Vedanta stock set for growth amid aluminium price surge, de-merger plans

Aluminium has a favourable price trend going into CY2025. Aluminium prices, which averaged $2,381 per tonne in 2QFY25, have now recovered to $2,600 per tonne, driven by high alumina prices on global bauxite supply concerns, improving demand from China and revocation of export rebates on aluminium products from China.

 

Aluminium prices have been driven by record high alumina prices which squeezed smelter margins. This was due to a series of global supply chain disruptions amid better demand as aluminium production in China ramped up.

 

The cost of alumina accounts for over 50 per cent of the cost of aluminium, compared to historical levels of 30-35 per cent. Tight alumina supply may continue into early 2025.

 

Vedanta’s demerger plans have been modified but the metals and mining major looks to be a beneficiary of price trends in aluminium and zinc. 

 

Vedanta has decided to retain its base metals company within Vedanta Limited since lenders think that would be more favourable for unlocking value and better debt allocation. Vedanta plans to complete the demerger process in January 2025, with share entitlement ratio of 1:1 for all its companies. 

 

Vedanta is also moving toward several project completions in the next 12-18 months. It has delivered the total shareholder return of 18.5 per cent per annum for the last 10 years. Deleveraging is critical going forward, since high leverage is a long-standing concern. The management says it would allocate net debt in proportion to the segment assets to achieve a tax-neutral demerger.

 

Diversified miners trade at discounts to pure-play miners, which is the logic for demerger. The proposed demerger may trigger re-rating, as investors focus on specific commodities. Apart from that, capital allocation should improve.

 

Fundamental drivers in the form of favourable pricing outlook as well as improving backward and forward integration are in place to support re-rating for the aluminium entity. The commodity price uptrend would drive earnings momentum.

 

Key projects going onstream in 12-18 months include alumina refinery expansion to 5mtpa (million tonnes per annum) from 2mtpa, as well as captive coal and bauxite mines, the Athena power plant, and capex in zinc and oil & gas. These should collectively deliver 330bps Ebitda margin expansion over 2-3 years.

 

In aluminium, backward integration with the Sijimali bauxite mine development, and captive coal mining (Ghogharpalli: 20mtpa) could help deliver aluminium Ebitda per tonne of $942 in FY27 ($480 in FY24).

 

The capital allocation framework prioritises dividends over deleveraging and this will continue as the parent VRL (Vedanta Resources) owns 56 per cent. Vedanta has also acquired Meenakshi Energy (MEL) with 1Gw capacity and Athena Chhattisgarh Power with 1.2Gw of capacity through Corporate Insolvency Resolution Process (CIRP) for total investment of Rs 7,000 crore, which will raise coal-based generation to 5Gw by FY26 (currently 2.6 Gw operational).

 

Only Rs 1,900 crore of power capex remains, so Vedanta Power should generate positive free cash flow from FY26 onward.

 

Hind Zinc will also be housed in Vedanta Ltd, and may have a favourable cycle with rising zinc prices on the back of tight mining zinc supply globally as well as an uptrend in silver prices. There is a potential margin of over 50 per cent and Zinc Ebitda could grow by around 40 per cent between FY24-FY27.

 

Assuming that the company pays out 75 percent of earnings as dividend, the group’s net debt would decline 20 percent by FY27.

 

The Q2FY25 Ebitda of Rs 9,820 crore beat consensus with aluminium Ebitda/tonne at $827. An Impairment reversal of Rs 1,140 crore in the oil & gas division further enhanced the bottom line.

 

The net debt was Rs 56,900 crore and net debt/Ebitda at 1.49x. Deleveraging at parent VRL is ahead of schedule. Analysts seem positive on the stock.