Vedanta slips 9%, hits four-month low amid heavy volumes

Growth capex, along with moderation in operating profitability, and higher than expected dividend payout is expected to result in increased leverage this fiscal

Shares of Vedanta hit four-month low of Rs 262 as they slipped 8.8 per cent on the BSE in Tuesday's intra-day trade amid heavy volumes.

The stock was trading at its lowest level since October 3, 2022. Thus far in the month of February, it has dipped 21 per cent from level of Rs 332.60. In comparison, the S&P BSE Sensex up 0.08 per cent at 59,337 at 10:38 am. Average trading volumes on the counter jumped 1.7 times, with a combined 17.06 million shares having changed hands on the NSE and BSE till the time of writing of this report.

According to a report by news agency PTI, dated February 20, the government has opposed Vedanta's proposal to sell its international zinc business to Hindustan Zinc (HZL) for $2.98 billion over concerns of valuation. The government has threatened to take legal action to stop the sale of the Africa-based assets to HZL, in which it holds a 29.54 per cent stake. CLICK HERE FOR FULL REPORT

However, Vedanta expects the deal with HZL to fructify as it is value accretive to both the entities. The funds received by the company would be deployed based on its capital allocation policy. It could be used to pay dividend, capex and other purposes, it had said.

Meanwhile, in the October-December quarter (Q3FY23), Vedanta's net debt increased by Rs 5,800 crore to Rs 38,100 crore from Rs 32,100 crore at end of Q2FY23. In the last three quarters, its net debt has increased by Rs 17,900 crore. As on Q3FY23, the company's gross debt stood at Rs 61,550 crore, the company said.

"The global macro environment is likely to weigh on any significant improvement in LME prices. The China opening is expected to support demand and prices, but fears of recession in Europe continue to raise concerns," analysts at Motilal Oswal Financial Services said in a Q3 result update.

Continued assistance through dividend payout to the parent, Vedanta Resources Ltd (VRL), to support the latter’s debt has resulted in significant cash outflow to minority shareholders. Though Vedanta has undertaken significant annual capex (about Rs 13,500 crore and Rs 9,000 crore in fiscals 2022 and 2021, respectively) more than proportionate improvement in profitability had improved net leverage to 2.2 times as on March 31, 2022 (3.1 times in the previous fiscal), Crisil had said on December 30, 2022.

Capex (incl. sustenance capex) increased to around Rs 8,500 crore in H1FY23 and is expected to increase further over the medium term (Rs 15,000-20,000 crore in fiscals 2023 and 2024), largely towards growth capex in the aluminium, zinc and oil and gas businesses. This along with moderation in operating profitability and higher than expected dividend payout is expected to result in increased leverage this fiscal, the rating agency said in detailed rationale.

However net leverage is expected to reduce to below 2.5x next fiscal with expected improvement in profitability and continued focus on deleveraging. However, profitability remains susceptible to volatility in the prices of metals and oil and gas. Any material acquisition or higher-than-expected cash outflow to support VRL will remain a key monitorable, Crisil said.

Tech View

Outlook: Negative

Target: Rs 218

Vedanta's sharp downtick on Tuesday pushed it below the lower end of the Bollingar Band on the daily chart and the weekly chart, placed at Rs 282 and Rs 275.5, respectively. It, however, has pushed it in the oversold zone as well with the RSI-14 indicator at around 16-mark.

While other momentum indicators suggest negative bias for Vedanta, moving averages are exhibiting mixed trend. The 20-day moving average (20-DMA) is below the 50-DMA (indicating a weak near-term outlook), but 50-DMA is holding above 100-DMA, and 100-DMA is above 200-DMA.  

That said, if the stock's 20-DMA (at Rs 307.87) breaks below its 100-DMA (at Rs 307.14), it will trigger fresh sell-off. The next downside support as per monthly charts is at Rs 218. 

Any pullback in the stock, however, may face hurdle at Rs 275, followed by Rs 282, and Rs 305. 

(With inputs from Nikita Vashisht)