The successful debt restructuring at Vedanta Resources Ltd (VRL), the parent firm of Indian miner Vedanta Ltd, has removed a major overhang on the VEDL stock, domestic brokerage firm Nuvama Institutional Equities said in its research note.
The share price target of the stock has been lifted to ₹362 from ₹265 earlier.
Nuvama believes the restructuring has come at a higher cost, but gives Vedanta a two-year breather to focus on ongoing aluminium and zinc capex and also on monetisation of steel and iron ore assets. These assets, as per Nuvama, would unlock incremental cash flows.
The debt restructuring bolsters the case for ratcheting up Vedanta's target valuation, the domestic brokerage said. "We now value Vedanta, excluding Hindustan Zinc, at 5.5 times EV/EBITDA (earlier 4.5 times) and HZ at 6.5 times FY26 EV/Ebitda. This along with a rollover to FY26E lifts the target to ₹362 from ₹265," it said while upgrading the stock to 'buy'.
Vedanta's parent has restructured bonds worth $3.15 billion maturing in FY24 and FY25. It agreed to pay $779 million upfront along with a consent fee of $68 million, totalling $847 million, thereby pushing maturities to FY27 onwards.
"This provides much-needed liquidity flexibility, and Vedanta can now utilise its cash flows to fund capex (high dividend shall sustain though; we expect DPS of ₹40 each in FY25E and FY26E, assuming no refinancing (dividend yield of 15%; versus ₹50 in FY24). While consolidated net debt shall stay high, it is likely to peak out in FY25E," the brokerage stated.
Vedanta is incurring major capex in its aluminium and international zinc businesses—both slated for completion by FY25-end. "Our calculation implies incremental cash flow of $1 billion-plus/year once the plants ramp up fully, potentially in H2FY26."
This would help Vedanta pay out higher dividends for the repayment of its parent firm's debt from FY27 onwards, Nuvama noted.
The metals and mining major is working towards monetising its steel and iron ore assets in India. "We reckon these assets can be sold at an enterprise value of ₹12,100 crore, providing an additional source of liquidity, which can be used to pare debt or fund capex."
Additionally, Nuvama said that the vertical split of its businesses can yield higher-than-the-current sum-of-the-parts valuation (SOTP) value, particularly as it shall enhance the power subsidiary's value by ₹
As per Nuvama, the monetisation of steel and iron ore assets and the vertical split of businesses can unlock even more upside potential.
Assuming the above two events play out, fair value can rise further by ₹51 per share, the brokerage said.
Vedanta has been performing well operationally, and even financially, and has not been in a distress situation, Nuvama said. The real issue of the stock's underperformance, as per the brokerage, has been the continuous overhang of the parent company's debt, whose repayment has now been deferred to FY27.
"In the interim (FY25 and FY26), Vedanta has a window to complete its expansion plans in aluminium and zinc, and thus generate additional cash flows. We also believe the company should monetise steel and iron ore assets and successfully split its businesses, which shall enhance value," it said.
Moreover, promoters still can offload up to a 13.6% stake to revert to a 50.1% stake in Vedanta, providing additional liquidity.
On the whole, the brokerage believes that Vedanta is moving in the right direction.
Recently, Moody's Investors Service downgraded VRL's corporate family rating (CFR) and senior unsecured bonds, a second such move since September, citing concerns over the company's ability to address its cash needs.
The rating agency downgraded Vedanta Resources' CFR to Caa3 from Caa2 and its senior unsecured bonds to Ca from Caa3, while maintaining its negative rating outlook.
Moody's said that VRL will face material liquidity issues over the upcoming 24 months and warned that the "default risk" remains high.
Shares of Vedanta Ltd were trading 1.25% higher at ₹270.40 apiece on the NSE today. The stock has gained 5% so far this year.
The share price target of the stock has been lifted to ₹362 from ₹265 earlier.
Nuvama believes the restructuring has come at a higher cost, but gives Vedanta a two-year breather to focus on ongoing aluminium and zinc capex and also on monetisation of steel and iron ore assets. These assets, as per Nuvama, would unlock incremental cash flows.
The debt restructuring bolsters the case for ratcheting up Vedanta's target valuation, the domestic brokerage said. "We now value Vedanta, excluding Hindustan Zinc, at 5.5 times EV/EBITDA (earlier 4.5 times) and HZ at 6.5 times FY26 EV/Ebitda. This along with a rollover to FY26E lifts the target to ₹362 from ₹265," it said while upgrading the stock to 'buy'.
VRL's debt restructuring provides liquidity to the business
Vedanta's parent has restructured bonds worth $3.15 billion maturing in FY24 and FY25. It agreed to pay $779 million upfront along with a consent fee of $68 million, totalling $847 million, thereby pushing maturities to FY27 onwards.
"This provides much-needed liquidity flexibility, and Vedanta can now utilise its cash flows to fund capex (high dividend shall sustain though; we expect DPS of ₹40 each in FY25E and FY26E, assuming no refinancing (dividend yield of 15%; versus ₹50 in FY24). While consolidated net debt shall stay high, it is likely to peak out in FY25E," the brokerage stated.
Vedanta is incurring major capex in its aluminium and international zinc businesses—both slated for completion by FY25-end. "Our calculation implies incremental cash flow of $1 billion-plus/year once the plants ramp up fully, potentially in H2FY26."
This would help Vedanta pay out higher dividends for the repayment of its parent firm's debt from FY27 onwards, Nuvama noted.
The metals and mining major is working towards monetising its steel and iron ore assets in India. "We reckon these assets can be sold at an enterprise value of ₹12,100 crore, providing an additional source of liquidity, which can be used to pare debt or fund capex."
Additionally, Nuvama said that the vertical split of its businesses can yield higher-than-the-current sum-of-the-parts valuation (SOTP) value, particularly as it shall enhance the power subsidiary's value by ₹
37 per share.
As per Nuvama, the monetisation of steel and iron ore assets and the vertical split of businesses can unlock even more upside potential.
Assuming the above two events play out, fair value can rise further by ₹51 per share, the brokerage said.
'Not out of the woods, but...'
Vedanta has been performing well operationally, and even financially, and has not been in a distress situation, Nuvama said. The real issue of the stock's underperformance, as per the brokerage, has been the continuous overhang of the parent company's debt, whose repayment has now been deferred to FY27.
"In the interim (FY25 and FY26), Vedanta has a window to complete its expansion plans in aluminium and zinc, and thus generate additional cash flows. We also believe the company should monetise steel and iron ore assets and successfully split its businesses, which shall enhance value," it said.
Moreover, promoters still can offload up to a 13.6% stake to revert to a 50.1% stake in Vedanta, providing additional liquidity.
On the whole, the brokerage believes that Vedanta is moving in the right direction.
Recently, Moody's Investors Service downgraded VRL's corporate family rating (CFR) and senior unsecured bonds, a second such move since September, citing concerns over the company's ability to address its cash needs.
The rating agency downgraded Vedanta Resources' CFR to Caa3 from Caa2 and its senior unsecured bonds to Ca from Caa3, while maintaining its negative rating outlook.
Moody's said that VRL will face material liquidity issues over the upcoming 24 months and warned that the "default risk" remains high.
Shares of Vedanta Ltd were trading 1.25% higher at ₹270.40 apiece on the NSE today. The stock has gained 5% so far this year.
Note To Readers
Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
First Published: Jan 11, 2024 12:32 PM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
