Brokerages Up Vedanta’s Target Price But Cite Dividend, Debt Concerns

Even as most brokerages increased Vedanta Ltd.'s price targets on a higher operating income forecast for 2021-22, they cited rising debt of the parent and lack of clarity on dividend as concerns.

Lower production guidance for the oil and gas division, which contributes 12% to operating profit, is also a worry for analysts. But higher commodity prices support analysts calls on the counter.

Oil and gas division production guidance for FY22 was kept at 175-185 thousand barrels of oil equivalent per year compared with fourth-quarter exit rate of 173 kboepd. Net debt of parent Vedanta Resource Ltd. stood at $7.2 billion and consolidated debt stood at $10.5 billion.

Earnings before interest, tax, deprecation and amortisation rose 17% sequentially to Rs 9,037 crore in the quarter ended March against the estimated Rs 8,863 crore.

Vedanta's stock fell as much as 3% on Monday before paring losses to trade 0.9% lower at 1:45 p.m. after the company announced earnings on a market holiday. That compares with a 0.14% fall in Nifty 50. 10 out of 18 analysts have a 'Buy' rating on the stock, while six suggest a ‘Hold’ and two recommend ‘sell’.

Here's what brokerages had to say after Q4 earnings:

CLSA

• Q4 operationally in line; raised 12-month target price to Rs 300—a potential upside of 6.34%.

• Guidance looks achievable as further capacity addition announced.

• Hindustan Zinc stake sale a trigger; dividend outlook uncertain.

• Key beneficiary of commodity upcycle; FY22/23 consolidated Ebitda estimate raised by 13%/7%.

• Concerns remains over dividend and inter-company loans.

• Delays in growth projects likely overhang.

Phillip Capital

• Maintains 'buy'; price target revised to Rs 315, suggesting an upside of 11.6%.

• Better-than-consensus Ebitda; oil and gas production uptick but guidance subdued.

• Expect major capex projects to translate into 5-10% volume growth across segments.

• Cautious on deviation on dividend strategy, tendency towards big-ticket investments and pledges keeps.

• Pure commodity play; upside looks limited.

Investec Securities

• Maintains 'hold'; target price revised to Rs 241, implying downside of 14.5%.

• Q4 Ebitda in-line with brokerage's estimates.

• No final dividend payout a negative.

• Government's Hindustan Zinc's stake should be up for auction and final verdict is expected.

Edelweiss Securities

• Maintains 'Hold'; increases price target to Rs 275, a potential downside of 2.5%

• Q4FY21 performance beat the brokerage's estimates due to the ferrous division.

• Repayment of $207-million inter-corporate loan from a total of $956 million lent to parent a positive.

• Increased the implied valuation to 3.5x (from 3.2x) due to this part repayment.

• Near-term repayment obligations of $1.5 billion might require further support from the parent.

• Parent’s high debt servicing obligation remains a cause for concern.

• Concerned about the slower than-expected uptick at the oil and gas and zinc divisions.

IIFL Securities

• Q4FY21 Ebitda at Rs 9,040 crore slightly ahead of estimates on aluminium volumes, iron ore profitability.

• Energy business and zinc International unit offset the gains partly.

• FY22-23 Ebitda estimates raised by 15-16% on higher price assumptions.

• Oil and gas volume guidance at 175 kboepd remains muted on delayed completion of capex.

• Overall debt ($3.3 billion at Vedanta Ltd. and $7.2 billion at parent) remains high.