Vedanta Fundamental Analysis: Risk Assessment

The ongoing demerger plan of Vedanta Ltd necessitate a thorough Vedanta Fundamental Analysis. The large cap conglomerate is soon going to demerge into six individual entities. Hence, it becomes essential to delve into Vedanta’s financial health and operational potential to assess the growth prospects of the newly divided companies. Thus, in order to make informed decisions, let’s dive deeper into Vedanta Fundamental Analysis.

About the Company- Vedanta Fundamental Analysis

Vedanta Limited is one of the world’s foremost natural resources conglomerates, with primary interests in aluminium, zinc-lead-silver, oil and gas, iron ore, steel, copper, power, ferro alloys, nickel, semiconductor and glass. The company has a world-class strategic assets based across not only in India but in South Africa, Namibia and Liberia. They are rightly positioned to create long-term value with superior cash flows. The company focuses on investments in smarter processes, industry-leading efficiencies, empowerment of our people, and strong corporate governance in order to address the nation’s growing needs.

The business has established a thorough structure to lead the natural resources industry in ESG (Environmental, Social, and Governance). Vedanta is dedicated to achieving carbon neutrality by 2050 or earlier. In order to speed up the journey to net-zero operations, the organisation has committed $5 billion over the next 10 years.

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News Headlines

The Demerger Story

Anil Agarwal’s Move: Anil Agarwal, a billionaire mining baron, plans to demerge Vedanta into six separate listed entities to unlock value and pave the way for future debt reduction.

Debt Obligations: Vedanta Resources Ltd (VRL), the parent company of Vedanta Ltd, faces heavy debt obligations, with repayments of $1.3-1.4 billion in the next six months, including a significant bond payment of $1 billion in January 2024.

Future Challenges: The global commodity markets are facing challenges, including muted demand from China. This makes it essential for Vedanta to consider options like refinancing or divestment of stake in Vedanta or its individual businesses.

Impact of Demerger: While the demerger could make partial divestment in different businesses easier and aid in deleveraging, it may not directly unlock value. Analysts suggest that dealing with debt remains crucial and may require divestment of non-core businesses.

Financial Sources: VRL relies on brand fee ($327 million in FY23) and dividends (received $2.5 billion in FY23) to service debt. However, with falling commodity prices, these sources may see a sharp decline, adding to financial challenges.

Market Response: Vedanta Ltd’s stock saw a nearly 5 percent surge after the board approved the demerger plan, aimed at unlocking shareholder value.

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Demerger Details

The demerger plan involves a straightforward vertical split, with shareholders receiving one share of each of the five newly listed companies for every share of Vedanta Limited.

Number and Names of Companies After Split: Vedanta Ltd will be split into six separate listed companies:

Impact on Shareholders: Shareholders will receive one share of each of the five newly listed companies for every one share of Vedanta Limited that they hold.

Change in Shareholding Pattern: The demerger will result in a change in the shareholding pattern for existing investors as they will now hold shares in each of the newly listed companies in addition to their holdings in Vedanta Limited.

Analyst Views

Brokerages have varying views. While some believe the demerger will be beneficial in the long term, others caution that it may not be enough to unlock value on its own, and the high debt remains a concern. Sumangal Nevatia (Kotak Equities): Views the demerger positively but emphasizes that debt remains a key concern. Philip Capital: Upgraded the Vedanta stock to ‘buy’ and suggests that the demerger will be beneficial in the long term. Motilal Oswal: Maintains a ‘neutral’ rating on Vedanta but lowered its target price. Nuvama Institutional Equities: Upgraded the stock to ‘hold’ and views the demerger positively. Centrum Broking: Suggests potential courses of action such as refinancing or stake sales in subsidiaries due to insufficient revenues.

CRISIL Ratings: CRISIL Ratings placed Vedanta Limited’s long-term bank facilities and debt instruments under ‘Rating Watch with Negative Implications’, indicating concerns about its financial situation.

Anil Agarwal’s Vision: Agarwal envisions that each company after the demerger will be of similar size to Vedanta. The six entities will have their own CEOs, who will also be stakeholders in the respective companies.

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Essentials & Financials- Vedanta Fundamental Analysis

Operating Revenue and Growth: Vedanta displays an operating revenue of a substantial Rs. 142,419.00 Cr. over the trailing 12-month period. An annual growth rate of 11% is commendable, signifying a healthy upward trajectory in revenue.

Fundamentals

Market Capitalization and Value: A large cap company, Vedanta, commands a Market Cap of ₹84,009 Cr. This indicates a significant presence in the market, and interestingly, it suggests that the company might be undervalued, given its robust revenue figures.

Profitability Ratios: Vedanta boasts impressive profitability ratios. With a ROCE (Return on Capital Employed) of 21.2%, ROE (Return on Equity) of 20.4%, and ROA (Return on Assets) of 7.61%, the company exhibits strong financial performance. Higher values in these ratios are not only desirable but also signify efficient utilization of resources.

Price to Earnings Ratio (P/E Ratio): The P/E ratio of Vedanta stands at 9.59. This indicates that the company’s stock might be undervalued compared to its earnings potential. Notably, it’s lower than the sector’s P/E ratio of 33.27, suggesting a potential opportunity for investors.

Earnings Per Share (EPS): The Earnings Per Share (EPS) of Vedanta, which reflects earnings consistency, is TTM 23.65 Rs per share. However, it’s worth noting that while positive, the EPS has been declining over the past three years, showing a YoY decline of -53.69%. This trend raises some concerns.

Debt Concerns: A point of concern lies in Vedanta’s high debt-to-equity ratio of 110%. The substantial debt amounting to nearly ₹ 79,883 Cr. is noteworthy, and the Debt to Equity Ratio of 1.68 is higher than the benchmark of 1, indicating a relatively high level of indebtedness.

Dividend Payout: In terms of shareholder returns, Vedanta has been maintaining a healthy dividend payout ratio of 159%. The current year’s dividend for Vedanta stands at Rs 101.50, offering a notable yield of 44.58%. This signifies a company committed to rewarding its investors.

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SHAREHOLDING PATTERN

In the quarter ending September 2023, the level of promoter pledge has remained constant, accounting for 99.99% of the holdings. However, there has been a reduction in the promoters’ ownership from 68.11% to 63.71%. On the other hand, FII/FPI have amplified their holdings from 7.48% to 7.82%, while Mutual Funds have also seen an uptick, increasing their holdings from 0.25% to 0.83%. The count of MF schemes has stayed steady at 23 during the same period. Institutional Investors have bolstered their holdings from 17.53% to 18.48% in the quarter concluding in September 2023.

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Evaluating Financial Statements

Vedanta fundamental analysis is incomplete without analysing the financial statements. This is because analyzing financial statements provides crucial insights into a company’s performance, stability, and overall financial health, offering a comprehensive view. So let’s start with the Income statement of the company.

Profit & Loss | Income Statements

Revenue from Sales:
-In the last 5 years (March 2019- March 2023): Revenue Increased from 92,048 crores to 147,308 crores (rise of approximately 59.67%).
-TTM Revenue (March 2023 to TTM): Revenue decrease from 147,308 crores to 142,419 crores (decline of 3.32% over the period).

Operating Profit:
-In the last 4 years (March 2019- March 2022): Increased from 23,171 crores to 44,824 crores (rise of approximately 93.60%).
-TTM Operating Profit (March 2022 to TTM): decrease from 44,824 crores to 30,645 crores (decline of −31.50% over the period).

Net Profit:
-In the last 4 years (March 2019- March 2022): Increased from 9,698 crores to 23,710 crores (rise of approximately 144.96%).
-TTM Net Profit (March 2022 to TTM): decrease from 23,710 crores to 12,218 crores (decline of −48.56% over the period).

EPS:
-In the last 4 years (March 2019- March 2022): Increased from Rs 19.01 per share to Rs 50.58 per share (rise of approximately 166.71%).
-TTM EPS (March 2022 to TTM): decrease from Rs 50.58 per share to Rs 23.65 per share (decline of −53.27% over the period).

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Balance Sheet

Balance sheets are always balanced because of the equality between Assets and Liabilities. We know that Liabilities is the sum of liabilities of the company, that is, what the company owes to other and the Equity, that is, share capital and Retained Earnings.

Thus, Total Assets = Liabilities + Equity or Liabilities = Total Assets – Equity

In this case, In March 2023, Assets = 190,434 crores, Share Capital = 372 crores.

Liabilities = (190,434 – 372) crores = 190,062 crores.

A balanced financial condition is shown by the fact that assets and liabilities only slightly differ from one another. This shows that the business is properly handling its duties and resources. It’s a reliable sign since it shows that the company’s assets are sufficient to cover its debts, which may lead to stability and financial security.

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Cash Flows Statements

While the Cash flows from operating activities refer to the cash generated or used by a company’s core business operations, reflecting the inflows and outflows of cash resulting from its day-to-day business activities. A company’s capacity to meet its financial commitments, invest in expansion, or return value to shareholders is indicated by a positive net cash flow, which shows that it has made more money than it has spent. 

Cash flows from operating activities: There is no consistency in the growth of figures over the last 5 years, that is, from March 2019 to March 2023 where it has increased from 23,754 crores (March 2019) to 34,963 crores (March 2022) and then witnessed a decline to 33,065 crores (March 2023). Though the numbers are always positive throughout the journey but we know the importance of consistent growth in this metric.

Net cash flow: A positive and growing net cash flow is better and desirable but it stood negative in the recent fiscal year 2023.

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PEER COMPARISON

Highlights Of Earning And Revenue- Annual/Quarterly

In the previous year, there was a notable 10.96% increase in annual revenue, reaching Rs 150,159 Crores. However, the annual net profit witnessed a substantial decline of 43.76%, settling at Rs 10,574 Crores. The stock price exhibited a significant decrease of 21.35%, markedly underperforming its sector by 77.89% over the past year.

On a quarterly basis, revenue saw a YoY decrease of 12.66%, amounting to Rs 34,279 Crores. Similarly, quarterly net profit experienced a decline of 40.29% YoY, reaching Rs 2,640 Crores. It’s worth noting that promoter pledges remain notably high, accounting for 99.99%.

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Let’s Wrap it up Vedanta Fundamental Analysis

Summing up the Vedanta Fundamental Analysis: The company has demonstrated commendable profit growth of 71.66% and substantial revenue growth of 20.38% over the past three years. Additionally, it maintains a healthy ROE of 30.27% and robust ROCE of 22.86%. However, it’s noteworthy that there has been a recent decline in the company’s revenue, net profit, and net cash flows over the past two quarters. Notably, FII/FPI, Mutual Funds, and Institutional Investors have reduced their holdings in the company, and all of the promoters’ holdings have been pledged up to 100.0%. Furthermore, top analysts like Sumangal Nevatia (Kotak Equities) and Motilal Oswal, among others, hold differing views regarding the company’s future performance. While the company’s fundamentals remain solid, it’s essential to acknowledge the substantial debt burden, which poses a significant risk factor that cannot be overlooked.

That’s all for today’s post. Hope you get some valuable insights from here.

Happy reading!

Disclaimer

The blog is meant for informational purposes and serves the general analysis of the stocks. Contents provided here are based on careful research and analysis utilizing the fundamental and technical indicators over a period of time. The post does not consist any direct recommendation about Investing or trading in the securities market. Thorough research and careful consideration are necessary for individuals to fulfill their personal responsibility in making financial decisions. Seeking professional advice before making any financial decisions is always advisable.