The aluminium business has been your star performer with a record EBITDA margin. Tell us what triggered this and are these margin level sustainable for the next foreseeable future?
As far as the aluminium business is concerned, I think we have done very well. The EBITDA contributions have been around $1,000 per tonne and the volume has also gone up. We took the decision at some point of time over about a year back that we are going to preserve our margins and at the same time we also took a decision that we are going to ramp up our aluminium volume. I am very proud to say the efforts have yielded results both in terms of volume as well as cost.
We have been able to contain the cost although the commodity prices or the aluminium prices have gone up. So, with aluminium prices and the cost, we could contribute around $1,000 of the EBITDA and this quarter the highest contribution from the aluminium business surpassed zinc business in our portfolio. We are very proud of it. But going ahead there are lot of structural measures we are taking.
We want to make this company more integrated by securing the raw material sources of bauxite, raising the capacity of Lanjigarh which you also know we declared two quarters back. As we speak the project is on, which we want to complete in next 12 to 15 months time. So, the complete supply of alumina through the domestic bauxite will come to our smelters. And operationalisation of the three coal blocks which we have won will also reduce the coal cost by another 30-35%. So, it will reduce our aluminium cost by say around $300-$400.
As you must have also noticed, we declared two quarters back that we are raising our value-added product capacity. The new smelter which we have announced at BALCO will also come up with 100% VAP capacity. So, our intention is to make the company 100% VAP. This could also contribute near $200 of the additional NSR. With a potential of $500 per tonne and from existing level of $1,000, even if we see the commodity headwinds, we still should be able to contribute $1,000 of EBITDA. But my own sense is that even the commodity prices are going to stay at current levels looking at the global equation which are emerging and looking at the renewable power.
Despite a 13% sequential improvement in Brent prices, oil and gas EBITDA was flat for you. Has the higher profit sharing at Rajasthan block impacted your profitability?
Yes, you are right. The profit petroleum was 60% and as per the agreement it went up from 40% to 50%. That means that minimum profit of petroleum will have to pay 50%, but maximum it can go to 60%. It will range between 50% to 60%. It has an equation with the investment multiple. Because of our lower investment last year because of COVID, the profit petroleum has gone to the upper level of the tranche and it is at 60%. That is the reason.
With crude prices looking up and the production getting better as this last quarter gas sales got impacted because of the demand in Gujarat where our gas pipeline goes, the industrial demand is resuming. In fact, going up and the production is also going up as we will progress quarter to quarter with the new drilling and infill drilling which is going on. We are quite confident that the trajectory of the contribution from oil and gas business will also look up.
Let us talk about ESL Steel. How is it integrating? Its realisations and EBITDA have been significantly lower than the industry average. When according to you will those levels improve?
We are taking all measures on the complete value chain in this business – right from improving the internal efficiency, their set health, digital efforts, debottlenecking of the existing furnaces, finishing the unfinished project which we took over from the previous promoter, raising the ultimate capacity to three million tonne, raising the value-added product capacity.
Because ultimately, we want to sell 100% product as the value-added product and making the product portfolio in such a way that it gives us some flexibility depending on the market condition, the market demand and which product market demand comes from, and some marketing efforts. I think overall all these actions will take us to the industry best and in the coming quarters you will see that this business will be contributing a healthy contribution in our overall pie.
Your debt ratios have come up quite substantially. Will you be able to maintain the debt to EBITDA ratio at 0.6X? Furthermore, did you see higher working capital during the quarter?
Yes so, the working capital is a function of the commodity prices. If you have a WIP, it is evaluated based on the commodity prices. That is why you must have seen the working capital going up, but we also had the sale pressure at the end of the quarter because of the COVID impact, otherwise our results have been still better. With now the demand opening up, commodity prices are looking better. The debottlenecking effort bringing the result, digital set health optimisation effort bringing result, some of our brownfield expansion is yielding results and the volume will be going up.
I think in the cost curve you will see the lower trajectory, and even if the commodity prices stay, it’ll make a healthy contribution of EBITDA and this trajectory of the net debt going down could be maintained. But ultimately, any vision or the dream of any organisation is to make the company debt-free and that is our intention in the next couple of years.
You have hinted at higher dividend for Vedanta via raising debt.
Well, it is a combination of many things. We declared the previous quarter that the capex guidance was $1.8 billion. The project and the sustaining together with the declaration of the new capex plan, I think still the overall cash flow will be restricted to $2 billion. But in the coming year we will give the guidance as we go forward with the balance sheet looking healthy. With the contribution from all the businesses becoming better, the trajectory of EBITDA going up, I think you will have the news on the dividend also in the coming quarter.
Vedanta Resources has its own focus on debt reduction as well. When can be Vedanta expect the receipt of the balance of the $1 billion loan extended to them?
All efforts are on. I cannot divulge every information as to what exactly we are doing, but the intent is very clear. We want to make both Vedanta, Vedanta PLC a debt-free company. If, God bless, the way the company is performing in all our assets and even in new acquisitions like FACOR, I think the coming quarters will be a very exciting journey for us.
