We view Vedanta’s (VEDL) acquisition of Electrosteel Steels (ELSS) as value accretive in the near term as: i) EV/t of $546 is significantly lower compared to recent transactions; ii) EBITDA/t accretion potential via captive iron ore use & capacity ramp up; and iii) opportunity to expand beyond 2.51mtpa. Assuming EBITDA/t of Rs 6,500-7,000 post capacity ramp up and iron ore self sufficiency, we envisage returns for VEDL’s shareholders to be between 20% and 25%. Maintain ‘BUY’ with TP of Rs 425.
We view VEDL’s acquisition of ELSS as its first step in the ferrous space, which has come at the right price and time. At a relatively inexpensive $546/t, the acquisition cost is significantly lower than $750/t capex already incurred in ELSS’ plant and comes at a juncture when its existing product range is gaining demand traction. We perceive upside potential of $30-35/t in current EBITDA/t of $65-70 through: i) capacity ramp up to 1.51mt; ii) potential captive iron ore sourcing from VEDL’s 10mtpa mine in Jharkhand; and 3) capacity increase to 2.51mtpa through an estimated $170-200mn investment.
VEDL’s resolution plan entails Rs 5,320 crore payment to creditors against outstanding claims of Rs 13,200 crore (implying haircut of 60%) by infusing Rs 1,810 crore equity (90% share in equity post transaction) and Rs 3,510 crore debt in ELSS. The balance 10% equity will be shared by creditors (in proportion to their outstanding) and existing shareholders.
We estimate lenders and existing shareholders ending up with 9.2% and 0.8%, respectively, of the equity post transaction with benefits of potential capital appreciation thereon. VEDL is a subsidiary of Vedanta Resources, the London-listed metals and mining group. VEDL is a globally leading diversified resources company with presence in oil & gas, zinc-lead- silver (through 64.9% stake in HZL and 100% stake in erstwhile zinc-lead business of Anglo American).