Yes, you guessed it right! Its Vedanta Ltd.
Vedanta’s share price has corrected from ₹319 to ₹239. This is due to various reasons from debt restructuring plans to not so good quarterly results.
In this article, we have analyzed the stock based on its fundamentals and valuation.
First, let’s look at the stock price chart…
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In the last year, Nifty 50 has increased from 18,409.7 to 19,675. 5 registering a 7% increase. Vedanta witnessed a decline of around 23% in the same period.
This underperformance was largely due to a lack of progress on refinancing its $1 billion worth of debt maturing in January and August 2024.
In addition, the adverse impact of the weakening commodity prices, especially of aluminum and zinc, affected its headline numbers.
However, after hitting a 52-week low of ₹208 on 28 September 2023, the stock started going north. Strong Q2FY24 results led to this spike.
Quarterly Activity
Here is a table comparing Vedanta’s quarterly numbers –
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The company’s net sales increased 16% quarter-on-quarter (QoQ) and 6% year-on-year (YoY).
Moreover, its gross profit jumped 55% and 60% on QoQ and YoY, respectively. This was driven by improved operational performance, easing of input prices and a favorable arbitrage award.
Talking about segments, aluminum, steel and iron ore businesses witnessed strong improvements in gross profit, while Zinc India, Zinc International, and copper saw pressure. Interest, on the other hand, seems to be concerning as it increased 54% on a YoY basis.
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*Interim results exclude extraordinary / exceptional items
Gross profit margin expanded from 24.3% to 32.6%. However, a contraction is seen in the net profit. This is broadly due to a one-time net tax effect of ₹61.3 billion as a result of adoption of a new tax regime effective FY23.
Vedanta has around ₹90 billion of debt that will be refinanced by Q4FY24 and has US$1 billion of debt that will be refinanced at the holding company level.
The holding company has approximately $3.1 billion of debt maturing in FY25, including $2 billion.
However, there was some relief when a recent arbitration case turned in favor of Vedanto. This will reduce the payout to the government by US$20 million per quarter in the oil and gas vertical.
Apart from that, Vedanta would also get ₹10 billion per quarter over the next five quarters, which will increase the vertical’s cash flow.
In addition, Vedanta has set aside approximately US$150-200 million as growth capex for its oil and gas vertical. This would be used to drill new wells, helping to manage the natural decline in the fields.
Vedanta is also likely to spend around US$1.7 billion as growth capital in FY24.
The Estimates of Vedanta
Currently, Vedanta’s price to earnings (P/E) ratio is 10.4x (times). This is slightly more than its 3-year average P/E of 7.2x.
The same is the case with its price to book (P/B), which is at 2.8x against its 3-year average P/E of 1.9x.
However, other valuation metrics such as market cap to sales and enterprise value through earnings before interest, tax, depreciation and amortization (EV/EBITDA) are acceptable.
Its market cap to sales is at 0.6x versus its 3-year average of 0.8. Similarly, its EV/EBITDA is at 4.3x compared to its 3-year median of 4x.
Therefore, the overall valuation of Vedanta seems to be acceptable as of now.
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Perspective
Vedanta’s EBITDA (excluding the arbitration claim) was in line with the street estimates. The company is focused on debt reduction.
Furthermore, the separation process is underway and is likely to be completed as per the timeline. However, Vedanta could face some headwinds in the global commodities market.
These are headwinds such as lower demand from China, a slowdown in China’s real estate sector, uncertainties in the Middle East and low London Metal Exchange (LME) prices.
Although the valuation appears to be reasonable, this stock has its own set of challenges related to the global headwinds and debt refinancing.
There may be scope for value creation from the Vedanta spin-off, but the company did not disclose key information.
It remains to be seen how Vedanta performs in the coming months.
We shared all the facts and gave a reading and analysis of the whole situation. Now it’s up to you to come up with your own estimates.
Have a proper, independent rationale regardless of whether it turns out to be right or wrong. This way you will develop a solid framework that would hold you in good stead in the long run.
Happy Investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com