Vedanta has an edge—all its divisions are primed for growth and that should lift its Ebitda notably over next few years, says Sunil Duggal, CEO of Vedanta (VEDL). It has been noticed that the aluminium and zinc divisions are the key growth drivers. Efforts are underway to boost production in oil and gas (O&G) business. The company is committed to superior-to-industry ESG (environment, social and corporate governance) benchmarks. In our view, Vedanta’s Ebitda uptick on the back of higher volumes, despite low commodity prices, is its key strength. We are raising Ebitda by 15% through FY25e on average factoring in higher volume estimates. Our revised target price works out to Rs 355 (up from Rs 265) at an unchanged 4x Ebitda as we roll over the valuation to Q3FY24E.
Key growth drivers: Aluminium and zinc divisions
The aluminium (Al) division’s Ebitda would gain a lot from cost efficiencies. (ii) The zinc (Zn) division’s growth is likely to be volume-led with Zn-International looking promising with better reserves and recovery. (iii) Production ramp-up at the O&G division is likely in H2FY23 due to ongoing initiatives. (iv) ESL capacity to be doubled by FY25E. (vi) New businesses: Ferrochrome and nickel to be scaled up. (vi) Focus on ESG, particularly, renewables, water, biodiversity and people.
Aggressive ESG goals and prudent capital allocation framework
We find VEDL’s aggressive ESG approach and prudent capital allocation framework are the key differentiators. Key takeaways: (i) Firm decarbonisation (encompassing green aluminium and copper), water positivity and waste management targets. (ii) Debt reduction at parent likely to be achieved through upstreaming of dividend with no intention of Intercorporate deposits (ICD). (iii) Committed to $4bn deleveraging at VRL. We find the three-pronged focus on earnings growth, ESG and cash returns comforting.
Outlook and valuation: Beating commodity blues; maintain ‘BUY’
Despite our assumption of progressively declining commodity prices, VEDL stands to gain from volume uptick across its Al, Zinc, O&G and ferrous divisions, and backward/forward integration in the Al division. This is likely to enable superior cash generation and earnings uptick through FY25E.
The company seemed confident of a significant earnings uptick over the next few years, and reiterated VEDL’s focus on ESG and a disciplined capital allocation framework.
Valuation: We value VEDL at Rs 355
Despite a better free cash flow yield, VEDL stock is trading at a discount to its diversified peers such as Anglo American, BHP, Rio Tinto, Glencore and Vale on both EV/Ebitda and P/E. In our view, there is a potential for upside on valuations as the stock is expected to deliver robust cash returns to shareholders over the next few years, besides earnings growth potential.