The successful debt restructuring at Vedanta parent company Vedanta Resources, according to a recent report from brokerage house Nuvama Institutional Equities, removes a significant overhang on Vedanta stock. Vedanta’s target valuation should be increased, as supported by the debt restructuring. The brokerage upgrades the Vedanta stock to a “BUY” rating and raises the target price to ₹362 (from ₹265).
The restructuring, according to the brokerage, is more expensive but allows Vedanta to concentrate on continuing capital expenditures related to aluminium and zinc as well as the sale of its steel and iron ore assets, which will generate additional cash flows, for a period of two years.
The brokerage feels that even more upside potential can be unlocked by the monetisation of steel and iron ore assets, vertical business split, etc.
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The brokerage believes that Vedanta Resources’ debt restructuring will give the company liquidity for the next two years.
According to a report by Nuvama, parent company Vedanta Resources has restructured bonds with maturities in FY24 and FY25 totaling USD 3.15 billion. It consented to pay an upfront consent fee of USD68 million in addition to USD779 million, for a total of USD847 million, deferring maturities until FY27. This gives Vedanta the much-needed liquidity flexibility, allowing it to use its cash flows to finance capital expenditures.Consolidated net debt will continue to be high, but FY25E is probably when it will peak.
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Not out of the woods, but moving in right direction, upgrade to ‘BUY’
According to the brokerage, Vedanta has not experienced any financial difficulties and has been operating profitably. The underlying cause of the stock’s poor performance has been parentco’s ongoing debt, which has been postponed until FY27. Vedanta has a window of opportunity to finish its expansion plans in zinc and aluminium and produce extra cash flows in the interim (FY25 and FY26).
“We also believe the company should monetise steel & iron ore assets and successfully split its businesses, which shall enhance value. Moreover, promoters still can offload up to 13.6% stake to revert to 50.1% stake in Vedanta, providing additional liquidity. On the whole, we believe Vedanta is moving in the right direction; upgrade to ‘BUY’,” the brokerage explained.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
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Published: 11 Jan 2024, 11:05 AM IST