CMP:
Rs. 116.80; Market Cap: Rs. 31,910.55 Cr; 52 Week High/Low: Rs. 190.95 /
Rs. 58.15.
Total
Shares: 273,20,67,720 shares; Promoters : 176,46,76,160 shares –63.34 %; Total
Public holding : 96,73,91,560 shares – 35.40 %; Book Value: Rs. 129.90; Face Value: Rs. 1.00; EPS: Rs.
18.46; Div: 350 % ; P/E: 6.32 times; Ind. P/E: 10.78; EV/EBITDA: 16.45 times.
Total
Debt: Rs. 77,952.03 Cr; Enterprise Value: Rs. 1,07,66,293 Cr.
VEDANTA LIMITED: VEDANTA Ltd was incorporated
in 1954 and is based in Panji, Goa, India. It got converted into public limited
company on March 25, 1981. It was formerly known as SESAGOA LTD and then
changed its name on merger with Sterlite Industries as SESASTERLITE Ltd in
2013, again in 2015 the company changed its name to Vedanta Ltd. VEDANTA is an India-based global diversified natural
resources company with operations in metals across zinc, lead, silver, oil and
gas, iron ore, copper, aluminum and commercial power. It is also engaged
in exploration, mining and processing of iron-ore. The Company operates in
three business segments namely iron ore, metallurgical coke and pig iron. The
pig iron business focuses on the domestic Indian market, especially to
foundries and steel mills in western and southern India. It also exports to the
Middle-East and South East Asia. The Company came with an IPO on November 1981,
with 22,05,000 equity shares of Rs. 10 each at a premium of Rs. 2.50 per share.
Vedanta gave its first bonus in the year 1978 in proportion of 2:3, then in
1986 in proportion of 2:5, in 1993 in ratio of 1:1, in 2004 in ratio of 1:1 and
lastly in August 2008 in ratio of 1:1. Vedanta had last split the face value of
its shares from Rs. 10 to Rs. 1 in August 8, 2008. VEDANTA is India's largest
producer & exporter of iron ore in the private sector which currently
accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron
ore mining company in the world. Its mining operations in India include Codli,
Sonshi/Surla & Bicholim mines located in Goa & Narrain mine located in
Karnataka. Sesagoa exported approx. 5 mn tons of iron ore, fines and lumps to
Japan, China, Europe. It also has mining interests in Western Cluster Iron Ore
project, Liberia. In addition, the company produces basic, foundry and
spheroidal grades of pig iron to steel mills and foundries as well as slag as a
by-product to the cement industry and metallurgical coke, primarily low ash
coke for foundries, blast furnaces & ferrous alloy industries. It operates Tuticorin smelter and India Copper Mines
of Tasmania. Its custom smelting assets include a copper smelter, a refinery, a
phosphoric acid plant, a sulfuric acid plant, a copper rod plant and two
captive power plants at Tuticorin in Southern India, and a refinery and two
copper rod plants at Silvassa in Western India. Its Iron Ore business consists
of exploration, mining and processing of iron ore, pig iron and metallurgical
coke and power generation. Its Aluminium operations include a refinery, a
smelter and power plants at Lanjigarh and Jharsuguda. Its other activities
include operation of its Vizag General Cargo Berth Private Limited in which it
owns a 100 % interest. Further it engages in generation &
distribution of power to Goa Electricity department & owns 30 MW power
plants in Goa that utilizes the waste heat gases from its coke making & pig
iron facilities as well as 30 MW waste heat recovery power plant. The company
sells its iron ore primarily in China, Japan, Korea, India, and Europe. In
April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51
% in SESA GOA from Mitsui & Co, Japan, for US$ 981 million. In April 2011,
the Company acquired 10.4% stake in Cairn India Ltd (CIL) from Petronas
International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the
assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). VEDANTA LTD is compared with OMDC, MOIL LTD, Hindustan Zinc Ltd, Sandur Manganese Ltd,
Greenearth Resources Ltd, NMDC Limited, Godawari Power & Ispat Limited in
India and globally with Rio Tino Plc of Australia, Vale of Brazil, BHP Billiton Plc of UK, Anglo American Plc of South Africa, Glencore Plc of Austrila, Anshan Iron and steel Group of China, Metalloinvest of Russia, Severstal's Karelsky Okatysh of Russia, Metinvest of Ukrain, Ferrexpo of Ukraine, Cliffs Natural Resources of USA, Sokolov-Sarbai Mining Production Association of Kazakhstan, APAC Resources Limited of Hong Kong.
Investment Rationale:
VEDANTA LTD has iron ore reserves and
resources of 374m tons in Goa and Karnataka. Goa's ore is medium grade and easy
to extract without blasting and crushing. The iron ore from Karnataka is of
high grade but found in rocky form, which necessitates blasting and crushing. VEDL
is India's largest private sector iron ore exporter and is an important Indian
arm of Global natural resource player VEDANTA Resources PLC; in February 2012
Vedanta restructured its subsidiaries by announcing merger of Sterlite
Industries into Sesa Goa in a 5:3 swap ratio, and later changed its name from
SESAGOA to VEDANTA LTD. VEDANTA LTD contributes 27 % of India’s domestic crude oil production.
India has 78 % of market share in Zinc, 48% in Aluminium and 34 % in domestic
market in copper. VEDL managed to register
strong performance in the aluminium division led by a decline in coal costs and
higher realisation. However, aluminium production volumes were lower on a QoQ
due to lower contribution from Korba‐II smelter and Jharsuguda‐I smelter. The ramp up at Jharsuguda‐II smelter too was
slower than expected. It is estimated that the volumes to increase at
Jharsuguda‐II smelter on the back of higher availability of power from 2,400MW
power plant and lower coal costs. Aluminium production volumes were lower by
3.4 % QoQ and 1.3 % YoY. The impact of lower production on revenue was offset
by some inventory liquidation. Aluminium sales volume was marginally higher on
a QoQ basis. Realisations too were higher on a QoQ basis with an increase in
import duty on aluminium from 5 % to 7.5 %. The impact of lower product
premiums was offset by increase in share of value added products. Value added
products accounted for 56 % of overall volumes. Outperformance in operating
profit was largely led by a decline in cost of production. Lower coal costs
coupled with a decline in alumina costs led to 6.3 % qoq decline in blended
CoP. On a per ton basis, alumina costs declined by 8.7 % qoq and power costs
were lower by 6.3 % qoq. The decline in alumina costs was largely due to lower
production of high cost alumina and consumption of external cheaper alumina.
The company was benefited from the sharp fall in alumina prices globally. Power
costs declined due to increase in availability of linkage coal and a decline in
e‐auction coal prices. Aluminium CoP at Jharsuguda declined 3.7 % qoq in
Rupee terms and 5.9 % in Dollar terms on account of the above two reasons. CoP
at BALCO too decline by 4.6 % QoQ in Rupee terms and 6.9 % in Dollar terms.
Post the commissioning of the 300MW CPP at BALCO II, the company has put the
high cost 270MW CPP on standby. Alumina production during the quarter was lower
by 3.2 % QoQ and 23 % YoY due to the closure of one stream at its refinery.
Aluminium business registered an operating profit of Rs. 355cr in Q4 FY16
against a loss of Rs. 11 Cr in Q3 FY16. Costs are expected to be lower in Q1
FY17 due to carry over of cheap alumina. However, this impact would be offset
by an increase in global alumina costs. As a result, the company has restarted
its 2nd stream of alumina refinery. It is targeting higher alumina production
in FY17 as the company has received environmental clearance to raise its
alumina production capacity from 1mtpa to 4mtpa. It plans to increase its
capacity from 1.5mtpa to 2mtpa via de‐bottlenecking. The company has guided for volumes of 1.2mtpa in FY17,
30% higher on a yoy basis post the approval to use IPP as CPP and rampup at
Korba‐II. Of the 1.25mtpa Jharsuguda smelter (4 x 313kt), 1st pot line started‐up on 1st April 2016 (to be ramped‐up in 3‐6 months). 2nd line is expected to commence ramp up from end‐Q2 FY16 and subsequently ramp up of 3rd line from Q4 FY16. Ramp up of
4th line would be Evaluated later. The 325ktpa Korba–II smelter has commenced
ramp‐up in April 2016 and is expected to boost volumes on the back of
commissioning of power plants. 2nd unit of 300MW of 1,200MW BALCO power plant
commissioned in March 2016. The conversion of IPP to CPP would allow the
company to utilize the low cost power produced at SEL for aluminium manufacturing
without paying a fee to the government. The ramping up process at Jharsugudai
II is under way and the company would rampup Capacities in FY17. The Chotia
coal block has received all the necessary approvals and has started operations
by end‐FY16. Laterite mine is also expected to start contributing from FY17. It
also expects CoP to reduce from the current range due to lower coal costs,
shutdown of high cost facilities, lower alumina costs and various cost saving
measures taken by the company. VEDENTA’s copper business will have some
improvement led by strong Tc/Rc margins and higher volumes. Its copper business
continued to report strong performance in operating profit. Tc/Rc margins have
been on the upswing over the last one year due to higher supply of concentrate.
Tc/Rc margins increased on a QoQ basis to 24.8c/lb during the quarter. Last
quarter performance during the quarter was impacted by flood in the region.
Copper production was higher by 5.2 % yoy and 14.6 % qoq. CoP too decreased on
a qoq basis on account of higher production. The sequential decline in
operating profit was largely due to one‐time benefit of export incentives in Q3 FY16. The management expects
Tc/Rc margins to be marginally lower on a yoy basis in FY17, in line with the change
in global trends. The management expects maintenance shutdown of 10 days in FY17. HZL registered a
sharp decline in topline due to both, lower volumes and lower realisation. The
miss in topline was largely due to a sharp decline in zinc metal output. Mined
metal output for the quarter was lower by 30.1% yoy and 17.5% qoq to
188,000tons. The decrease was on account of lower production primarily from
Rampura Agucha open pit as per the mine plan, which was partially offset by
record production from all the underground mines especially Sindesar Khurd. The
sharp decline in output from Rampura Agucha led to a 29% yoy decline in refined
metal zinc volume. However, higher contribution from Sindesar Khurd led to a
sharp jump in integrated silver and lead output. Product premium was marginally
lower for Zinc metal and higher for lead metal. The company has guided for
subdued metal production in H1 FY17 as per mine plan, while maintaining its
full year guidance of marginal growth in mined metal production. The mine
expansion plan is on track and the company expects to raise its mined metal
output by 1.2mtpa over the next three years. HZL reported 33.9% yoy decline in
operating profit on account of lower realisations and lower volumes. This was
quite lower than our estimate due to a sharp fall in zinc volumes. Costs were
also higher due to a decline in average grade of ores. Power and fuel costs too
decreased due to lower prices of e‐auction coal. CoP in Rupee terms was higher by 10.8% qoq and 14.2% yoy
to Rs. 58,044/ton. The management expects costs to be lower going forward due
to operating leverage. The Company has re‐negotiated several contracts to optimize costs and expect this to
translate into significant savings in FY17, taking benefit from the recent
commodity price downturn. In the international zinc division, production was
lower by 17 % qoq due to lower production from Skorpion (maintenance shutdown)
and closure of Lisheen mine. Costs declined by 21.3 % qoq in Q4 FY16 due to
higher volumes at Skorpion and various cost initiatives. However, the decline
in costs was lower than expected. FY16 production volumes stood at 226kt, out
of which Black Mountain accounted for 63kt and Skorpion accounted for 82kt. The
company expects FY17 volumes at 170‐190kt. It is focused on cost reduction initiatives by including labour
and equipment productivity improvements. It expects FY17 costs to be US$1,200‐1300/ton from US$1,431/ton in FY16. The first ore production is expected
2018 and mines will reach rated capacity of 250ktpa in a year post ramp‐up. The capex will be US$400mn of which US$200mn will be spent in FY17.
Vedanta managed to ramp up its iron ore operations in Q4 FY16. The company
managed to sell 2.6mn tons of iron ore against 1.5mn tons in Q3 FY16.
Production too was strong at 2.8mn tons against 1.4mn tons in Q3 FY16. The
company exited Q4 FY16 at a run rate of 0.8mn tons per month. The jump in sales
was supported by a rebound in global iron ore prices and removal of export duty
on ore less than 58 % from 1st March ’16. The company has managed to reduce its
costs on the back of operational efficiencies, contract re‐negotiations and resolution of transportation issue. The company is now
in the 1st quartile for global cost curve for its Goa operations. It has guided
for FY17 production of 5.5mn tons from Goa and 2.3mn tons from Karnataka. The
company is pursuing to increase its environmental clearance in Karnataka from
2.3mn tons. Over the last two months commodity prices have bounced back from
their lows on the back of inventory restocking, Dollar weakness and lower
concerns over Chinese demand. It is believed that the base metal prices have
formed a bottom and are likely to stay around current levels. Vendanta has
managed to bind its loose ends over the last six months. Increase in
availability if cheap coal has aided the company to reduce its costs sharply.
This coupled with volume ramp up of low cost capacities would boost the
company’s earnings over the next two years. Conversion of IPP to CPP would push
aluminium volumes higher. It is expected that going forward VEDL’s debt to
decline as capex outflow would be low and cash generation would be quite high
at HZL and Cairn. Cost rationalization would further help the company in
delivering strong numbers. In
2011, Vedanta Group acquired 58.5 per cent controlling interest in Cairn India
from its UK parent, Cairn Energy plc, 20 per cent of this was acquired by
Vedanta Ltd and 38.5 per cent by Twinstar Mauritius Holdings Ltd (TMHL) - a
special purpose vehicle wholly owned by Vedanta Resources plc (VED). In July
2015, VEDL announced a merger with its subsidiary Cairn India, in which
minority shareholders of Cairn India will receive 1 equity share of Vedanta for
each Cairn India held and which is expected to be completed in this month of
JUNE 2016. The effective merger ratio is of 1:1.04 after adjusting the preference
shares allotted to Cairn’s shareholders, so Cairn India shareholders will get
104 Shares of Vedanta for every 100 shares of Cairn India held. This deal will
make VEDL to have access to Cairn India’s Rs. 21,000 CR Cash. The merger with
Cairn India did face some hurdles due to the widening spread but now it is
expected to be completed by end of JUNE 2016. Post the change, the valuation of
Vedanta would be at 4.9x FY18 EV/EBIDTA, which is attractive.
Outlook and Valuation:
Vedanta is formed with the merger of Sesa Goa and sterlite Industries.
Vedanta is one of the largest natural resource companies globally with exposure
to all the major commodities. It has refined zinc and lead capacities of
1.5mtpa in HZL and Zinc International, Crude oil production capacity of 225-240
kboepd, Iron ore production capacity of 17mtpa, Aluminium capacity of 2.3mtpa
and 8.8GW (including current expansion) of power capacity. VEDANTA LTD
contributes 27 % of India’s domestic crude oil production. India has 78 % of
market share in Zinc, 48% in Aluminium and 34 % in domestic market in copper. VEDANTA
has been focusing on operational improvement in various segments. In aluminium
segment, it has been trying to improve its efficiency by reducing the cost of
production. Lower alumina prices supported initially, however, with price rise,
the company has started focusing more on ramping up its refinery. As 2400 MW
power plant got CPP status, power cost also is likely to come down gradually.
Both of these will result into lower cost of production. The management is
expecting the CoP to come down to US$1250/ tonne in FY17 itself. In iron ore
segment too, rise in global prices is likely to complement the company’s
efforts to reduce the cash cost to US$14/ tonne. Both these segments have been
under stress for a long time and operational improvement there would be
positive. The capacity ramp up will help in better performance. The falling oil
prices led to Rs. 12,304 crore of impairment charges on the balance sheet.
However, the commencement of production capacity of 1.2 mt Aluminium
(Jharsuguda Smelter), 9,000 MW Power plant along with ramping up of Iron Ore
operations in Goa and Karnataka will provide necessary boost to the top line.
The company has been able to reduce its debt level from Rs. 52,000 Cr in FY15
to Rs. 50,400 Cr in FY16. Overall on debt front, company has increased portfolio
duration thereby reducing its interest cost from 8.2 % to 7.9 %. However,
savings from interest will be partially offset by depreciation which is expected
to increase by 20 %. The value of goodwill may also change post completion of the merger with
Cairn India depending on the market conditions. Company is
undertaking several costs saving initiative wherein it has been able to save $250
mn in FY16 and is targeting to save another $250-30 mn in FY17. On account
of revaluation of assets and capitalization in Aluminum & Power Business
Company has recorded higher depreciation in Q4 and is expected to increase by
20 % in FY17 also. Taxes have been lower in Q4FY16 on account investment income in HZL set
off against carried forward tax losses. Going forward management expects tax to
be close to MAT rate. Management has highlighted that reduction in oil cess from Rs. 4,500 per
tonne to 20 % ad-valorem and increase in aluminium import duty from 5 % to 7.5 %
will positively impact its business segments respectively. The company has Gross
debt of Rs. 77,952 and net debt of Rs. 25,286 crore as on March 31, 2016, which
are lower than Rs. 80,952 crore at December 31, 2015. Gross debt and net debt
were lower over the quarter primarily on account of refinancing. Out of the
total debt of Rs. 77,952 crore, the Rs/US$ split is 52 % and 48% each. During FY16,
the company capex amounted to $600 million. FY17 capex is
expected to be around $1.0 billion. FY17 maturities of $2.3 billion are a combination of $1.3 billion of
short-term debt and $1 billion of term debt $1.3 billion of
short-term debt is expected to be met through a combination of rollover and
replacement with term debt $1 billion of external term debt and $1 billion of intercompany loan to
Vedanta plc to be met through a combination of refinancing, working capital
initiatives and internal accruals $200 million cash and liquid investments at Vedanta standalone $200 million
refinanced in April $1 billion of undrawn committed facilities. The company
expects to repay the remaining inter-company loan of US$ 1.8 billion at Cairn
SPV over the next three to four quarters, having already repaid US$ 400 million
in January 2016. Given the company is focused on deleveraging, the board has opted to not
declare any dividend out of $3.3 billion debt obligation, management highlighted that $1.2
billion is to be funded through rolled over short term debt, $1 billion will be
funded through Internal operation and other sources and for the balance $1
billion the company is negotiating with various banks. Company has
increased duration of its debt portfolio which is expected to reduce interest
burden going forward. On the coal requirement front w.r.t 9,000 MW power facilities, the
company is expecting to source 25 % from imports, 20 % from Linkage, 40 %
through IPP Linkages and balance through auction. Vedanta's reported a loss at
the PAT level due to exceptional item (non-cash impairment charge). Going
forward, with a positive view on the company’s domestic zinc business (HZL) and
on account of strong underlying fundamentals VEDANTA will do better and its profitability
will be mainly driven by higher zinc prices and
improved iron ore profitability and also due to improvement in aluminium and
power operations. Higher depreciation and tax will limit the net profit jump. Based on the expected improvement in aluminium and iron ore business and
also higher estimates for Hindustan Zinc, the valuation of VEDL on SOTP basis
comes at Rs. 125. At the CMP of Rs. 116.80, the stock is trading at P/E of 10.52 x FY17E and, 6.99 x FY18E. The company can post EPS of Rs. 11.10 for FY17E and Rs. 16.70 for FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
| KEY FINANCIALS | FY15 | FY16E | FY17E | FY18E |
|---|
| SALES (₹ Crs) | 73,710.00 | 64,434.00 | 76,274.00 | 85,737.00 |
| NET PROFIT (₹ Cr) | (15,646.00) | (9,323.00) | 3,304.00 | 4,965.00 |
| EPS (₹) | 21.90 | 7.30 | 11.10 | 16.70 |
| PE (x) | 4.80 | 14.30 | 9.30 | 6.20 |
| P/BV (x) | 0.60 | 0.70 | 0.70 | 0.60 |
| EV/EBITDA (x) | 4.70 | 7.10 | 6.20 | 4.90 |
| ROE (%) | 10.20 | 4.40 | 7.20 | 10.10 |
| ROCE (%) | 9.90 | 7.00 | 8.10 | 9.30 |
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*As the author of this blog I disclose that I do not hold VEDANTA LTD in my any of the portfolios.
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