Vedanta Limited

Vedanta Logo

Vedanta Ltd., promoted by high-profile Anil Agarwal has always had a roller coaster ride. The company is financially very strong and has both good growth potentials. However, it pays to look at the ups and downs of the company.

Mr. Anil Agarwal has informed in an interview that they are starting a semi-conductor manufacturing factory in India with Japanese collaboration. This has created a buzz on the stock and stock market reacted positively since the world is worrying about semi-conductor supplies. Another news is that Vedanta Resources Ltd., a debt-laden company having its headquarter in the U.K is likely to get merged with the Indian norm. This had created criticism and the company has vehemently denied any such more. Both the above instances happened within a week’s time (February 2022).

Photo courtesy company website

The problems faced by the company with its Tuticorin Copper Smelter plant are legendary. This unit is closed for operation due to alleged pollution control regulation violations. The company is fighting a case in the supreme court and in case they are unable to get the factory back in business they may have to take an impairment loss. If you put a gun in my head and asked me to wager, I would grudgingly wager on Vedanta not getting the plant back. If they get a reprieve, the shareholders can have a nice pay day. Secondly, Vedanta group, U.K took over Sesa Goa Ltd., an Iron Ore mining company from Goa and it is Sea Goa that got christened as Vedanta Ltd. They subsequently took over the mining operations of Dempo group Goa. However, in 2018 there was a mining ban in Goa and there is no reprieve there either, as on date. This has a potential to create a nice pay day for shareholders too. But it is a big IF

Despite all these, the company has a robust business model and its financials are very strong. The company has been trading in narrowband and has been an undervalued company all along due to these problems. It is hard to find a NIFTY and SENSEX company that is undervalued.

The consolidated revenue of the company is as follows:- Zinc, Lead and Silver 28%, Oil and Gas 9%, Aluminium 33%, Power 6%, Iron Ore 5%, and the remaining 13% is copper business. Zinc, Silver and Lead revenue happens in Hindustan Zinc Ltd. It is a subsidiary of Vedanta Ltd., and Vedanta holds close to 65% shares in Hindustan Zinc. This means  2/3 of the market cap of Hindustan Zinc is part of Vedanta’s market capitalization. In other words about Rs.92,000 crores out of a market capitalization of Rs.1,33,000 crores from Vedanta. Another major subsidiary is BALCO. This contributes to 33% of Vedanta’s revenue in their the aluminium business.

The company tried to delist from Indian exchanges in 2020. The delisting exercise failed since they were unable to get the required number of shares from the shareholders.

These are the pertinent points that have to be borne in mind. To recapitulate the company is in excellent business. However, there are some compliance worries (Tuticorin plant). Their Copper Smelter and Iron ore business are as good as defunct and has already been discounted by the market. They have exceptionally good reserves of various minerals in all mining divisions. No wonder, the promoters wanted to delist. And alleged compliance issues do not sit well with a publicly listed index constituent. Hindustan Zinc which is a major constituent of Vedanta’s value chain was valued first. You can have a look at the valuation of Hindustan Zinc here. 

Courtesy Money Control: Muted demand due to covid is firmly going away. Likely Consolidated Revenue for FY2022 will be over Rs.120000+ Cr. A YoY growth of over 25%
Courtesy Money Control: 25% revenue growth would imply a profit Rs.10000 Cr. However profit growth is likely to remain muted. We expect the company to end with a net profit of Rs. 21000 Cr. as against Rs.15003 Cr. in FY21.
Courtesy: Money Control: Company’s Return on Equity will continue to be at a healthy rate of 18% for the finance year 2022. We believe it will improve further in the coming years. Translated, Vedanta is likely to end FY2022 at an earnings per share of ~ Rs. 54 in FY2021

A few basic details and quality parameters about the company

These are based on financials of the company based on the year ended FY2021. These generally indicate long term prospects of the company. Most of the ratios are self explanatory. A few require explanation, though. Piotroski F score is a number from 0 to 9 that signifies financial health. Higher the number better it is. G Factor or Growth Factor is a number between 0 and 9 that signifies the potential to grow faster. Higher combination Piotroski score and G Factor are quite rare. We arrive at a graded score based on about 20 such parameters. Our score for Hindustan Zink is 70. which is very excellent.

Estimates based on past. Future outlook also determines the eventual number
Discounted Cashflow valuation table, in case you are interested.
Valuation based on these calculations. We will be revisiting it as soon as new financials are available in May’2022.

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DISCLAIMER This Blog, its owner  & contributors are neither a Research Analyst nor an Investment Advisor and expressing the views only as a valuation enthusiast and an Investor in Indian equities. He/She is not responsible for any loss arising out of any information, post or opinion appearing on this blog. Investors are expressly advised to treat the blog entries as one more opinion on the subject company and are expressly advised to do own due diligence and/or consult financial consultant before any investment decision. Author of this blog not providing any paid service and not sending bulk mails/SMS to anyone or asking for email ids or contact details. These are just ballpark enterprise valuations. We do not claim the value provided by us to be correct. These are based on the past ten years financials which has no relevance to the future whatsoever. We are not providing any recommendation on the stocks concerned. In fact, the market price is of no relevance to us and we just provide the enterprise value debt component and shareholders value. And its future business prospects. Additional Disclaimer: We hold shares in Vedanta Limited and hence our views may be biased. Reader is advised to do his own due diligence.

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