ICICI Securities Recommends Buying Vedanta with a Target of Rs 600

ICICI Securities is optimistic about Vedanta’s growth and has recommended a “buy” rating on the stock, setting a target price of Rs 600, as per their research report dated October 6, 2024.

Vedanta’s Growth Plan: Focus on Volume, Value, and Cost

ICICI Securities resumed coverage on Vedanta (VEDL) with a strong “buy” recommendation, based on three core growth drivers: volume growth, value creation, and cost reduction, particularly in its aluminum and Zinc-India divisions. Key highlights include:

ADVERTISEMENT

1. Vedanta has ambitious growth targets for all its divisions.
2. The aluminum and Zinc-India segments are expected to be the main drivers of earnings growth.
3. Oil and gas production should start recovering by FY26.
4. Vedanta’s growth strategy could reduce its debt by $3 billion over the next three years.
5. Dividend yield is expected to remain above 5% annually.

ICICI Securities anticipates a 25% annual growth in EBITDA through FY26, with return on equity (RoE) of 40-45% over the next two years. Their sum-of-the-parts (SoTP) valuation sets a target price of Rs 600 per share, implying an EV/EBITDA of 5.7x on projected FY26 and FY27 earnings.

Long-Term Growth Plans

Vedanta has laid out growth plans across its key divisions until FY30:

• Aluminum: The company is working towards full integration from mining to metal production.
• Zinc-India: Plans are in place to ramp up both mining and smelting capacity to 2 million tonnes per year (mtpa).
• Oil & Gas: Vedanta is executing a large-scale project in the MBA fields to increase oil and gas production.
• Zinc-International: The Gamsberg Phase 2 expansion (adding 220 KTPA) and a new concentrator are set to be operational by FY25, with the goal of reaching 1 mtpa in zinc and copper production by FY30.

ICICI Securities believes Vedanta’s management has solid plans in place to increase production in the zinc (India and international) and oil and gas divisions. In the aluminum division, Vedanta is focused on reducing costs through its own alumina, bauxite, and coal supplies.

Aluminum and Zinc-India to Drive Profits

The aluminum and Zinc-India divisions are expected to be key contributors to Vedanta’s earnings. These two segments could account for 85% of the company’s additional EBITDA by FY26. Aluminum EBITDA is projected to double by FY25, thanks to higher production volumes, lower costs, and an increase in aluminum prices. Vedanta is also expanding its value-added product capacity, which will boost earnings further.

For Zinc-India, increased production of refined metals and silver is expected to be the main growth driver. The company is currently conducting a feasibility study to boost refined metal production to 2 mtpa and silver production to 1,500 tonnes annually.

Oil & Gas and Zinc-International Expected to Stabilize

Vedanta’s oil and gas and Zinc-International divisions have faced delays in ramping up production, but ICICI Securities expects profitability to improve as production picks up. The company is targeting more profitable resources, expanding its gas production, and increasing its total resource base.

For Zinc-International, the completion of the Gamsberg Phase 2 project by FY25 is expected to support Vedanta’s goal of producing 1 mtpa at lower costs.

Reducing Debt and Boosting Dividends

Vedanta Resources, the parent company, has reduced its debt by $4.5 billion over the last two and a half years, and plans to cut an additional $3 billion by FY27. This debt reduction will likely be supported by dividends and branding fees from Vedanta Limited. Vedanta also offers a dividend yield of 5–6%, adding extra appeal to the stock for investors.

Outlook: All Segments Poised for Growth

ICICI Securities believes Vedanta has strong growth potential across all its divisions, especially aluminum and Zinc-India. The company’s focus on expanding its value-added product portfolio and increasing production in oil, gas, and zinc should further strengthen its performance. Additionally, the upcoming demerger could allow investors to focus on growth-oriented divisions separately. However, the market will be closely watching how debt is distributed among the divisions after the demerger, especially in the aluminum segment.

Valuation and Risks

ICICI Securities values Vedanta using a SoTP methodology, which results in a target price of Rs 600 per share—17% higher than the current market price. Along with a 5–6% dividend yield over the next three years, this makes the stock an attractive buy.

However, there are some risks to this positive outlook, including a sharp drop in commodity prices, delays in coal mining projects, and slower-than-expected growth in the zinc divisions.

Aluminum Division’s Key Highlights

• FY25 is expected to be a transformative year for the aluminum division, with key projects driving both volume growth and cost efficiency.
• The aluminum division is working towards full vertical integration from mine to metal, aiming to reduce dependence on external supplies of bauxite, coal, and alumina.
• By FY30, Vedanta aims to have a fully integrated supply chain with 100% of its aluminum sales coming from value-added products.

In conclusion, ICICI Securities sees strong growth potential in Vedanta, backed by its focus on increasing volume, reducing costs, and generating value for shareholders.