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Cairn merger, hot metal may trigger a Vedanta re-rating

Analysts are expecting Vedanta’s standalone net debt (post Cairn merger) to be slashed by two-third by FY18-end from around Rs 56,000 at Septemberend.

, ET Bureau|
Updated: Jan 25, 2017, 12.24 PM IST
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For Vedanta, aluminium production is the biggest earnings contributor followed by power and copper, while it is crude for Cairn.
For Vedanta, aluminium production is the biggest earnings contributor followed by power and copper, while it is crude for Cairn.
ET Intelligence Group: India’s largest mining conglomerate Vedanta is likely to benefit from several triggers like the completion of Cairn India merger, which will lead to sharp debt reduction, ramp-up of its aluminium smelter and visibility on dividend paying policy. The rising aluminium and zinc prices will also help. All these factors will lead to further re-rating of the stock.

Analysts are expecting Vedanta’s standalone net debt (post Cairn merger) to be slashed by two-third by FY18-end from around Rs 56,000 at Septemberend.

In addition, with firm aluminium prices, the company will ramp up its aluminium production by over 50%. If aluminium and crude oil prices sustain, analysts expect Vedanta’s post-Cairn merger EBIDTA (earnings before interest, tax and depreciation) to grow 18-20% for the next two fiscals.

For Vedanta, aluminium production is the biggest earnings contributor followed by power and copper, while it is crude for Cairn. Prices of all these commodities have been buoyant in the last three months. Aluminium prices are up 14% and copper has gained 23% in the last three months. Crude prices too, have remained firm.

According to estimates, Vedanta (including Cairn) should clinch EBIDTA of Rs 11,000 crore in FY17, Rs 13,000 crore in FY18 and Rs 15,300 in FY19. It was Rs 2,550 crore in FY16 (excluding Cairn). With the capex cycle over and no major capex lined up, free cashflows (FCF) of the company will improve significantly.


Improving cash flows will also lead to higher dividend payouts, given Vedanta’s holding company too, is sitting on a huge debt of more than Rs 60,000 crore and has no other major earnings contributor. The company is expected to formalise a dividend policy after the merger in the June quarter, which could surprise.

Vedanta’s subsidiary Hindustan Zinc is also generating huge cash flows from its zinc, lead and silver operations, prices of which too have rallied 15-20% in the last three months.

Vedanta is open to buying the government’s stake in Hindustan Zinc. With Hindustan Zinc stock soaring and the government falling behind its divestment targets, the stake sale in the company may happen earlier than anticipated. With access to Hindustan Zinc, cash and cash flows, Vedanta’s debt will be negligible.

Although, Vedanta’s stock has gained 288% in the past one year, it is still trading at a discount to historic average. It is trading at FY18 EV/EBIDTA of 4.4, while global mining peers such as Rio Tinto and BHP Billiton are trading around 6-7 times. Indian aluminium manufacturer Hindalco too, is trading at 6.5 times.
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