57
(^) Outlook BUSINESS / (^) 22 December 2017
Indian and global peers. Further, given the signifi -
cant improvement in the balance sheet, Vedanta
has committed a minimum dividend payout of 30 %,
which is further value accretive for shareholders.
The stock is currently trading at one-year forward
EV/EBITDA multiple of 4. 5 x, which is not only low-
er than its historical average but is also trading at
a discount to global aluminium and zinc peers. The
stocks of BHP Billiton, Rio Tinto and Glencore are all
trading above 6 x. We have valued the company on a
sum-of-the-part basis. The bulk of the value in the
stock comes from its zinc operations in India and the
oil and gas division. Given the positive outlook on all
commodities and a ramp-up in production, we arrive
at a value of # 450 a share. The key risk to our call is
a likely fall in zinc and aluminium prices, lower vol-
ume growth, and an increase in cash cost, especially
in the aluminium business. However, we believe the
other trigger for the stock could be the sale of residu-
al equity stake of the government in both Balco and
Hindustan Zinc. b
The writer has no position in the stock, but Elara Capital has
recommended the stock to its clients
co as it relies on external sources for both bauxite
and alumina besides importing a large part of its
coal requirement. The company has given up on the
Niyamgiri (Odisha) mines and, hence, the key trig-
ger for the company to reduce cost will be to win
bauxite mines, when the government puts some
mines on the block or to enter into an agreement
with Nalco to source alumina locally.
The company is also very optimistic on the growth of
its oil and gas business. We expect a signifi cant ramp-
up in production through enhanced oil recovery proj-
ects within existing fi elds. The management has un-
dertaken cost-effi cient measures and has closed down
small unviable projects. Consequently, the new proj-
ects undertaken have become viable even at a crude
price of $ 40 a barrel. But an overhang in this segment
remains that the production sharing contract (PSC)
for its Rajasthan block (which accounts for 90 % of
overall volumes) will be up for renewal in May 2020
and the new hydrocarbon exploration licensing poli-
cy requires additional 10 % increase in profi t sharing
with the government. Currently, the extension of PSC
the for Rajasthan block is under arbitration since Ve-
danta is seeking an automatic extension of the con-
tract for 10 years without any changes in fi nancial
terms, in lieu of improved visibility on commercial
gas production.
SWEET SPOT
We believe Vedanta is in a sweet spot as the current
upswing has turned the tide in its favour and is likely
to aid improvement in earnings and help the metals
major in deleveraging. Vedanta has committed a ca-
pex of $ 1. 2 billion, which is almost double that of the
previous year (FY 17 ). Of the capex, 50 % is being spent
on zinc, 30 % on oil and gas, 10 % on copper and the
balance for the aluminium business.
On the back of rising commodity prices, the com-
pany also reduced its debt by # 11 , 460 crore. Given the
deleveraging and strong earning performance, the
miner’s net debt/EBITDA at 0. 6 x is the lowest across
Prudent allocator
Vedanta is optimally deploying its cash fl ows
FY16 FY17 H1
FY18
H2
FY18e
FY19e
Oil & Gas Zinc Al & Power
Copper
Optionality Capex
Free Cash Flow (pre-capex)
2.3
0.2 0.3
0.2 0.3 0.1
0.2
0.3
0.5
0.2
0.2
0.1 0.1
0.1
0.1
0.2 0.1 0.2 0.3
2.2
0.5
Source: Company
CY17 RETURN 33%
net profit #5 ,512cr
ttm p/e (x) 15
roce 16%