Good news on all fronts for Vedanta

Earnings to grow by 25 per cent annually over FY17-19 on firm base metal outlook

For Vedanta, it seems that almost everything is falling in place. First, with base metal prices rebounding, its business prospects have improved. The company’s operating profits in December quarter was the highest in last seven quarters. Not surprisingly then, its stock price has grown more than three-folds from lows of Rs 60 last February to highs of Rs 275.40 in March 2017; and closed at Rs 267 on Friday. Despite this rally, there are more triggers and as the outlook remains firm there could be more gains ahead. 

Base metals have seen a strong run with zinc the best performer. As Zinc averaged at $2,511 a tonne on the London Metal Exchange (LME), up 56 per cent year-on-year, March quarter may see further improvement looking at current per tonne price of $2,800-plus. The gains are on the back of constrained supplies, and prices are likely to remain firm moving forward too. Analysts at Elara Capital have already upgraded their LME zinc price assumption to $2,625 from $2,250 for FY18. What’s more, looking at increasing production at Hindustan Zinc (a 64.92 per cent subsidiary), more benefits will flow to Vedanta. 

Aluminium, copper, lead, etc have also seen 8-28 per cent price increase during the December quarter, and March quarter performance should remain healthy. Even iron ore prices are firm and have seen substantial improvement over last one year, while outlook for Cairn India has also improved. Not only have crude oil prices rebounded from lows in the last one year leading to an improvement in Cairn India’s profitability, but current levels also make exploration and production (E&P) activities viable. The expected extension of its prolific Rajasthan block beyond 2020 will accrue more benefits as Cairn India can now allocate more capex and enhance output, which has been largely stagnant. Analyst see higher outlook from FY19 with this development as oil reserves of the company get a boost.  

Analysts at Edelweiss say that Vedanta will benefit from favourable zinc and aluminium price outlook and capacity ramp up. Similar views are echoed by Elara Capital who expected higher volumes and prices to drive Vedanta’s earnings.

Vedanta is targeting aluminium output of 1.9-2 million tonne (MT) in FY18 against the current run-rate of 1.3 MT. Besides, it is making efforts on fully ramping up its new smelter at Jharsuguda in FY19. With Hindustan Zinc changing its mining methodology, it is also targeting ramp up of mined metal production to 1.2 MT per annum by CY19. Also, in the power division, the new units in Talwandi Sabo power and Balco should ram pup through FY18. In case of iron ore, Vedanta has received additional three MT per annum mining allocation in Goa for FY17 as it reached annual mining production cap in January. Besides, as Goa government is trying to get its mining cap increased from 20 MT to 30 MT, Vedanta could also see its production rising by 50 per cent. Thus, analysts this remain positive on volumes growth. 

Edelweiss says that with capex cycle behind, they expect the company to generate free-cash-flow of Rs 14,000? Rs 15,000 crore over the next two years, which should accelerate deleveraging. 

Meanwhile, another catalyst for Vedanta will be the merger of Cairn India. The National Company Law Tribunal (NCLT) on Thursday approved the merger of Cairn India with Vedanta Ltd. The merger will give Vedanta access to Cairn’s strong cash balance as well as operational cash flows, which is an added positive. The recent dividend announcement by Hindustan Zinc to the tune of Rs 14,000 crore will also add to Vedanta’s balance sheet. 

In the light of these two catalysts and as expansions accrue benefits, analysts at CLSA expect the company to register an EPS CAGR of 25 per cent for FY17-19. They have also hiked their target price for Vedanta to Rs 340 from Rs 300 earlier. Target prices of Edelweiss stood at Rs 310 and Elara’s at Rs 326.