Target: ₹540

CMP: ₹321.85

Vedanta gives exposure to Aluminum/Zinc, Lead, Silver/Oil&Gas, and its growth aspiration across these verticals is promising. Low cash cost positioning is a competitive advantage which gives it the ability to be among the last men standing even in a downturn.

Parent’s (VRL) high leverage is a blessing in disguise for Vedanta shareholders. VRL has a net debt of nearly $8 billion (September 2022 end) and is largely dependent on cash flows from Vedanta, which has to upstream large dividends to VRL. We expect Vedanta to pay out dividends of ₹80/50 a share in FY24/25 which translates to a cumulative yield of about 40 per cent.

While Q3-FY23 consolidated EBITDA at ₹7,100 crore was a touch below the lower end of market expectations of about ₹7,500 crore, pre-capex FCF of ₹6,500 crore was encouraging. Q4-FY23 EBITDA/FCF momentum is expected to be positive, on falling energy costs, higher LME metal prices, seasonally-stronger volume and WC release.

We forecast Vedanta to generate disposable free cash flow of ₹1,14,000 crore over FY23-25 which is what we call ‘Value Add’. On 12M-forward EBITDA (largely based on spot spreads), the stock is trading at EV/EBITDA of 4.2x, implying that even if metals prices were to suddenly correct to normalised levels, there is limited downside to the share price.

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