Vedanta: Triggers outweigh worries

Power unit closures to have marginal impact, while volume growth and firm realisations in metals and oil businesses will continue driving earnings

The Vedanta stock may have come off its peak seen in the last fortnight of September, but the company’s business prospects remain firm. The temporary closure of almost half of its captive power capacities (1,605 MW out of 3,615 MW) at Odisha aluminium smelter due to environmental reasons is one factor that has impacted street sentiment, but broader markets too have been under pressure. Nevertheless, analysts don’t see much impact of the power capacity closure till remaining capacities are functional and the matter does not aggravate further. Positively, aluminium prices are expected to remain firm and so are other base metal prices. Added to these are benefits of capacity ramp-ups and also of-late the prospects of its oil and gas business, which falls under its subsidiary Cairn India, owing to improved crude oil prices. All these suggest that any correction in the share price offers a good investment opportunity for investors.

In the aluminium segment, closure of some power capacities may lead to slight increase in power costs as the company may have to buy part of its power requirement from external sources. But, till rest of the power capacity is functional, Vedanta can ramp-up plant-load-factor of these to cater to the requirement, say analysts. It's only after this, the deficit can be met through external power. Analysts at Axis Securities say that they do not expect any major impact unless the rest of power units are also asked to be shut beyond timelines given by pollution control board.

Notably, production ramp-up after pot outages at Jharsuguda‐I smelter in April continues to improve. Pot outages refer to the closure of smelting pots (capacity) used in the production of aluminium. The production trend remains encouraging and August data which came out in late September show that output is the highest since April 2017. Analysts at Edelweiss Securities estimate almost 45‐50 per cent of the pots to have been rectified and believe that by December quarter, the entire battery of 608 pots would be operational. Its subsidiary, Balco, too, delivered 12 per cent year-on-year growth in aluminium volume at 48,500 tonnes, the highest ever monthly level. Copper volume was up 7-8 per cent year-on-year at 37,000 tonnes after routine maintenance activities carried out in July.

The encouragement comes from Hindustan Zinc as year-to-date zinc and lead volumes are up 70 and 34 per cent respectively as per Edelweiss data, indicating the volume ramp remains steady, particularly at the company’s Rampur Agucha mines.

All this indicates towards a firm volume outlook for the company already benefiting from improving realisations. Cairn India, which contributed about 12 per cent to overall revenue of Vedanta, will also see improved performance moving ahead with crude oil prices expected to remain elevated in the back of geopolitical tensions and good demand. This should add to company’s earnings and provide a new trigger.

In this backdrop, most analyst are bullish on Vedanta with target prices of Rs 350 (Axis Securities) to Rs 361 (Motilal Oswal, Edelweiss) indicating upside potential of 10-14 per cent from current stock price of Rs 318.