Vedanta's Electrosteel buy is value-accretive; move to buoy earnings

Mining major Vedanta has taken a step towards adding steel to its armoury, which is expected to buoy its value and earnings.

With the company’s resolution plan for acquisition of Electrosteel Steels being approved by the National Company Law Tribunal, Vedanta will be acquiring a 90 per cent stake in the latter.

According to analysts’ estimates, while the acquisition price of Rs 53.20 billion represents a haircut of 60 per cent for existing lenders, the enterprise value (EV; total of equity and debt) per tonne at $545-560 is significantly lower compared to recent industry transactions. 

The EV would fall to $409 per tonne if Electrosteel’s capacity is expanded to 2.51 million tonnes per annum (mtpa), an analyst at a foreign brokerage said. Electrosteel is underutilising its 1.5-mtpa capacity, which can be raised to 2.51 mtpa.

Soumen Chatterjee, head of research at Guiness Securities, said Electrosteel’s capacities were well organised and Vedanta would gain from the acquisition, which is at a reasonable valuation.

Analysts at Edelweiss said the cost of acquisition was lower than the $750-per-tonne capital expenditure incurred at Electrosteel’s plant. It comes at a time its existing product range is gaining demand traction.

According to Edelweiss, on a per tonne basis, there is an upside potential of $30-35 from the current Ebitda (earnings before interest, tax, depreciation and amortisation) levels of $65-70 of Electrosteel through a capacity ramp up to 1.51 mtpa, potential captive iron ore sourcing from Vedanta’s 10-mtpa mine in Jharkhand and capacity increasing to 2.51 mtpa through an estimated $170-200 million investment. 

Electrosteel’s plants are relatively new and Vedanta can utilise their entire economic life. Considering the time taken to set up such capacities, the acquisition looks positive.

Overall, for Vedanta, the move is in line with its indicated interests in ferrous sector in Jharkhand. Vedanta has iron ore mines in Jharkhand and Goa. With Electrosteel, it has moved up the value chain. In fact, there is a scope for Vedanta’s Jharkhand iron ore mines to service steel capacity of 5 mtpa, indicating further room for value creation.

Although the relatively small size of the acquisition means that it may add marginally to Vedanta’s consolidated earnings, the return on investment potential is good. Assuming an Ebitda per tonne of Rs 6,500-7,000 after the capacity ramp-up and iron ore self-sufficiency, Edelweiss envisages returns for Vedanta shareholders to be between 20 per cent and 25 per cent.

Vedanta’s stock was up about 1 per cent to Rs 292.15 levels on Wednesday, as the news was anticipated by the Street.