Vedanta gains 14% in five sessions. Here are four factors fuelling rally

Commodity major's stock has hit its highest level since February 2023

Shares of Anil Agarwal-led commodity major Vedanta are up for a fifth straight trading session on Wednesday. After soaring 14 per cent in these five sessions, the stock has hit its highest level since February 2023. Here are five factors behind the rally:
 

China optimism

The rally comes amid encouraging economic data from China, the world’s largest consumer of several commodities. Data released on Sunday showed China's manufacturing activity expanded for the first time in six months in March. The data triggered a rally in the prices of most global metals. As Anil Agarwal-led Vedanta is a leading producer and supplier of iron ore, steel, copper and aluminium, the increase in prices is expected to boost its margins.

Silver play

Silver prices have rallied nearly 15 per cent in the past one month. The rally is expected to benefit the operating margin (ebitda) of Hindustan Zinc Ltd (HZL), where Vedanta holds nearly 65 per cent stake. Shares of HZL ended Wednesday's session at Rs 328, a gain of 3.9 per cent, and have gained over 12 per cent in April. “As silver is a by-product, about 86 per cent of silver revenue is considered as ebitda of HZL. In FY26E [estimated], silver is expected to contribute Rs 5,000 crore, which is 32 per cent of HZL’s Ebitda and thus 12 per cent of Vedanta’s ebitda,” said a note by Nuvama on Wednesday. Both Vedanta and HZL have high sensitivity to silver prices. The brokerage said a $5/ounce change in silver price changes HZL’s ebitda by 6.5 per cent and fair value by 7 per cent. Vedanta’s ebitda would change by 2.5 per cent and fair value by 4 per cent. Nuvama has assigned a fair value of Rs 394 for Vedanta and Rs 261 for HZL. As HZL shares are already trading above the fair value, the brokerage prefers to play the silver up move via Vedanta.

Demerger on the cards

In September 2023, Vedanta announced plans to demerge and separately list five key businesses, including aluminium, oil and gas, and steel. The demerger could lead to creation of six independent verticals: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta. The company is expected to allocate its debt across the demerged entities in proportion to assets. Analysts have said the demerger will improve Vedanta’s valuations, fundraising ability and simplify price discovery. It is proposed that for every share of Vedanta, shareholders will receive one share of each of the five newly-created companies. HZL and the electronics business will remain with Vedanta. It remains to be seen how the minority shareholders and creditors of the company vote on the proposal.

Efforts to deleverage

Earlier, Vedanta spelt out a plan to deleverage its debt by $3 billion over the next three years. “Deleveraging is our priority. We would be deleveraging the debt of Vedanta Resources by $3 billion over the next three years. Vedanta’s cash flow pre-growth capex is estimated to be $3.5-4 billion for FY2025, sufficient for secured debt maturities of $1.5 billion,” said Navin Agarwal, vice-chairman of Vedanta, in a recent meeting with analysts. The company is expected to clock an ebitda of $5 billion in FY24. At the group level, Vedanta is eyeing an ebitda of $6 billion in FY25 and over $7 billion in FY26.