, in case somebody intends to pay a dividend, in that case that one can do only from retained earnings. If you don't have sufficient balances, one may get maxed out in terms of ceiling. Once we unwind the balance of general reserve into the profit and loss account, in that case your headroom will increase. There can be many more examples.
Sure. That's great, sir. I was looking for that. Thank you. Thank you so much, and all the best.
Thank you.
Thank you.
The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.
Good evening. Thank you for the opportunity. First question is with respect to the aluminum business. If you could just share some more details on what is the current situation there and what is the inventory we have and the cost inflation we expect. Looking at your cost in 2Q versus your full year guidance, it appears that we are not expecting a very significant cost inflation only to the tune of $50-$100 per ton. If you could just share some more details on this.
I will go for this, and then I will ask my colleague, Rahul, also to add. As far as coal situation is there, this has been a global event. Everybody knows that with global coal crisis came where the 20 mines got submerged in China and their coal production stopped and they started importing coal from all over the world. In India, the events took place, not only rain, the power demand going up, then crisis coming up and the government diverting the total coal to the IPPs and. The good situation is, and the good news is that we have been able to maintain our operation in the current context. It was not about the cost of the coal in this scenario.
It was about sustaining our operation, number one. Number two, you know, at this commodity prices, we did not want to lose our opportunity. We are able to maintain, you know, our operation. The coal stocks from where we were and to where we are have also gone up and the situation is much better. Rahul, over to you for any addition to the reply you want to give.
No, thanks, Mr. Duggal. I think, just to add further, you know, one is that, if you see our Q2 result, I think we have been, you know, fairly good performance in terms of our volume, cost and also the, you know, containing our overall cost. Going forward, I can say that, the good part is that we have the 100% coal security for the Q3, which is through the, you know, linkage and auction. We are working closely with the, you know, Coal India to materialization. That is our positive side of it.
The second, I think, we are all of us, you must have seen that I think, things is improving at the Coal India because the situation at IPP, the stock level has gone up also from the, you know, 7 million to 9 million plus. Now the non-regulated sector, especially aluminum, is getting that kind of momentum. Then we see that that should not be the challenge. As of now, we have a stock of 2-3 days, but we are managing and we see that whatever we have the security for 100% we have to materialize, and that's our objective going forward.
Okay, just to clarify, our cost of production is close to $16.50 in 2Q, and our full year guidance is maintained at $16, it slightly increased to $16.75-$17.75. Given the current situation of coal, where we don't have any inventory or anything for the fourth quarter and also the alumina prices, we still expect the cost inflation to be around $100 from here or not more than that. Is that the right understanding?
No. Actually $100 means it will. We are giving the average cost for the year. If it is average cost per year, if we consider the same volume in H2, I think it gives us a headroom of $200 per ton. You can see that the cost had gone up in quarter two compared to quarter one by say around 8%. Although the situation was very bad in September, which since has improved, as Rahul also explained that the number of days of the coal stock have become better. Along with that, the coal security is also there. We are hopeful that this was only a, you know, one-off situation which was there for one and a half months' time, and the situation will ease out as we will go forward.
As far as the alumina prices are concerned, we know the alumina prices of late have gone very high. You also know that we have a bauxite security from the domestic Kodingamali mine. We are also hoping that the government may give permission for the additional capacity, one of which permission was also given for 7 lakh tons. With that, the differential between the domestic alumina production and the imported alumina production is higher at this point of time. Having some security up to around 45% from our domestic production, we feel that we should be able to contain cost. The situation is more dynamic. Let us see what happens going forward.
Understood. That's helpful. Second question is with respect to Zinc International. As per media report, there appears to be an evaluation of restructuring the business under HZL, to bring all the Zinc business under one entity. If you could just share what could be the thought process, the timeline, and if at all any transaction would, in case such a restructuring were to happen.
Oh, this is a board matter actually. It will be board. What discussion takes place in the board, I may not be able to divulge any information at this point of time. Broadly, I can tell you that this is a natural situation where both the companies can complement, and one plus one becomes eleven, not two. This is what I can comment at this point of time.
Understood. Just one last clarification. This exercise of converting general reserve to retained earnings, it will take 8-10 months for approvals, et cetera, and only then we can have some more flexibility. Is that the right understanding?
That is right. I mean, it requires some multiple approvals, including NCLT shareholders. Of course, the board may have blessed it, and also by creditors. It takes about 8-10 months. In the interim, we don't see any challenges. As you may seen our balance for the profit and loss account is about INR 12,000 crore. As we generate profitability quarter-on-quarter, our balance is sufficient for our needs for next couple of years.
Understood. Thank you very much, and all the best.
Thank you.
Thank you.
Thank you. We take the next question from the line of Ritesh Shah from Investec Capital. Please go ahead.
Hi, sir. Thanks for the opportunity. Sir, I have three questions. First is, would it be possible for you to qualify how much is the VRL level net debt, and how much is the debt maturity for FY 2022 and FY 2023? Just a related question over here. What I'm trying to understand is what could be the dividend payout. If you can help me with the additional data point on the incremental debt that we have to procure money from Oaktree Capital.
Okay. Yeah, sure. For the total VRL debt, external debt is about $8.75 billion, including the ICD outstanding of about $70 million. Almost two point two billion is debt maturity for next one year. Almost similar, I would say, for the FY 2023, the year next as well. You may have seen announcement by the VRL a couple of months ago that VRL has de-leveraged by almost a point three billion in the first half. They also intend to further de-leverage by point five also. Almost a point eight odd billion is de-leveraging plans for Vedanta Resources. Coming to the point of payment of dividend, I mean, you already have seen in the last month or so, we paid INR 18.5 per share, total about six point eight thousand crores.
In terms of further plans, I mean, as you would appreciate, it will not be right to comment as of now. This is a matter of board discussion. From zinc side, typically we pay dividend in the first half, and I think it will not be unreasonable to expect something in the near future. We have to wait and watch for a couple of more months.
That's it, sir. You said $2.2 billion for FY 2022 and $2.2 billion for FY 2023. Is that right?
INR 2.2 billion is a debt maturity due over next 12 months and something similar thereafter.
Okay, perfect. My second question is on the Zinc business, for the merger business. Sir, you indicated one plus one is eleven. I don't have much understanding of the Zinc International business. But I think it seems like a forced marriage, if I have to look at it from outside, given the quality of assets that one looks at, Hindustan Zinc, Vedanta Zinc, lead or silver. So how should one understand this? That's one. Secondly, I think the timing of any potential transaction, if it is, we are looking at zinc prices, even if it's again pretty very high. That's one question. Why not prioritize or work with the government on Hindustan Zinc divestment?
The arbitration that we had spoken about earlier, I think that would do more good to the minority rather than trying to marry Zinc International with Hindustan Zinc.
See, as far as zinc is concerned, I think there are very rare communities like zinc in the world. It is very difficult, and it will be very difficult to find the new zinc assets. It's a very precious thing to have zinc in the portfolio. You see, the R&R of both the companies is almost same. With the same R&R, Hindustan Zinc having a capacity of 1.2, and they have a capacity of 300 KT. There also the project is on the drawing board, and we are evaluating how the growth will come through putting up the additional concentrator. We are also evaluating whether the Skorpion refinery could be converted to the sulfide route for treatment of the sulfide ore.
As far as the divestment of Hindustan Zinc is concerned, you must be knowing that the final hearing in the Supreme Court, in the NCLT has just been concluded, and we have reserved the order. You may also be aware that we have given in writing to the government and the court that we are happy with the open auction of these shares. I think when the order will come, which is reserved now, any day, the court will give no objection and will give a go-ahead to the government. When this will be auctioned, it is anybody's guess that who wants to participate and who doesn't want to participate. I will still reiterate that any zinc assets in this world are very precious, and this marriage is very natural and very precious.
Sure, sir. Sir, last question on capital allocation. Just your quick thoughts on one, where are we on the Gujarat copper smelter? Second, fertilizer plant in Rajasthan. Third, we had earlier indicated on aluminum downstream assets. Fourth, on BPCL refining assets, typically is there any thought process or how should one understand that? Thank you so much.
Very smartly you clubbed four, five questions in one question. BPCL, as far as BPCL is concerned, last year the EOI was invited, and as you know that we participated. Two more PE funds participated. This was just the expression of interest. We are doing the due diligence. FHA has not been finalized as yet, and then the RFP will be called, and then the decision will be taken. This is where we are at this point of time, and I hope government may like to conclude this before March. Who gets what, we want to create a separate fund for this. As far as copper smelter is concerned, we are evaluating, and we had given an EOI to different state governments, and we are at the evaluation stage as to where we could prefer.
This is at the very initial stage of evaluation. Arun Misra is there. I request, Arun, if you can reply on fertilizer. Rahul, if you can reply on the aluminum part.
Arun Misra here. On the fertilizer portion, we are ready with the business case, and we are now going through the process of filing for environmental clearances related to you know, there are certain issues between the current existing Chanderiya smelter and the fertilizer plant. Also, we are in the process of recruiting CEO who would be the business leader for the fertilizer process. I think work on the ground will start in full swing somewhere in January for this fertilizer plant.
Sure, sir. Sir, aluminum downstream?
You know, last time I think we had talked right on the BALCO that you know 414 billet you know project. As you know that this project is already you know it's been approved by our board, and we are going ahead with that. We are expecting the environmental clearance in the Q3. This downstream billet project of 420 will kick off.
Sure, sir. Thank you so much for the answers. Congratulations for numbers and bold ESG goals. Thank you.
Thank you.
Thank you. The next question is from the line of Indrajeet from CLSA. Please go ahead.
Hi, good evening. Thank you for the opportunity. Couple of questions from my side. First, on the Hindustan Zinc and Zinc International marriage that you have discussed, do we need any kind of government approval for Hindustan Zinc to go ahead with the transaction, or a simple board majority approval will do?
I don't want to comment on much on this marriage because, you see the parents are different. On one side, Hindustan Zinc board is there. Another side, Vedanta board is there. This is a very initial stage of the discussion which might have taken place. It will be very difficult for me to divulge any information on this. All that process will be followed if anything happens. One is this is a board matter because we are in a related business. This is not a new line of business. It does not require a specific government approval as such. Ultimately, after the board approval, it will require the shareholder approval.
Sure. If both the opportunities are open to us, that is expanding in Hindustan Zinc from 1.2 to 1.5, and also the opportunity of getting Zinc International, which one will be higher, right, in terms of our capital allocation process or policy? Yeah.
No, these are two different initiatives, if they are. I mean, one is to capitalize the given assets and make this marriage work where I said that it will become one plus one eleven. The other is an evaluation and debottlenecking, which does not require much of the CapEx.
Yes. Thank you. Lastly, can you help us with how much coal we are getting from our captive sources currently, the mines that we have, and also what was the coal mix for Q2 between the auction linkage, imported and captive?
Rahul, these are specific information you have ready with in your hand. Can you give that?
No, I think I have answered in the previous question. Basically, you know, but today our mines, it's not been, you know, operationalized, and this is purely on the, you know, what we are looking through the Coal India, which is linkage and auction. We have the 100% coal security for Q3, which I have already said.
Just to add, we are in the process of operationalization of the mines. Because the situation which we have faced last quarter or last month and the current quarter, we want to make our business more predictable. As we speak, we are taking fast-track action on the Jamkhani coal block. Other two mines also we are making and building a strategy. Our own vision is that we want to operationalize Jamkhani coal block in the next, say, one year, and rest Radhikapur and Kuraloi mine block in the next two years' time, so that we have a structural reduction in the cost, which has a delta of, say, around $200 per ton from the current level. We want to insulate and make our business more predictable.
Another good news is there that we have got permission for converting one of our 600 MW unit at Jharsuguda to CPP, which will become applicable from January 1, 2022. Which will also help us to contain the coal power cost.
Absolutely. That's all from my side. Thank you.
Thank you.
Thank you.
The next question is from the line of Vishal Chandak from DAM Capital. Please go ahead.
Yeah. Hi. Thanks. My first question was with regard to your time commitments on net zero. One of the things that you mentioned is that you will become net water positive. If you could just, you know, elaborate on how do you intend to become net water positive? Because you mentioned that Hindustan Zinc is already at 2.4 times and given that most of your power plants, in fact all of them are thermal. How do you intend to become net positive on water? That's the first question. Related to that is on EV adoption. You mentioned, you know, about decarbonizing 100% of your LMVs. How do you plan to do that? If you could just, you know, lay us a roadmap on that.
Sure. First on water positive. You rightly said that we are at 2.41 times water positive in Hindustan Zinc, and Arun has made a strategy to go to 5 times water positive. I mean, you might be knowing that we have replaced the fresh water to the dams which we have given to the community with the sewage treatment plant water, which we took from Udaipur sewage. We put up the plant and we, as we speak, we have a capacity of treating 60 MLD of water per day to feed to our couple of locations. This is one. This is a good model. When we evaluated our other entity, we found that Cairn is also water positive as we speak.
These two entities are located in the state which are water deficit. The similar models we want to replicate in our other businesses. As we speak, we are on a drawing board building the strategy because we have the internal benchmarks available with us and best practices available with us. Replicating all these best practices, the initial calculation which is coming is that it is very much possible to become water positive in the next 10 years. That is why we have made a public commitment that we want to be water positive. By doing this commitment, we want to put a pressure on ourselves to deliver.
When we have made a commitment to the larger world that we want to be water positive, we want to come back to all of you to showcase that we have honored our commitment. The second question was on what?
Second question was on EV.
EV fleet. We have declared that we want to convert all our LMV fleet to the EV fleet and to decarbonize, and mining fleet also to EV fleet. The converting LMV fleet to EV is not very difficult proposition as of now. We were doing our own math. It says that the lifetime cost per kilometer is 50% of the current cost where we use diesel or petrol. It makes all the economic sense. Only thing is that we have to take action, and we have to become more disciplined. It is very much possible to tie up with the partners today. We are in discussion with various partners who can partner with us to decarbonize our LNG operation.
As far as decarbonization of the mining fleet is concerned, Arun has signed this MoU with the OEMs, major OEMs like Normet, Sandvik, Epiroc, that he wants to partner with them in Hindustan Zinc to make some pilots underground in some areas which could be replicated in other areas of the mine. We all know that these mining equipment supply OEMs have already commercialized their lot of their machines. It is not that it is something like new concept which we will have to try. Some mines in the world are already using it.
With the focused effort of Arun, I'm sure after the pilot becomes successful, he'll be able to convert the entire mining fleet of Hindustan Zinc, and the learning of which could be replicated in our other entities and other operations.
Sure. That's helpful, sir. Also my next question was with regard to on a possible sale of Zinc International assets to Hindustan Zinc. You mentioned that in that case 1 + 1 would become 11. As of now, practically speaking, both these two entities are under the same management of Vedanta. How would change of control within one subsidiary to another subsidiary improve efficiencies? Because I understand best practices would even be shared today itself and transactions, related party transactions, et cetera, are being taken care of. How would that now translate into a multiple level of savings or improvement in economics by just transferring one asset into another subsidiary?
Actually, this is at a very initial stage, if it is. As I said, this is a board matter. I don't want to speak much on this because this is also more like a compliance issue at this point of time. I will keep my comments more reserved and not divulge much of my own thoughts and, don't want to speak anything which will not be in the best interest of our governance, which is also one of our pillar of ESG.
Thank you. The next question is from the line of Pinakin from J.P. Morgan. Please go ahead.
Yeah. Thank you very much, sir. My first question is that, if you just take a step back and look at it, we have lifetime high commodity prices in many of the base metals. At the same time, parent entity is very, very leveraged, and that's always the risk for the minority shareholders of Vedanta Limited. Now, operationally also some of the businesses have not shown great results. Wouldn't this company at these prices want to hedge some of the commodity exposure and bring in cash flow visibility and stability? Not fully 100%, but some kind of hedging even where aluminum, zinc and oil prices are?
As a policy, we don't hedge, but we evaluate the options depending on the situation from time to time. As of now, we have not decided. The situation is quite volatile, and I cannot commit to you which direction we will go. As a policy, we do not hedge.
Sunil, the second question is on the oil business. We have yet again reduced the production guidance. Consistently oil has disappointed over the last few quarters, not delivering on volume growth. Now even costs have started rising. If you look at this quarter in terms of oil price at roughly $75 a barrel, there was an EBIT of INR 1,300 crores. There would be EOR CapEx and cost of business. What is the strategy in terms of turning around the oil business? Is this something where the volume growth is looking increasingly difficult to achieve?
No, I get what you are saying. The volume was more muted. I will help my colleague Prachur also to add on. Let me tell you that the last quarter, along with the decline, the major contribution was to come from gas asset and tight. The desired results were not to the level of our initial plan. We could not get the full advantage which we conceived at some point of time. Now to build the results, some of the drilling projects have been initiated and Prachur can give more detail on that. Let me also tell you that we are partnering with the government and asking for their support.
Four key things the government has given the assurance that they are likely to help us. Number one, long-term visibility of the PSC agreement. Number two, our levies are at 70% compared to, you know, 30%-40% with the other oil and gas producing countries. The government is quite favorably inclined to look at it. We also convince the government that this kind of business requires the marketing freedom. It is a very regulated sector where you require the approval from DGH or ONGC as a partner, whereas, you know, in Hindustan the government has a share of 30%, we only meet in the boardrooms. So the government is quite favorably disposed for all these.
We are evaluating all those options like enhanced oil recovery or shale oil to see that whatever the potential is there in our assets and beyond in OLE, how we can capitalize on each one of them and grow the production. Prachur, anything you want to add from what I said?
Because you covered most of it. I just want to highlight one point here is if you look at the quarter one and quarter two volumes, being at 165, the biggest part I would like to talk about is in our MBA fields, which are our oil fields. You know, traditionally these are mature fields, and for the last 7 years, these were the first two quarters there was no decline seen in these fields. From an oil perspective, I mean, the decline was managed through the polymer and, at this moment. Our main geological surprise came in the gas business, where due to the subsurface performance, some of the wells did not come as we expected.
However, we have taken up projects to add more wells in gas to recover the production. As Mr. Sunil mentioned, I think from a government support, there are two projects that potentially has a large upside that we are working on is the tertiary oil recovery to further improve the Mangala field in our MBA fields. Secondly, the prospectivity of shale in our Barmer Block. The kind of success that we had in working in the Cambay Block, we want to further monetize in the coming months. That will be my commentary on the volumes.
Understood. I think you know, dig deeper, do you think that Vedanta needs a foreign partner to better explore the oil opportunity, given that there have been series of disappointments and, you know, there are more and more difficult fields?
No, actually, we are already partnering with the global majors, no. We are the who's who in the oil and gas sector is already working with us. Prachur, you also explained that how many experts we are engaging, and, depending on where we have to add reserves and where the potential is there, all these experts we want to bring on board. But let me tell you the likes of Baker Hughes, Halliburton, SLB, and everyone, whom-whosoever is there in the world, they already work with us, and they look at. But we are trying to change the contracting and partnership model for which, Prachur, you can just explain.
Sure. I think, you know, as you mentioned, all these projects that are going through, they are being done through these international majors itself. Secondly, for the forthcoming projects, the way we are working with these partners is where they take a larger level of responsibility from end to end, starting from the technical design till execution of the project, and they are heavily incentivized upon success. That model, we believe, will further, you know, bring them into the picture, right. Secondly, on the expert side, just for your information, few, you know, six months ago, we had the CEO from BP is now a technical advisor who is full-time, who's working with us now on these projects to define how we can make the success.
From a expertise point of view, I think that's not the, in my view, that's not where the bottleneck lies. The bottleneck lies now is to make this recovery shale and exploration programs a success to add the reserve that grow the production. Because the prospective resources are there, and to make these projects viable, that's what Deepakji was mentioning. We have a significantly increased support now from the government to make these projects viable, which, you know, in the current infrastructure may not have been. But now with that support, we'll go ahead with these projects.
Let me assure you.
Sure.
Let me assure you, we are totally committed to produce 300,000 barrels in the midterm, and we are evaluating all those opportunities. The excitement and the motivation within our team is extremely high, and we are very committed. With the support of the government and the motivation of the Prime Minister, he has recently assured in one of the meeting he had with the CEOs, that each and every support will be given because the country also wants the energy security. In that direction, the shale oil, the enhanced oil recovery, marginal fields, OALP, optimization of recovery, giving the approvals, giving the liberty to us, to act without approval of the authorities and take some more risk.
All that we want to do because the oil prices are such that it enables us to take some more risk. You know that until the risks are taken, the delivery will not be there. These are some of the assets where the reserves are already lying. Like you see the enhanced oil recovery and some of the other assets like offshore also. If the pilot becomes successful for shale oil, you see, we will take a quick jump and we will take some, you know, leap, big leaps going forward.
Thank you. We take the last question from the line of Raashi Chopra from Citigroup. Please go ahead.
Thank you. I just wanted to clarify on coal. You indicated that there's 100% coal security for the next quarter. But you have about 2 to 3 days of inventory. Just to understand, what do you mean by that coal security?
Coal security means the coal is tied up either through the linkage or the auction. The total coal is tied up. That is called the security for the quarter. Hello, am I audible?
Yes, sir. Sir, give me a minute. We just lost the line for the participant. Miss Raashi Chopra, you may go ahead.
Can you hear me?
Yes, we can hear you, ma'am.
Yes. All I'm saying is that there's no need to panic with this 2-3 days of inventory, is what I want.
We could manage with one day stock. Now the two to three days to four days it is going. I think we are much better off where compared to where we were. Now the coal stocks at the IPPs are going up and becoming better. The government is also committed that the holiday which they had given to us on the coal block supplies which they had allotted to us, it is being released steadily.
Okay, got it. Thank you. Just to reconfirm the number, the debt that Vedanta is talking about $8.75 billion, right?
That's correct, Rashi.
Okay. Thank you. That's it.
Thank you.
Thank you. Well, that was the last question for today. I would now like to hand the conference over to Mr. Varun Kapoor for closing comments. Over to you, sir.
Thank you, Janice. To conclude, thank you all for taking out the time to join us this evening. If you have any further questions, feel free to contact either me or the rest of the Investor Relations. Here's wishing it to be a very good evening. With that, I'll pass it back to the operator.
Thank you very much. On behalf of Vedanta Limited, this concludes this conference. Thank you all for joining. You may now disconnect your lines.