Vedanta slumps from Sept 30 peak: Is it a good entry point?

After climbing to a record high of Rs 523 on September 30, shares of commodity major Vedanta have come off over 15 per cent amid a fall in the overall markets.

The Anil Agarwal-led firm’s latest slump comes after its stock price doubled over the past one year.

Is it a blip or a trend reversal?

Most analysts are upbeat on the counter driven by Vedanta’s strong showing during the second quarter ended September 2024 (Q2 FY25), which has improved earnings visibility over the medium term.

Furthermore, operational efficiencies, capacity expansion, debt reduction, attractive dividend payouts and ongoing demerger are driving analysts’ optimism.

The 12-month price targets for Vedanta range between Rs 470-Rs 663, implying an upside between 8 per cent and 50 per cent from current levels.

“Even after factoring in higher alumina price, we maintain FY25 estimated ebitda and increase FY26 estimated ebitda by 3 per cent to factor in higher silver prices and aluminium cost of production.

"With demerger of business likely by FY25-end, we are valuing individual businesses separately.

"A partial rollover to FY27, yields target price of Rs 663 (from earlier Rs 608).

"This excludes Rs 15 dividend per share in the rest of FY25 and Rs 35 in FY26. It remains one of our top picks,” said a note by Nuvama. (Ebitda is short for) earnings before interest, taxes, depreciation and amortisation.)

In 2023, the mining conglomerate announced plans to demerge and separately list five key businesses, including aluminium, oil and gas, and steel.

The demerger could lead to creation of six independent verticals: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta.

Vedanta’s management has said that the completion of the demerger process is expected by March 2025.

However, it has also indicated that the demerged entities would list at different times, as and when approvals are secured.

CLSA has revised lower the estimated ebitda for FY25-27 by 2-9 per cent citing soft oil and iron ore prices.

But its target price of Rs 520 offers almost 20 per cent upside from current levels.

“Ongoing expansion projects augur well for volume growth and margin expansion.

"The execution of these projects will be key to outperformance, while its dividend yield is likely to remain elevated, in our view,” said CLSA in a note.

Vedanta posted an ebitda of Rs 9,820 crore in Q2 FY25, ahead of most estimates, with cost efficiencies helping offset weakness in metal prices.

“Net debt at Rs 56,900 crore and net debt-to-ebitda at 1.49 times – [was] best in last six quarters, benefitting from qualified institutional placement proceeds.

"Besides, deleveraging at parent is progressing ahead of schedule.

"We lower our FY25 (ebitda estimates) by 6 per cent on the sharp spurt in alumina price but keep FY26E EBITDA broadly unchanged.

"We maintain BUY with a sum-of-the-parts based target price of Rs 600, implying an EV/EBITDA of 5.7x on FY26E and FY27E blended EBITDA (50 per cent weight each),” said a note by ICICI Securities.

While most analysts are positive on the stock, they also highlight key risks. For CLSA is it a slower-than-expected pick-up in growth projects, weaker commodity prices and deviation from stated capital allocation policies.

“Higher than expected escalation in alumina prices; delay in commissioning of coal mines in aluminium division and cost escalation in Zinc-India and Zinc-international divisions,” are some of the risks flagged by ICICI Securities.

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