Use the rally in Vedanta to exit the stock: Analysts

Vedanta on Tuesday inked a pact with the Gujarat government under which the company, along with Taiwan's Foxconn, will jointly invest $19.5 billion to set up a semiconductor project in the state.

The share price of Vedanta zoomed nearly 10 per cent to close at Rs 305 on Wednesday as investors lapped up the stock after the company said it will set up India’s first semiconductor plant in Gujarat.

Vedanta on Tuesday inked a pact with the Gujarat government under which the company, along with Taiwan’s Foxconn, will jointly invest $19.5 billion (Rs 1.54 trillion) to set up a semiconductor project in the state. As per the agreement, the Vedanta – Foxconn joint venture (JV) plans to build separate units for semiconductor and display production near Ahmedabad.

While the plans are big and will boost foreign direct investment (FDI) in the country, analysts do not expect this to have any significant impact on the company’s fortunes for at least a few years.

“This plan would definitely be good for the economy as it will not only help us attract FDI but also reduce forex spending by substituting chip imports. But, I do not see any meaningful contribution from this unit to the company’s bottom line at least in the next two-three years. It will take time for the plant to be up and running before it starts contributing to Vedanta’s financials,” said G Chokkalingam, founder and chief investment officer (CIO) at Equinomics Research.

On its part, Vedanta expects the JV to break even in four-five years with the first phase of the project likely to see an investment of $10 billion spread over two-three years.

“Investors in Vedanta will see this move as a diversification into an area that is high tech and could lift the overall valuation of the company, but the losses in the initial years could drag down the overall profitability and cash flows,” said Deepak Jasani, head of retail research at HDFC Securities.

The investment, which will be funded through internal accruals, Jasani said, will ease concerns over the diversion of money to reduce leverage at the promoter company level; however, shareholders will now have to be prepared for lower distribution of dividends due to cash being needed to fund this large venture.

That said, timely execution of the proposal remains crucial and needs to be monitored closely. “Whether the company will be able to produce competitively enough or not remains to be seen,” said Bhavesh Chauhan, research analyst at IDBI Capital.

At the fundamental level, Vedanta’s net profit declined 23.7 per cent sequentially to Rs 4,421 crore in the April-June 2022 quarter (Q1-FY23). The Ebitda margin was lower at 32 per cent versus 41 per cent a year ago (39 per cent in the March 2022 quarter) as gains were partially offset by higher cost of production amid input cost inflation.

“A recent sharp fall in commodity prices due to inflationary risk and recession fear would mean further deterioration in performance in the July-September quarter, which we expect would bounce back in the second half as coal linkages are getting better”, said Phillip Capital in a recent note.

In this backdrop, G Chokkalingam, founder and chief investment officer at Equinomics Research suggests investors book profits given the recent surge. “Falling prices of copper and aluminum are likely to keep the company’s main business in a tight spot going ahead,” he said.

A K Prabhakar, head of research at IDBI Capital, too, suggests investors exit the stock in the current rally as he remains cautious on the metal sector, which is Vedanta’s bread and butter business, given the softness in commodity prices.