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Target: ₹490
CMP: ₹219.45
Vedanta Ltd (VEDL) has put its shut copper smelter unit for sale. The unit which has been shut for the last few years because of government restrictions is EBITDA loss-making.
Our FY23-24 Vedanta forecasts builds in EBITDA loss of ₹260 crore a year and our fair value (which is EV EBITA based) implies a negative value for the smelter. In our view, any successful sale completion would be a positive.
Given global recessionary concerns, Indian metal stocks are down sharply (5-15 per cent). Within the India metals sector, Vedanta has the highest pay-out and hence offers relatively more stable dividends. While there is substantial leverage at the unlisted parent company, Vedanta’s balance sheet is relatively strong.
For VEDL’s earnings and cash flows, LME zinc prices are relatively more important. Current spot LME prices imply consolidated EBITDA of ₹50,000 crore for FY24 (vs JPMe ₹45,900 crore).
Implied dividend yield on the stock is about 15 per cent on our FY24 estimates, we do not see a risk of inter-company loans
We are Overweight on VEDL with a March 2023 TP of ₹490.
Downside risks include: A sharp decline in LME aluminium and zinc prices; inter-company loans to the parent/transactions with the parent that are negative to minority shareholders; and further delays in oil PSC extension.
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