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My Best Pick
22 December 2017 / Outlook BUSINESSM
y pick for the New Year is
Vedanta and it’s a recognition
of the fact that one of the big-
gest commodity rallies has just
commenced globally. Coming aft er a 10 -year bear cy-
cle, the metals major is a good proxy to play the rally.
While metal stocks have had a dream run since the
start of 2016 , we believe the rally is far from over for
non-ferrous stocks. Vedanta is well-placed to bene-
fi t from the buoyancy in the commodity cycle given
its presence across diff erent commodities, advantage
of scale and a healthy balance sheet. We believe the
upswing in commodity prices and capacity ramp-
up in zinc, aluminium, oil and power businesses will
improve the company’s bottomline.
Given the strong industry fundamentals, cost com-
petitiveness and huge potential, zinc has now become
the cash cow for Vedanta and accounts for bulk of its
profi t as well as valuation. In a span of just two years,
the fortune of the zinc industry has changed with
the closure of two large mines in Australia (Century
mines) and Ireland (Lisheen mines). The closure of
these mines has pushed the industry into defi cit andglobal inventories at both the London Metal Exchange
and Shanghai Futures Exchange have hit 10 -year lows,
leading to a sharp rise in zinc prices that have doubled
from $ 1 , 600 /tonne to over $ 3 , 000 /tonne in two years.DIGGING DEEP
Expansion at zinc mines of both Hindustan Zinc and
Zinc International will also be a key growth driver
for the company. In India, Vedanta plans to increase
capacity to about 1. 2 million tonne by FY 20 , translat-
ing into about 13 % sales volume CAGR over the next
two years. At Zinc International, expansion of the
Gamsberg project in South Africa is likely to start in
mid-CY 18 with about 100 , 000 tonne volume in FY 19
and a further ramp-up to about 250 , 000 tonne by
FY 20. With prices expected to remain at these levels,
Vedanta will be raking in profi t in the zinc segment,
given its low-cost structure.
In the aluminium business, prices have rallied to
over $ 2 , 000 a tonne and are likely to remain fi rm on
the back of Chinese government’s crackdown on ille-
gal aluminium capacity, rising input prices and pro-
duction cuts announced by China. Going forward,
this segment can create a big delta for Vedanta in
terms of cash fl ows as with higher ramp-up, produc-
tion cost will come down and the miner will benefi t
from higher operating leverage.
The company plans to increase overall production
in this segment from 1. 7 mtpa to 3 mtpa by FY 20 , in-
dicating a signifi cant jump in volumes. Though we
believe higher prices will benefi t the company, its
cost structure is higher compared with peer Hindal-Given the strong industry
fundamentals, cost
competitiveness and huge
potential, zinc has now become
the cash cow for VedantaShining metal
Closure of major zinc mines globally benefi ts Vedanta
EBITDA mix (H1 FY2018) %56
24947ZincOil & GasAluminiumPowerCopperSource: CompanyNote: Market related data as on December 1, 2017; Financials
for FY17; Consolidated fi nancials considered wherever ap-
plicable
Data: Ace Equitynet sales#72 ,225cr
stock price# 287 M-CAP#1 ,06 , 646cr
ROE 18.92%