Vedanta Best Placed To Benefit From Rising Commodity Prices, Say Analysts

Mining conglomerate Vedanta Ltd is likely to see less pressure on cash flows after liability management at the holding company level and is now best placed to ride rising commodity prices, analysts said.

Improved performance in aluminium, power and zinc enabled the company to turn in EBITDA of Rs 87,600 crore in the January-March quarter, up by 4% quarter-on-quarter. The improved performance was attributable to lower cost of production in aluminium and zinc and higher sales volume, partially offset by softer zinc prices.

Despite marginal delays, Vedanta is set to complete its alumina/ aluminium/ international zinc expansion during the current fiscal year (FY25), which will provide visibility around volume growth and cost reduction FY26 onwards. The start of coal mines in FY26 shall further lower its aluminium cost of production.

In a post earnings note, Nuvama Institutional Equities said management is moving ahead to demerge the businesses by end of current fiscal (April 2024 to March 2025). The vertical split of its businesses into six listed entities can yield Vedanta higher-than-the-current value.

"We believe Vedanta is best placed to ride rising commodity prices. Rising commodity prices not only improves cash flows, but open up the potential of increasing the valuation multiple too as debt overhang shall subside significantly," it said.

Citi said liability management at the holding company gives confidence around Vedanta India's balance sheet as well.

"With less pressure on cash flows, commodity price resilience, potential sale of the steel/iron ore businesses — management expects this over the course of two quarters, likely restructuring — NOC is awaited from the lenders to file with the NCLT for the demerger, Vedanta hopes to complete the process by calendar year 2024, our dividend yield estimate of 10%-plus — we reiterate Buy (on company shares)," it said.

Phillip Capital said Vedanta has successfully resolved its debt issue and commodity prices have also jumped, providing further support to the cash flows. "We continue to hold our positive outlook as we feel the commodity prices have legroom to improve from here as well driven by Chinese stimulus and improved demand in 2H. The demerger of businesses and potential sales of any assets will help the management to meet its debt obligations. We have increased our FY26 EBITDA by 17%."

Antique Stock Broking Ltd. said strengthening of commodity prices (supported by tightening of supply and steady demand) would support topline growth while accrual of benefits of most cost optimization initiatives coming in FY25 onwards would support profitability.

"We like the company's low-cost producer advantage," it said. "We factor in 6% higher aluminum, 9% higher zinc prices, which raises our FY25/ 26 EBITDA by 11%/ 15% (respectively)."

Centrum said for the current quarter, it expects sharp increase in commodity prices to aid strong growth in the zinc and aluminium segment driving overall earnings growth.

"Vedanta is set to level up across businesses through capacity expansion and cost savings through backward integration will drive margin improvement and earnings growth," it said. "We expect zinc India and aluminium to grow by 18% and 30% CAGR over FY24-26."

Despite a huge dividend payout of Rs 45 per share and capex outlay of around $2 billion each in FY25 and FY26, strong earnings visibility is expected to help generate strong free cash flows to deleverage net debt position by $1.4 billion, it added.

CLSA said Vedanta has guided for group Ebitda to rise to $6 billion/ $7.5 billion by FY25/27 through capacity expansion, backward integration and value addition projects.

Reported net debt fell by Rs 6,000 crore quarter-on-quarter to Rs 56,300 crore helped by sharp working capital reduction (inventories/receivables), which is likely to be sustainable.

"Vedanta reiterated its guidance of reducing debt at parent Vedanta Resources, VRL, by $3 billion in the next three years. Ramp-up of ongoing projects would drive up project capex to $1.9 billion in FY25 (FY24 $1.4 billion)," it said, adding it does not expect debt at the company to rise.