Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0793
    0.0000 (-0.00%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2636
    +0.0014 (+0.11%)
     
  • USD/JPY

    151.2160
    -0.1560 (-0.10%)
     
  • Bitcoin USD

    69,439.02
    -1,883.84 (-2.64%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,369.44
    +201.37 (+0.50%)
     

Vedanta Will Continue to Trend Higher

- By Faisal Humayun

Vedanta (VEDL), a diversified natural resources major, was trading at $14.6 per share on June 21. In the next two months, the stock surged by 28% and trades at $18.8. Even after the big rally, I expect more upside for the stock.

While I have discussed Vedanta earlier as well, as a brief overview, I would like to talk about the company's major EBITDA segments. This will help take the discussion forward as key EBITDA upside triggers.


For the first quarter of fiscal 2018 (year ending March 2018), Vedanta reported 54% of EBITDA from the zinc segment, 28% from the oil and gas segment, 11% from the aluminium segment and 4% from the copper segment.

Zinc prices surging

One of the key factors that has contributed to the recent surge for Vedanta is the fact that zinc prices have hit a 10-year high as a result of supply cuts from Chinese mining companies and sustained demand from China.

Importantly, demand from India for zinc has just started to grow and Vedanta is well positioned to cater to local demand for the next five to 10 years. With a significant portion of demand for zinc coming from the construction, infrastructure and transportation industry, I am bullish on Vedanta because of the company's India-focused operations.

The important point to note here is that Vedanta has several expansion projects in India for the next two to three years. The capacity expansion to 1.2mtpa is on track for completion by 2020. Further, the international zinc segment, the Gamsberg project is likely to deliver growth with first production targeted by mid-2018.

Overall, zinc prices are likely to remain firm, and the zinc segment will remain as a key EBITDA growth driver for the company in the coming quarters.

Oil and gas segment growth

For first-quarter 2018, the oil &and gas segment contributed to 28% of the EBITDA and in the next few years, the segment will continue to be the next most important EBITDA driver.

The key development in this segment is the completion of the merger with Cairn India, and the focus completely shifts to growth. It is important to note that oil has remained firm at $45 to $50 per barrel; even if it's assumed that oil trades in the range of $55 to $60 per barrel in the next 12 to 24 months, the company's oil and gas segment EBITDA is likely to be robust.

Cairn India has one of the lowest operating costs globally and with operating cost in the range of $6 to $8 per barrel, the EBITDA expansion is likely to be meaningful even if oil moves higher by 10% to 15% in the next six to 12 months.

The company also has a few growth projects with first oil expected from Mangala Infill in the second quarter of fiscal 2018. In addition, the RDG Gas project is likely to see Phase 2 of gas production from calendar year 2019.

Besides the strong EBITDA on the back of low operating cost, the company has growth projects in the next two to three years that will ensure steady growth.

Fundamentals support growth

Besides the growth from the zinc and oil and gas segment, Vedanta also has growth lined up from the power and iron ore segment. The segments discussed will be the key stock upside triggers.

In addition to the business growth, strong fundamentals are another reason to be bullish on Vedanta for the next few years. As the industry witnesses relatively higher commodity prices, Vedanta is positioned to deliver on the back of high financial flexibility.

As of June 30 Vedanta had total debt of $10.4 billion with cash and investments of $7.5 billion. This translates into net debt of just 2.9 billion, and the company's strong cash position ensures smooth debt servicing and dividends. Importantly, considering ongoing cash flows, Vedanta is fully funded for the next 24 months.

Government reforms

Investors considering exposure to the industrial commodity theme for the next three to five years can consider Vedanta with the company's India-specific operations being one of the key advantages.

The India government is on a slow but steady path to reforms with strong stress on urban and rural infrastructure. With construction and infrastructure being the key demand drivers for zinc, Vedanta is well positioned to see sustained demand from India.

India currently is the fastest-growing economy and is likely to deliver robust growth at least for the next five to 10 years. While global economic growth presents challenges in a synchronized world, I am bullish on India and Vedanta.

Conclusion

Even after the recent rally, I consider Vedanta to be interesting for fresh exposure. Further, it is important to note that the company's cash flows have been robust and I expect Vedanta to be a quality dividend stock as well in the long term.

Considering the factors discussed, Vedanta is a strong buy and can be a long-term portfolio catalyst.

Disclosure: No positions in the stock.

This article first appeared on GuruFocus.


Advertisement