Vedanta shares: Debt restructuring at VRL removes overhang; target Rs 362, says Nuvama
Vedanta share price: The real issue for the stock’s underperformance, Nuvama said, has been the continuous overhang of parent company’s debt, whose repayment has now been deferred to FY27.
- Jan 11, 2024,
- Updated Jan 11, 2024 9:08 AM IST
Nuvama Institutional Equities in a note said the successful debt restructuring at parent Vedanta Resources (VRL) has removed a major overhang on Vedanta Ltd stock, as it upped its share price target for the metals & mining major to Rs 362 from Rs 265 earlier. The domestic brokerage believes that the restructuring has comes at a higher cost, but gives Vedanta a two-year breather to focus on ongoing aluminium and zinc capex and also on monetisation of steel & iron ore assets. These assets, Nuvama said should unlock incremental cash flows.
"The debt restructuring bolsters the case for ratcheting up Vedanta's target valuation. We now value Vedanta ex-Hindustan Zinc at 5.5 times EV/EBITDA (earlier 4.5 times) and HZ at 6.5 times FY26 EV/Ebitda. This along with a rollover to FY26E lifts the target to Rs 362 from Rs 265); upgrade to ‘BUY’," Nuvama said,
The monetisation of steel & iron ore assets and vertical split of businesses can unlock even more upside potential, it said.
VRL has restructured bonds worth $3.15 billion maturing in FY24 and FY25. It agreed to pay $779 million upfront along with a consent fee of $68 million, totaling $847 million, thereby pushing maturities to FY27 onwards.
'This provides much-needed liquidity flexibility, and Vedanta can now utilise its cash flows to fund capex (high dividend shall sustain though; we expect DPS of INR40 each in FY25E and FY26E, assuming no refinancing (dividend yield of 15 per cent; vs. Rs 50 in FY24). While consolidated net debt shall stay high, it is likely to peak out in FY25," Nuvama said.
The brokerage said Vedanta has been performing well operationally, and even financially, and has not been in a distress situation. The real issue for the stock’s underperformance, it said, has been the continuous overhang of parent company’s debt, whose repayment has now been deferred to FY27.
"In the interim (FY25 and FY26), Vedanta has a window to complete its expansion plans in aluminium and zinc, and thus generate additional cash flows. We also believe the company should monetise steel & iron ore assets and successfully split its businesses, which shall enhance value. Moreover, promoters still can offload up to 13.6 per cent stake to revert to 50.1 per cent stake in Vedanta, providing additional liquidity," Nuvama said.
On the whole, Nuvama believes Vedanta is moving in the right direction. "Vedanta is working towards monetising its steel & iron ore assets in India. We reckon these assets can be sold at an EV of Rs 12,100 crore, providing an additional source of liquidity, which can be used to pare debt/fund capex. Additionally, vertical split of its businesses can yield higher-than-the-current SoTP value, particularly as it shall enhance the power subsidiary’s value by Rs 37 per share. Assuming the above two events play out, fair value can rise further by Rs 51/share, it said.
Nuvama Institutional Equities in a note said the successful debt restructuring at parent Vedanta Resources (VRL) has removed a major overhang on Vedanta Ltd stock, as it upped its share price target for the metals & mining major to Rs 362 from Rs 265 earlier. The domestic brokerage believes that the restructuring has comes at a higher cost, but gives Vedanta a two-year breather to focus on ongoing aluminium and zinc capex and also on monetisation of steel & iron ore assets. These assets, Nuvama said should unlock incremental cash flows.
"The debt restructuring bolsters the case for ratcheting up Vedanta's target valuation. We now value Vedanta ex-Hindustan Zinc at 5.5 times EV/EBITDA (earlier 4.5 times) and HZ at 6.5 times FY26 EV/Ebitda. This along with a rollover to FY26E lifts the target to Rs 362 from Rs 265); upgrade to ‘BUY’," Nuvama said,
The monetisation of steel & iron ore assets and vertical split of businesses can unlock even more upside potential, it said.
VRL has restructured bonds worth $3.15 billion maturing in FY24 and FY25. It agreed to pay $779 million upfront along with a consent fee of $68 million, totaling $847 million, thereby pushing maturities to FY27 onwards.
'This provides much-needed liquidity flexibility, and Vedanta can now utilise its cash flows to fund capex (high dividend shall sustain though; we expect DPS of INR40 each in FY25E and FY26E, assuming no refinancing (dividend yield of 15 per cent; vs. Rs 50 in FY24). While consolidated net debt shall stay high, it is likely to peak out in FY25," Nuvama said.
The brokerage said Vedanta has been performing well operationally, and even financially, and has not been in a distress situation. The real issue for the stock’s underperformance, it said, has been the continuous overhang of parent company’s debt, whose repayment has now been deferred to FY27.
"In the interim (FY25 and FY26), Vedanta has a window to complete its expansion plans in aluminium and zinc, and thus generate additional cash flows. We also believe the company should monetise steel & iron ore assets and successfully split its businesses, which shall enhance value. Moreover, promoters still can offload up to 13.6 per cent stake to revert to 50.1 per cent stake in Vedanta, providing additional liquidity," Nuvama said.
On the whole, Nuvama believes Vedanta is moving in the right direction. "Vedanta is working towards monetising its steel & iron ore assets in India. We reckon these assets can be sold at an EV of Rs 12,100 crore, providing an additional source of liquidity, which can be used to pare debt/fund capex. Additionally, vertical split of its businesses can yield higher-than-the-current SoTP value, particularly as it shall enhance the power subsidiary’s value by Rs 37 per share. Assuming the above two events play out, fair value can rise further by Rs 51/share, it said.