Vedanta Aluminium share price: Buy, says Nuvama; cites higher dividends and 3 other triggers

Nuvama Institutional Equities has initiated coverage on Vedanta Aluminium Metal Ltd (VAML) with a ‘Buy’ recommendation and a target of Rs 540, valuing the Vedanta group stock at 6.5 times estimated FY28 EV/Ebitda. Nuvama is expecting higher Ebitda growth of 29 per cent for VMAL over FY26–28, compounded annually, driven by lower cost of production, strong aluminium prices, deleveraging as well as higher dividends of Rs 15 per share in each of FY27 and FY28.

Nuvama said the demerged company of Vedanta is the fastest expanding primary aluminium company in India. It expects aluminium prices to stay firm until FY28 as supply tightness is likely to loosen in H2FY28. 

"Vedanta Aluminium is on a path to reduce its CoP (hot metal CoP less than $1,600/t in FY28), which shall help profitability to exceed historical average. A lean balance sheet provides flexibility for growth. We reckon a divdend per share  of Rs 15 in FY27E/28E. We value VAML at 6.5x FY28E EV/EBITDA and a target of Rs 540 (including Rs 15 DPS). Initiate at ‘BUY’," Nuvama said.

Nuvama estimated backward integration may lower Vedanta Aluminium's hot metal cost of production on a structural basis, saying CoP may likely to fall from $1,749/t in FY25 to $1,587/t in FY28. It sees strong balance sheet with net debt/Ebitda of 0.1 times by FY28 against 1.5 times in FY26, providing flexibility for future growth.

Nuvama said the fall in aluminium prices have erased the war-risk premium. That said, the physical market is tight, which is reflected in an increase in regional premium for Q2FY27. The brokerage also observed a fewer commercial ships at Strait of Hormuz compared with the pre-war level. 

"We forecast VAML shall record operating cash flow of Rs 49,500 crore, which would easily cater to the capex requirement of Rs 16,000 crore during FY27 and FY28. This would lead to free cash flow of Rs 33,500 crore, which is likely to be used for deleveraging as well as higher dividend payment," Nuvama said.

Given the phased commissioning of 435ktpa aluminium smelter at 51 per cent subsidiary Balco by end-FY27, Nuvama forecast volume growth may come in at 8 per cent CAGR over FY26-28 to 2.86mt. This is likely to be supported by firm aluminium prices versus historical average. 

"We expect blended realisation to rise at a CAGR of 3 per cent over FY26–28E. We are factoring in average LME aluminium price of $3,200/t in FY27E and $3,000/t in FY28E (average FY22–26E LME aluminium price was USD2,553/t)," Nuvama said.