Vedanta Limited (NYSE: VEDL) Q4 2020 Earnings Call Transcript

Vedanta Limited (VEDL) Q4 2020 earnings call dated June 08, 2020

Corporate Participants:

James Cartwright — Head of Investor Relations

Sunil Duggal — Interim Chief Executive Officer

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

Ajay Kapur — Chief Executive Officer, Aluminium and Power

Analysts:

Indrajit Agarwal — CLSA — Analyst

Amit Dixit — Edelweiss Capital — Analyst

Amit Murarka — Motilal Oswal Securities Ltd — Analyst

Ritesh Shah — Investec Capital — Analyst

Rajesh Lachhani — HSBC — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Vedanta Limited Full Year FY20 Results Conference Call. [Operator Instructions] I now hand the conference over to Mr. James Cartwright from Vedanta Limited. Thank you, and over to you, sir.

James Cartwright — Head of Investor Relations

Thank you. Good evening, and thank you everybody for joining Vedanta Limited’s fourth quarter and full year results call. On the call today, we have Sunil Duggal, our Group CEO; Arun Kumar, our Group CFO; as well as Ajay Kapur, our Aluminum CEO.

And to start, may I point you all towards our results press release and presentation on our website, including the disclaimer on Page 2 of the presentation. Likewise, the primary purpose of this call is to discuss earnings and operational performance. For all questions around the delisting proposal, I’d like to refer you to the frequently asked questions posted on our Vedanta Limited website and also the presentation on the Vedanta Resources website that goes into further details of the delisting plan. Myself and the rest of the IR team will be happy to engage in further quick questions around the delisting post the call.

With that, let me turn the call over to Sunil to start today’s presentation. Thank you.

Sunil Duggal — Interim Chief Executive Officer

Thank you, James. Good evening, ladies and gentlemen, and welcome to Vedanta fourth quarter FY 2020 earnings conference call. This is my first set of results ever accepting the role of Group CEO of Vedanta Limited. And I’m honored to be leading the Company which I have been proudly part of for the last 10 years. I must begin by acknowledging Mr. Srinivasan Venkatakrishnan for his leadership to our company over the last two years. Under his guidance, we further strengthened our foundation that will benefit our organization long after his departure. We are grateful for his service.

And now, coming and starting with the year gone by, to describe FY 2020 as a dynamic year is an understatement. The macro environment has been extremely challenging with the impact of COVID-19 pandemic during the final quarter. The virus outbreak, which saw lockdown across geographies, has become one of the biggest threats to the global economy, disrupting businesses and supply chains world over. During these testing times, our priority is to ensure the health and safety of our employees, contractors and stakeholders, while ensuring the business continuity to the extent possible. I will talk more about the direct impact of COVID pandemic, but our responsibility to the communities we work in remains paramount to what we do. With that, amongst other measures, Vedanta set up dedicated INR201 crore fund catering to three specific areas: livelihood of the daily wage workers across the nation; preventive healthcare support to all our employees and contract partners across our plant location as part of its endeavor to join ranks with the Government of India to combat the widespread outbreak of COVID-19. Multiple relief measures were taken across the country through initiatives like providing meals to 10 lakh daily wage earners and treating over 50,000 stray animals daily on an entire month, to name a few. We also leveraged our existing community program like Sakhi, Khushi, etc. to create grassroot capabilities at village to make interventions sustainable and locally-owned. In a move aimed at supporting front-line health workers, doctors during COVID-19 times, Vedanta Limited has enabled mass production of personal protective equipment in Gurugram. The Company has imported 23 PPE machines recently in collaboration with the Ministry of Textiles and has teamed up with authorized apparel manufacturers to roll out over 5,000 PPEs per day. During these difficult times, our efforts are aligned to the singular vision of making our communities, the state and nation self-reliant and self-sufficient. We are committed to extending all help possible to help alleviate the pain, which pandemic has caused. We are closely working with the government, alongside our people and partners, to emerge from these trying times stronger and better.

So now, moving on to the operational performance, the COVID pandemic has hit the world hard and us in the last quarter of the year. We have taken a proactive approach to keep our assets and people safe, while ensuring optimum operations during these difficult times. With respect to our operations, our Zinc India operations were halted from March 22 and most employees were encouraged to work from home, barring some employees who attended the call for duty to keep production assets safe, including critical care and maintenance. The operations were restarted on April 8. In April itself, we ramped up all our mines and smelters to 40% to 80% of capacity, respectively.

In our Zinc International business, operations started on safely on April 17 with strict compliance to government regulations and SOPs. Our BMM plant and mining and Gamsberg plant is operational, supported by ore stockpile. In our oil and natural gas business, we have managed to continue our operations at all our three producing blocks with minimum manpower. Oil production had minimal impact as we continue to supply to our domestic crude oil buyers. Gas sale was impacted by around 50 million scuffs due to lower demand during lockdown, which has been normalized now. Our growth projects, which were the drivers to our near-term volume addition, faced some temporary impact. However, our surface facilities contractors, who are enhancing liquid handling capacity at MPT and constructing new gas terminals, have started ramping up manpower now and activity level, while maintaining adequate safety methods.

In our aluminum business, all our facilities have been categorized as essential services and continuous process industries by government authorities and continue to operate at current production levels, while largely maintaining flattish volume YoY. In iron ore, all our plants and mines operation requiring continuous process and essential services were working with limited operations, and currently, we are operating at about 75% capacity. With respect to the steel business, ESL has been operating at two-third of the capacity. In order to ensure volume support, ESL tapped the export market, largely due to constraints in domestic market.

Now moving on to the key operational highlights for the year, Zinc India MIC production was marginally down 2% and metal production down 3% for the year. Major developments to take capacity to 1.2 million tonne per annum now is in place. Zinc International overall production was up 63% YoY. Gamsberg production ramped up to 108 kt. Oil and gas gross production at 174 kboepd. RDG early gas production ramped up to 90 mmscfd. Aluminum production at 1.9 million tonne per annum. Aluminum cost was $1,690, down 14%. Record production at Lanjigarh, 1.8 million tonne, up 21%. Lanjigarh cost $275 per tonne, down 15%. Electrosteel, record production of 1,231 kt, up 3%. Sales 1,179 kt, almost flat. In iron ore business, our sales from Karnataka were up 125% YoY at 5.8 million tonnes. Nand Ghar, our flagship CSR initiative, has crossed 1,000 Anganwadi mark and is currently standing at a count of 1,250 plus. Continuous improvement as per Golder recommendation is under implementation across all tailing dams.

Now, coming to our safety records, we began this fiscal year with a strong commitment to improve our safety performance. While there have been significant gains made across all our businesses, I am deeply saddened by the loss of two lives in the fourth quarter of the year, bringing the total loss of lives to seven in this year. Our LTIFR stands at 0.66 in FY 2020. We have completed the incident investigations for every accident and are taking measures to ensure repeats do not occur. Learnings from all incidents are being implemented across our businesses. Occupational health and safety are non-negotiable factors for us, and we are determined to achieve absolute zero harm in our operations.

As discussed above, the last quarter of FY 2020 has been a time of global crisis as a result of COVID-19 spread. We are fully committed to the safety of our employees. Our strategy has been three-fold: practice physical distancing for all essential work streams, rely on early diagnosis for our workforce to prevent an outbreak, and share knowledge and best practices across our businesses to ensure safe workplaces. While the average footfall at our plants has been reduced significantly, our employees are actively involved in building homegrown solutions to the challenges created by COVID-19. For example, we now have one-touch based hand-washing system, which was built by our employees. Additional safety measures in terms of sanitizer, fogging, social distancing through on-ground marking, etc. are also in place to ensure minimum contact. We have also launched a healthcare helpline for our employees in partnership with Apollo Hospital through which they can teleconsult with a general physician or a psychologist.

Now, turning to sustainability, our unwavering focus on operating a sustainable and responsible business continued to deliver results in FY 2020, as well as affirmed by third-party experts. Work on improving the stability and the management of our tailing dams continues. Business units are implementing the recommendations from the audit conducted by Golder Associates in the previous year. In addition, we have updated the tailing dam performance standard and have added a detailed set of guidance note that all our business units must adhere to when managing their tailing facilities.

2020 also is the end of our cycle for GHG emissions intensity reduction target. We have managed to reduce our GHG emission intensity by 13.81%. This is below our target of 16% from a 2012 baseline and indicative of the stretch target we had taken. This reduction is equivalent to 9 million TCO CO2 [Phonetic]. We have begun work on setting our next set of long-term GHG reduction targets, and we’ll be disclosing those numbers in coming quarters. Our highlights for us in 2020 include 7 million meter cube of water saving over the past three years, as well as more than 100% fly ash utilization for second year running.

Now, coming contribution to the communities, with nearly 190 initiatives spanning healthcare, education, community infrastructure, drinking water, sanitation, sports, women’s empowerment, environmental protection, restoration, livelihood, skill development, Vedanta is a force for good in the communities where we impact more than 3.2 million people across 868 villages. At our flagship Nand Ghar program, we crossed the 1,250th Nand Ghar mark, and we are rapidly moving forward, reaching 4,000 Nand Ghar, which is our target.

Now coming to business unit reviews, first on Zinc India, mined metal production for the quarter was 2% — up 2% YoY to 249 kt despite operation shutdown from March 22 onwards in compliance with lockdown to combat COVID-19. Mined metal was higher YoY on account of higher ore production and better overall grades. Sequentially, mined metal production was up 6% on account of continued improvement in ore grades across the mines. For the full year, mined metal production was 917 kt, down 2% YoY, primarily on account of fewer days of production in March due to lockdown related to COVID-19 and lower grades at Sindesar Khurd during H1, you may remember, and Kayad mine. Integrated metal production was 221 kt for the quarter, down 3% YoY and up 1% sequentially due to lockdown in March. Integrated zinc production was 172 kt, down 2% YoY and 4% sequentially. Integrated lead production was 49 kt, down 7% YoY, while it was up 20% sequentially, as Dariba lead smelter resumed normal operations during this quarter. Integrated silver production was 168 tonne, down 12% from a year ago due to power — due to lower lead production, partly offset by better SK silver grades and improving silver recovery rate, while it was 12% up sequentially on account of higher lead production, better grades and higher silver recovery.

For the full year, metal production was down 3% to 870 kt and silver production was lower by 10% to 610 tonne on account of fewer days of production in March due to lockdown, lower lead production in Q2 and Q3 due to temporary operational issues, and lower silver grade. Going forward, we do expect a volume growth at HZL, given the completion of 1.2 million tonne per annum mining infrastructure.

Now, coming to Zinc International, in our Zinc International business, the total production for the year stood at 240 kt, 63% higher YoY, primarily due to ramp-up of first phase of Gamsberg expansion plan. The cost of production was $1,665 per tonne, down 13% YoY. The Gamsberg production volume increased from 17 kt in FY 2019 to 108 kt in FY 2020 at a COP of $1,445 per tonne. We are working towards improving volumes at Gamsberg with more consistent feed grades and recovery percentage. Work is on full earnest there. The operation at Skorpion mine has been suspended on shifty grounds and the mine has been put under care and maintenance.

With respect to demand, the key market for zinc and lead concentrate, that is Korea, China, is ramping up now post initial COVID-19 setback in February and March. Major smelting groups like Korea Zinc, Nyrstar and Glencore plan to continue normal production at respective facilities in Australia and Europe.

Coming to oil and gas, in pursuit of our vision to contribute to 50% of India’s domestic crude oil production, we have increased our block acreage by acquiring 51 blocks in Open Acreage Licensing Policy, OALP, and two blocks in Discovered Small Fields. The acquisition has established us as one of the largest private acreage holders in the country with a 10-fold jump in acreage from 6,000 square kilometer in August 2018 to 65,000 square kilometers. The PSC block offers a rich project portfolio, comprising of enhanced oil recovery, tight oil, tight gas, facility upgradation, and exploration and appraisal prospects. These projects are being executed under an integrated development strategy involving leading global oilfield services companies and are on track to deliver near-term additional volumes. During the year, 235 wells were drilled and 45 wells were hooked up. Early gas production facility has been commissioned to design capacity of 90 mmscfd. Project execution is the key to [Phonetic] focus and bringing some of the gas facilities, EOR and additional wells related project into fruition will be our key focus and attempting to deliver net of decline volume increase on schedule.

We had a planned shutdown at the Mangala processing terminal in February as announced in the last quarter call, which has enabled us to tie in the key surface facilities and carry out activities to enhance the asset integrity. In October 2018, Rajasthan production sharing contract was granted extension of 10 years with effect from 15 May, 2020, subject to certain conditions pursuant to Government of India policy on PSC extension. One of the conditions for PSC extension related to audit exception issued as part of routine audit in 2018. The condition stated that if the audit exception results into creation of liability, the same needs to be settled prior to expiry of PSC. These audit exceptions have been deployed as per the provisions contained in the PSC and stand disputed now. These were again notified for payment in May 2020 to the tune of $364 million relating to the group share. Total amount was $522 million. Since the audit exceptions were disputed, they do not result into creation of liability. As per PSC provision, we have invoked dispute resolution as per PSC in November 2019 and now initiated arbitration to resolve this. Due to extenuating circumstances surrounding COVID, MoPNG has permitted continuation of petroleum operations in the RJ Block with effect from 15 May, 2020 until extension addendum is signed or three months, whichever is earlier. In all our blocks, our objective is to reduce the cycle time from exploration to production. We have implemented the largest onshore full tensor gravity gradiometry airborne survey in India to optimize time and cost-intensive seismic data acquisition to fast track drilling. The seismic acquisition program has been initiated in Assam and the mobilization of the crew is underway in Rajasthan.

Now, coming to the aluminum business, in our aluminum business, we saw record alumina production from Lanjigarh refinery at 1,811 kt, up 21% YoY. Through continued debottlenecking, quarter four FY 2020 saw one of the lowest cost of production at Lanjigarh at $258 per tonne due to benefits from increase in locally-sourced bauxite, continued debottlenecking, improved plant operating parameters and rupee depreciation. On aluminum hot metal cost of production, we have already achieved our earlier production target — announced target of $1,500 per tonne with Q4 FY 2020 cost of production at $1,451 per tonne, 20% lower YoY. We expect the cost to be even lower in quarter one. And going forward, given stable OMC bauxite supply and lower alumina and cost — coal cost, and the business will take — will make reasonable cash margin even at $1,500 level.

In wake of COVID-19 concerns, the outlook for the initial months of FY 2021 was volatile with some aluminum consumers either reducing or shutting production, a trend seen across geographies, and LME taking a nosedive. Now, however, we see announcements by many industries to resume production in some form at the earliest. The global primary aluminum market is currently at surplus, but we also see LME looking upwards at $1,500 per tonne plus in the last few days. We continue to actively monitor the market and will dynamically adopt our product and geography mix [Phonetic] to cater to changing market requirement. The coal block allocation amendment rule 2020 was notified by the government, in line with measures announced to free up coal market over the past few months from intend to auction 50 coal blocks in Finance Minister’s speech and the Parliament passing the mineral law bill 2020 to remove captive and use eligibility for coal mining by private companies. The government is also introducing a revenue-sharing based bidding model with no technical or financial eligibility criteria. Being one of the largest captive coal consumers in India for power in our aluminum smelters, we see this as a very welcome move in freeing up the coal market. This will reduce our dependency on Coal India and improve the competitiveness of coal suppliers in addition to transparency. We’ll actively evaluate all opportunities that these amendments will present to improve our coal security and power cost performance of our aluminum operation.

Now, coming to iron ore, in our iron ore [Technical Issues]

Operator

Excuse me, this is the operator. Participants, the line is disconnected. Please stay connected while we reconnect Mr. Duggal.

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

Sunil Duggal — Interim Chief Executive Officer

So I don’t know where I was disconnected, but I am coming to iron ore now. In our iron ore business, sales at Karnataka at 5.8 million tonnes for the year, up 125% YoY due to an increase in production stock liquidation at Karnataka. Production of pig iron was marginally down by 1% to 681 kt in FY 2020. On Goa, we continued to engage with the government and local communities to restart our operations.

Coming on steel, our steel business saw healthy margins for the quarter at $127 per tonne, up 132% QoQ. The full-year production was up 3% YoY at 1,231 kt. With the domestic market showing positive response, we plan to resume our full-scale facility with more focus on value-added product in our product portfolio and continuously work towards reducing cost.

Coming on outlook, we are deferring guidance for FY21 to the end of quarter one. After studying the overall situation and when there is a better clarity, we will come back. Our current focus remains around efficient operations, active management of cost and capital conservation.

As we conclude, I would like to emphasize that this call is to discuss the results of the year gone by and we will not be taking questions on the recently announced offer from Vedanta Resources to take the Company private in this call. The proposed delisting process will be fair and transparent process in accordance with SEBI regulations. The details and the expected timings around the postal ballot are on our website, as are all the releases relating to the transaction. Our Investor Relations team will be able to help with any further question you may have in this regard.

Now, I would like to hand over to Arun for the financials. Arun?

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

Yeah, thanks Sunil, and good evening, everyone. I’m on the quarter four FY20 financial highlights page. In the current situation, as Sunil pointed out, we stay focused on getting the best out of what we influence, which is volume cost efficiency and claw back as much as possible of the lower LME or Brent. That explains some of the strong performance on cost and efficiency, be it sequential quarter or versus previous year. Again, FY20 over FY19, on a concentrate price basis, has been the best performance in the last five years in terms of EBITDA growth, obviously driven by cost and volume. More details in the coming pages.

The other key focus is on cash preservation or liquidity, curtail capital spends to high-return projects, thus generating positive and substantial free cash flows. This is similar to 2016 where the low price scenario brought out the best free cash flow post capex in the Company in the large decade. On this page, you’ll see us maintaining a robust EBITDA margin thanks to the cost improvements, ROCE still in double digits and exiting the year with significant cash results, which has served us well in the current quarter as well.

The EBITDA at INR4,800 crores is better than quarter three on a comparable basis, though on an absolute basis is lower. ROCE has followed the past trend. The liquidity of INR38,000 crores has helped in the current quarter in choppy money market especially. And as a consequence, the net debt stands at roughly around INR21,000 crores, down 21% year-on-year with the annualized net debt to EBITDA continuing at 1.0 times.

As usual, we have a detailed income statement in the appendix. Page 24 and 25. However, some key updates on the income statement. On below EBITDA line items, bet it depreciation, interest costs, interest income, all are as per expectation and guidance, which was reiterated in quarter three as well, as well as during the whole year in the earnings calls. On top of it, the tax charge or the ETR for the year is also at 32%, which is broadly in line with guidance of 30% to 32% that we’ve been giving for the year right from the beginning of the year.

However, I’d like to help you understand the tax line a bit more. There are three things on the tax line which matter this quarter. I’ll go in that order. Number one, as per accounting standards, INR1,700 crores tax charge on the dividend income or potential dividend income from Hindustan Zinc has been created given the fact that any income from there creates a deferred tax liability for the recipient of the dividend, given that it is knocked off against the brought-forward carried-forward tax losses, as we call, during the normal tax computation. And the accounting standards suggest that one has to estimate, and hence the charge of INR1,700 crores. And you have a better visibility to it given the actual dividend declared by Hindustan Zinc post the year-end.

Item number two, in quarter two of this year, FY20, if you recollect, we had a deferred tax liability write-back of INR2,500 [Phonetic] crores, driven by changes introduced in the tax regime wherein, as per the future earnings model, deferred tax liability would have been released due to the lower rate of tax, consequent to shifting toward new tax regime, down the line, post absorption of the current benefits of MAT. So, in fact, several other corporates have taken similar write-backs. This deferred tax liability largely pertained to the tax versus VAT [Phonetic] carrying value of the fixed assets, if I may remind you all. Now, based on the trued up model, in quarter four, which was actually driven by the newly introduced Finance Act 2000 and primarily the way the dividend gets — future dividend streams get taxed, the trued up reversal amount for the year stands at INR1,800 crores, still a significantly large sum. However, the quarter four impact would hence have a charge of INR700 crores. Removing the impact of the underlying — removing the impact of these two items, the underlying tax is around INR700 cores to INR800 crores for the quarter, though from a full-year perspective, both of these offset each other.

The item number three, which is anyways available as separate line, tax credit on the impairment charge taken of INR6,500 crores is the third item, which is clearly classified as exceptional as well. Both the impairment-related deferred tax reversal as well as the dividend-related tax are shown as separate line items in the Regulation 33 format in any case. These are all — as you know, these are accounting complexities of deferred tax.

Moving on, on the investment income for quarter four FY20, the only point is that versus last year quarter four, it is lower given the one-time income we had last year. Hence, the whole portfolio earns around 30% pre-tax income as guided earlier, no surprises there as well. The same trend would be noticed on a full-year basis on that line.

Now, coming to the impairment, we’ve added an extra page, as you can see, Page 45, I guess. The net of tax charge is about INR10,800 crores. This has two broad components. First is pertaining to the oil and gas, which is INR9,700 crores and is primarily driven by price assumptions and some owing to exploration-related write-offs.

The policy approach, standard operating procedure for price assumptions and the variety of other assumptions which are largely — price is largely consensus driven, is completely unchanged as compared to the earlier years. The impact in the Ind-AS account will be higher than IFRS, which will come out later, given the lower yearly depreciation charge and difference in depreciation standards of the two accounting standards. On oil, for consensus assumed in FY20, FY21 and FY22 at the end of FY18 when the last true-up was done were all in the mid-to-late 60s in terms of Brent. The current assumptions all indicate about INR20 lower — sorry, $20 lower on an average the next three years, and the medium term, which used to be 70s as per our earlier FY18 true-up, is now down to the 50s. This is what the consensus estimates are. WACC is almost same, slightly upward bias. Opex is lower. Opex assumptions are lower because we’ve seen better opex and certain potential lower NPV given the project delays and the delayed realization of the benefits and some of the litigation items. The lower depreciation over the last three years versus the IFRS base are the contributors to this impairment. On the second item, nearly 70% of the carrying value of the work in progress of the copper expansion, core LTP expansion, has been taken at about INR470 crores after an assessment of the asset recoverability test. These early two fundamental items. There are a couple of other minor items as well there.

And finally, on this page and the detailed income statement, the PSC extension and DDH demand are part of our Reg 33 notes and have been very well covered in Sunil’s update that you just heard now.

With that, if I move on to the next page dealing with the sequential quarter EBITDA bridge, as can be seen from the bridge, if you remove the LME impact and the base quarter impact of both together around INR2,250 crores, INR750 crores plus INR1,500 crores, then the EBITDA would actually be up around 10%. One could conclude it is largely driven by the aluminum sector, which if you recollect, we had highlighted even during the quarter three earnings call that quarter four costs were tracking lower. We believe this cost performance in aluminum will sustain during the current year, as Sunil highlighted. Again on volumes, while it shows up flat, it does not have the impact — or rather, it has suffered from the impact of the lockdown in March month. Of course, the lockdown was in the second half of the month, but majority of the March sales also happen in the second half of the month. It also confirms that we did exit with higher inventory across, which is now being liquidated in quarter one.

Again, on the — moving on to the next page on EBITDA bridge versus the previous year fourth quarter, fairly similar story. Excluding the price impact, EBITDA is again higher. And in the appendix, there is a full-year EBITDA bridge as well, probably Slide 29. EBITDA for FY20 as a whole, as I mentioned earlier, was around INR21,000 crores, lower 12% year-on-year, driven by lower commodity prices, which contributed to a negative INR8,000 core. But more than 50% of the drop in price was recouped through improved costs, albeit some of them are cost inflation as well. Of course, volume line would have been better but for the lockdown in the month of March, as I just alluded to a little while ago.

Moving on to the next page on net debt, during the year, net debt reduced by INR5,600 crores, reflecting our long-term trend of positive free cash flows post capex. Some of the full-year sales contracts [Phonetic] and customer advances, typically a 4Q phenomenon, did not materialize given the market disruption in March and as well as the financial market segment, hence a negative on the full-year working capital. These are expected to be a timing issue, should set itself right during the H1 of the current year.

Briefly on the capex page, two pages down the line, the numbers are well within the guidance as well. We plan to conserve capital, as I articulated earlier, though the formal guidance will be shared during quarter one call.

Moving on to the next page on balance sheet, again, a fairly self-explanatory page. The liquidity for the Group remains strong with cash and cash equivalents of nearly INR3,800 crores, albeit the tightness in the domestic capital markets in March due to COVID-19. In the wake of tightened liquidity, the Company used its internal cash accrual during Q1 to meet some of the short-term debt obligations, primarily around commercial paper, comfortably. We also opted for some selective loan moratoria as applicable, given the preference to conserve liquidity and timing. CRISIL confirmed and held the rating level in this scenario, which is comforting. We are focused on improving the term debt maturity profile, and we believe we will make meaningful progress this quarter given various discussions in advanced stages with banks and financial sector. Else, the fundamental Vedanta Limited consolidated balance sheet looks fine with net debt-EBITDA maintained at 1. Our investment portfolio is being monitored closely in the scenario. We don’t have any new risks during the quarter. It continues to be CRISIL Tier 1 rated largely. Vedanta had indeed declared interim dividend of INR3.90 per share earlier in the year. Given the need to preserve and build liquidity around operations in this price scenario, final dividend for FY20 was not on the agenda of the Board meeting. The Board will evaluate further during FY21 as the scenario unfolds.

Overall, we continue to focus on costs and efficiencies, cash and liquidity in the scenario. Formal volume and cost guidance can be expected in the next earnings call perhaps. As we conclude, I’d like to emphasize again that this call is to discuss the results of operations. We will not be taking questions of the recently-announced offer from Vedanta Resources to take the Company private. As Sunil articulated, the details of the process, FAQs, timings around postal ballot are all on the website, and our Investor Relations team will be more than happy to help with any further questions you have in this regard, which will be taken offline.

With this, I hand it over to James for the Q&A session.

James Cartwright — Head of Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Indrajit Agarwal from CLSA. Please go ahead.

Indrajit Agarwal — CLSA — Analyst

Hi, thank you for taking my question. A couple of questions from my side. One, you have announced — you have just said that you will again evaluate the dividend distribution for FY21. We had a dividend distribution policy earlier that whatever dividend we get from Hindustan Zinc will be [Indecipherable]. Is there a change in that dividend policy? Or is it still effective?

Sunil Duggal — Interim Chief Executive Officer

Arun?

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

Yeah, as far the dividend policy is concerned, there is no change in the dividend policy. The dividend policy states that minimum payouts when profit is available, both the companies, as well as a pass-through of Zinc dividend as long as it’s not a special dividend. So, to that extent, this policy will be maintained in FY21. As I mentioned earlier, it will of course be subject to liquidity situations and what the Board decides finally.

Indrajit Agarwal — CLSA — Analyst

So, in case the dividend from Hindustan Zinc is not distributed, the deferred tax of INR1,700 crores, does that mean excess cash outflow or it can still be adjusted against the other group income?

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Indrajit Agarwal — CLSA — Analyst

Sure. Second question, on your capex on Slide 26 of the presentation, the $1.35 billion Cairn capex, so how much is avoidable? How much capex do you have to actually incur to maintain production YoY and how much of this can be avoided to preserve liquidity?

Sunil Duggal — Interim Chief Executive Officer

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

Indrajit Agarwal — CLSA — Analyst

Sure.

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Sunil Duggal — Interim Chief Executive Officer

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

Indrajit Agarwal — CLSA — Analyst

Sure. Thank you. Last question is, on Slide 35, your aluminum profitability, the power cost over there has dropped sharply by about $140 per tonne QoQ. So if you can shed some more light in terms of what was the coal cost, how much of this reduction is sustainable, etc.?

Sunil Duggal — Interim Chief Executive Officer

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

Ajay Kapur — Chief Executive Officer, Aluminium and Power

Yeah, sure. Thank you, Sunil. So basically, we’ve had a good mix of both coal. What Sunil was mentioning, the coal availability was better and at a lower cost also. So that gave us about $55, $60. Additional to that, performance, technical parameters, including the PLF of the plants, that also gave additional about $25, $30. And the remaining came from RPO where earlier, we had much higher percentage, but after the Odisha government’s notification after Ministry of Finance — Ministry of Power notification, so now the RPO for Odisha was pegged at 3% and Chhattisgarh at 2.5% [Phonetic]. So that also gave additional $30, $35 [Phonetic]. And most of it, the RPO, the technical parameters are sustainable. Coal impact in quarter one, we are actually seeing the benefit of even lower procurement prices, so — which I think also Arun mentioned and Sunil also mentioned. We believe that that will help us in a much better cost of production going forward in quarter one and beyond.

Indrajit Agarwal — CLSA — Analyst

Thank you. That’s all from me.

Operator

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

Amit Dixit — Edelweiss Capital — Analyst

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

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

Yeah, Amit, thanks for the question. So fundamentally, let me make a few distinctions. One, global players, there could be multiple assets and multiple headrooms. Here it’s broadly the Rajasthan asset, as you know, which has the maximum value. Of course, there are a few other assets like Cambay and Ravva. And second is that in a language that you appreciate, it’s almost mark-to-market in a manner of speaking, simply because this is the fourth time in the last six years that you’ve taken an impairment. Twice you’ve taken an impairment charge and once you’ve taken an impairment reversal. And hence, any sharp movements in price or reserve, you would have a higher likelihood of impairment in Cairn rather than probably other companies which may not be strictly comparable. At least at the asset level, it might be comparable.

Now, your second sub-question there, how much of it is really price. You will realize that the $20 number that I gave you is lower price assumption on an average compared to the earlier one when we trued up in March 2018. As pertains to FY21, FY22, FY23, which is a go-forward period and of course into the future, simply a three-year impact on $20 would itself give you a number of $700 million, $800 million. With that, you add the NPV, you add the exploration bit, etc., you almost arrive at your number. So, an overwhelming majority of it is price-driven is the point I was trying to make as I explained the impairment.

And the third sub-question that you had here, of course, the possibility of a write-back is very well there. But obviously, in our accounting world, as you know, the threshold for write-back is far higher than a threshold for a write-down, and as is the common language, we call it conservative. And to take you back through the memory lane, a couple of years ago, there was a write-back, but that was very, very clearly led by addition of reserves, physical reserves that added thanks to the EOR programs and the other capex, which are related to the capex question that was raised by Indrajit. All those capex items created reserve, so wrote it back actually. Otherwise, possible, but thresholds are definitely normally higher. I hope that helped answer the question.

Amit Dixit — Edelweiss Capital — Analyst

Thanks a lot for this answer, quite detailed one. The second question is on oil and gas production itself. Despite investing close to $1 billion in last two years, we have seen that oil production has come down from 200 kboepd to 160 kboepd. Of course, this quarter, there could be one-offs because you had shutdown at Rajasthan block. However, in the last presentation, we had given guidance of 225 kboepd of exit capacity and the number of wells hooked at the end of H2 were 90. However, we see just 75 at the end of H2. So, how long do you think we will — will it take for us to achieve this 225 kboepd that we guided at FY20 exit?

Sunil Duggal — Interim Chief Executive Officer

So, the lesser production was a combination of the decline and the new projects and the liquids facility, which was to be upgraded. So, as the water cut goes up, you have to feed more water and polymer. So if the liquid facility is limited, so that means you have to cut down the production. So until the new facility is hooked up, there will not — you will see the decline faster. So — but as I said that there are five projects which are coming up, which are almost nearing completion now. And by this time, some of the projects might have already got completed if the COVID would not have happened and the labor would not have run away from there. And some of the equipment which were held up in Italy, China, those would have come in time. So — but there was a bit of the delay. Some of the projects which were to get completed last year got delayed for some reason or the other. Now, we are in the process of getting these projects completed. So gas, which was — from where we got the early supply of gas, which is contributing to 20,000 barrels per day, when this project will get commissioned in quarter two, this will contribute additional 20,000 barrels. Liquid handling facility, as I just said that how this will add. This will add to a volume of around 10,000 barrels. So, this will also get completed in quarter two. Tight oil, the another project which is getting hooked up will get completed in quarter two. This will add around 10,000 barrels again. Offshore Ravva, this project is about to get completed in a month or two. This will add 5,000 barrels. And MBA infill and polymer facility, which is being done by the Halliburton, where all wells are done and the surface facility is about to get completed, this will get completed in the next two to three months’ time, again, early quarter two. And this will also give you 10,000 barrels. And all this addition, including the base volume, we are confident that the exit volume this time should be definitely between 220,000 barrels to 240,000 barrels.

Amit Dixit — Edelweiss Capital — Analyst

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

Sunil Duggal — Interim Chief Executive Officer

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

Amit Dixit — Edelweiss Capital — Analyst

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

Operator

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

Amit Murarka — Motilal Oswal Securities Ltd — Analyst

Hi, good evening, everyone. So, I just wanted to understand [Indecipherable] of aluminum cost reduction. So, can you help break up the cost reduction in terms of how much is coming from the fuel cost, how much is from the lower cost of alumina, just to understand? Basically, what is related to the commodity price deflation and how much is structural reduction?

Sunil Duggal — Interim Chief Executive Officer

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

Ajay Kapur — Chief Executive Officer, Aluminium and Power

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

Sunil Duggal — Interim Chief Executive Officer

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

Amit Murarka — Motilal Oswal Securities Ltd — Analyst

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

Sunil Duggal — Interim Chief Executive Officer

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

Amit Murarka — Motilal Oswal Securities Ltd — Analyst

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

James Cartwright — Head of Investor Relations

No, we just — we are signing the PSC as per the new policy, which is 50%. And the investment multiple recovery remains same as earlier, but that is a separate thing that we are disputing with them that it should remain at 40%.

Amit Murarka — Motilal Oswal Securities Ltd — Analyst

Okay, sure. Thanks.

Operator

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

Ritesh Shah — Investec Capital — Analyst

Yeah. Hi, thanks for the opportunity. My first question is for Arun. Sir, how should we look at the debt maturity profile and the cash flows into FY21? I understand on one of the slides, we have given INR9,100 crores. Sir, how much is the outstanding commercial paper? And how should one look at cash flows for this year? It looks like it’s like walking on a tight rope.

Sunil Duggal — Interim Chief Executive Officer

Arun?

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

Not really because I think the outstanding commercial paper is probably down to about INR3,000 crores, INR4,000 crores at this point of time, very, very manageable levels. Even otherwise, the credit supports a higher level. And secondly, in terms of refinancing broadly, we believe that in the next, with some luck, 30 days, if not 60, 70 days, we should be done with the majority of the refinancing for the year. So, we are comfortable of that. And as I alluded to in my talk track, we are in advanced discussions with some of our key banking partners.

Ritesh Shah — Investec Capital — Analyst

So basically, we are looking at refinancing of nearly INR12,500 crores this year. Is that something which is comforting for us despite the tightness in the credit markets? Is there a fair way to understand that? Or should one look at a significantly lower capex? I understand we are not giving guidance, but some color over here would be quite useful.

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

So, on capex — sorry, go ahead, Sunil.

Sunil Duggal — Interim Chief Executive Officer

No, you good ahead. I will add later.

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Ritesh Shah — Investec Capital — Analyst

Right. Sir, honestly, given your commentary, it looks like we are in a comfortable position. And as a minority, definitely at Vedanta level, one should be looking at a dividend payout at least what has transpired through HZL to the parent. Is it something that one can expect during the year going forward? Any commentary over here? Or is it something one will have to look at, at a later stage base on cash flows?

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

No, feedback is quite valuable, and we will definitely share it in general with the Board when we meet. Thanks.

Ritesh Shah — Investec Capital — Analyst

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

Sunil Duggal — Interim Chief Executive Officer

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

Ritesh Shah — Investec Capital — Analyst

Okay, fine. Thank you so much.

Operator

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

Rajesh Lachhani — HSBC — Analyst

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

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Sunil Duggal — Interim Chief Executive Officer

But, just to build on what Arun has said, in the current context, actually we have risen to the occasion and we are proud of what we are doing in terms of how we are liquidating our stock, how our capacity utilization has gone up. We are almost operating at 80%, 90%, 100% our volumes. But on cost, I may tell you that we have redesigned ourselves and we have divided the total cost into the various buckets, in seven, eight buckets. So — and we have made the ManCom [Phonetic] in each organization where three, four, five people are there who are the key decision makers, who would meet on a daily basis to make the decision. But on the cost, we have divided this into eight, nine buckets and we have given the ownership of that cost bucket to the each senior individual in each company. And these all costs are reviewed in the war rooms on a daily basis. And I am very proud to tell you that we have decided ourselves that we will try and endeavor to protect our margin what was there in quarter four and quarter three last year, even in this low cycle of commodity prices.

Rajesh Lachhani — HSBC — Analyst

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

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Rajesh Lachhani — HSBC — Analyst

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

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Rajesh Lachhani — HSBC — Analyst

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

Arun Kumar GR — Whole-Time Director and Chief Financial Officer

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

Rajesh Lachhani — HSBC — Analyst

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

James Cartwright — Head of Investor Relations

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

Operator

[Operator Closing Remarks]