Vedanta: Rising commodity prices, dividend hopes augur well for the stock

Going ahead, improvement in zinc prices will boost Hindustan Zinc and Zinc International performance for Vedanta.
Vedanta’s stock plunged more than 20 per cent on Monday after the failed delisting attempt by its promoter and founder, Anil Agarwal-led Vedanta Resources (VRL). The stock had already corrected 11 per cent in the previous three trading sessions.

The stock had seen good gains in the past two months and touched Rs 140 levels in expectation of the delisting going through at over Rs 170 per share. Many investors had bought the company’s shares of late to benefit from delisting, but have now turned into sellers, leading to pressure on the stock. Once this selling gets over, the stock will start tracking fundamentals, which have improved significantly. Further, expectations of dividend have also risen.

“High debt on the books of the parent means Vedanta is looking at all options to raise cash and can announce a dividend payout,” says Ambareesh Baliga, a market expert. VRL has scheduled repayments of $1.9 billion until September 2022 (in addition to an interest payment of $500 million). It had net debt of $7.3 billion at end-FY20, say analysts at Motilal Oswal Securities (MOSL).

Meanwhile, fundamentals have been improving, and this could reignite sentiment. Vikas Jain of Reliance Securities feels the stock can return to a near-term high of Rs 140 levels. The metal sector has seen upswing over the past few months and with higher commodity prices, the outlook remains positive.
The base metal prices on the benchmark London Metal Exchange have rebounded significantly since March-April. Aluminium and zinc, which matter the most to Vedanta, are up 27-40 per cent since then. The two contributed about 57 per cent to Vedanta’s FY20 operating profit. Among others, the copper price has rebounded 46 per cent, thereby improving the base metal realisations outlook for Vedanta.

Oil and gas, under Cairn India, is another key performance driver for Vedanta and contributed 31 per cent to the FY20 operating profit. The per barrel crude oil prices have rebounded to $40 levels, from sub-$20 in March, and are another positive. The write-offs the firm had been making in the earlier quarters (looking at low crude prices) may also be behind, says Baliga. 

Though the June quarter performance did bear the lockdown impact and was weak, the aluminium segment surprised by posting improved operating performance (Ebitda growth of 15 per cent sequentially) due to cheaper alumina and coal. Improvement in the zinc price should boost Hindustan Zinc’s and Zinc Inter-national’s performance for Vedanta. The lead and silver prices — up by an average 34 and 43 per cent sequentially in the September quarter — will accrue benefits. The concerns over debt, extended loans to parent, and accounting practices, however, remain. Cairn India (a fully owned subsidiary of Vedanta) had provided a loan of Rs 2,311 crore to VRL, to be paid back by June 2021 and this can get extended. Emkay Global says this loan reflects as cash in Vedanta's books, though the money has been transferred outside its books.

Considering the fundamentals, analysts at MOSL arrive at a sum-of-the-parts valuation of Rs 140. Factoring in the recovery in commodity prices, cost reduction in aluminium, completion of zinc capacity expansion, and expected ramp-up in the oil and gas business, they see 28 per cent annual growth in earnings during FY20-22.

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