What’s Next for Vedanta Ltd., our Conviction Buy at 95 in Nov. 2020 ?

By SP Tulsian
about 4 months ago

Vedanta was recommended in the Member Zone at Rs. 95 on 9th November, 2020, and 80 buy calls reiterating our view have been given since then (almost 13 buy calls every month!). No other stock came close to this level of repeated and vigorous recommendation.


Why such a view on this stock? Our Deep Research and Conviction persuaded us that this stock is about to explode and there were umpteen reasons for the same. Let’s explore a few of them and how to identify winner stocks -


  1. Vedanta delisting move was failed on 26th October, 2020, as requisite quantity was not received in the Open Offer. This made Vedanta share to fall from Rs. 140 ruling on 30-9-20 to Rs. 105 on 26-10-20.
  2. On 26-10-20, share was ruling cum dividend, with Rs. 9.50, while went ex- dividend from 28-10-20. This was giving a yield of close to 9% then.
  3. Vedanta declared such hefty interim dividend, to save on tax under section 80M of Income Tax Act, as they received a big interim dividend from its 65% subsidiary, Hind Zinc Ltd (HZL).
  4. HZL was ruling at Rs. 200 on 30-10-20 with M. Cap of Rs. 85,000 crore, while value of 65% stake held by Vedanta in HZL was at Rs. 55,000 crore then.
  5. Strangely, M cap of Vedanta on 28-10-20 was at Rs. 35,000 crore, which was just 64% valuation of HZL.
  6. Vedanta had a Net Worth of Rs. 73,222 crore on 30-9-20 on standalone basis. Even standalone debt on 30-9-20 of Vedanta was at Rs. 20K crore. Vedanta had Net Fixed Assets of Rs. 40K crore, on 30-9-20. This obviously does not include NPV of HZL, but only Book Value of investment in HZL, which was just 5% of HZL NPV.
  7. Market always over-react, on delisting getting failed of any stock, due to speculative forces seen prevailing then. Ineos Styrolution had same fate when share fell to Rs. 484 on 9-9-20, but now ruling at Rs. 1,250 (Even Ineos was recommended by us at Rs. 565 on 11-11-2020 after delisting failed).
  8. Infact, commodity cycle started improving from start of Q2 of FY21, as seen from standalone Q2 FY21 numbers, wherein PBT was in black of Rs. 500 crore, against red of Rs. 200 crore in Q1 of FY21, excluding exceptional income.
  9. Crude Oil, Aluminium, Iron Ore, being 3 verticals of standalone Vedanta, were expected to post good numbers, which came so in Q2 of FY21. Even HZL, posted 57% QoQ rise on PBT for Q2 of FY21, which were captured in consolidated numbers of Vedanta.
  10. HZL having annual cash profit of Rs. 10K crore, and PAT of Rs. 8K crore, a 65% subsidiary of Vedanta, is a GOLDMINE. In the past, Interim FM, hinted of a valuation of Rs. 32K crore, Govt. intends to monetize of its 29.5% stake of HZL.
  11. Hence, M Cap of Rs. 35K crore and EV of Rs. 55K crore of Vedanta, in Oct 20 end was translating in a PE of less than 4x.
  12. Vested interests Media and Fund Managers, on not getting Ad support or Professional assignments from Vedanta, were, for their own vested interests, were misguiding retail investors. Or both were seen in colluding with BIG FISH to enable them to buy Vedanta in double digit.
  13. LIC Chairman was categorical in saying that they value Vedanta share at Rs. 320 per share, in Oct 20, and will not tender below that rate, which was laughed by Media and Few Fund Managers then.
  14. Post failure of delisting move, 5% creeping acquisition from the promoters was seen a logical move, which came in, 1 month after delisting failure.
  15. Vedanta is a complete and pure Natural resources play, with presence in Zinc, Lead Silver, (through HZL) Crude Oil, Aluminium, Iron Ore, Power, Steel, while all the verticals are seen ruling at best of its commodity cycle of last 8-10 years.


The above reasons set up a perfect stage to buy a fundamentally strong stock at mouth-watering valuations in Nov 2020. Today, six months later the stock is up 200% while the Nifty is up 17% in the same period. Also, Vedanta promoters were probably the only ones to avail SEBI one time exemption, to raise stake in FY 21, having raised 10% stake in Vedanta at Rs. 235 per share. This was a game changer and seen a confirmed bullish move ahead on the company and stock.


Coming to the present, let’s take a look at the Bumper Q4 numbers of the company

Recently declared Q4 FY21 numbers is seen to be an icing on the cake, while we have been expecting this robust Q4 numbers, largely to led by Aluminium, Oil & Iron Ore. Consolidated revenue for Q4 FY21 was at Rs. 27,874 crore, higher 24% Q-o-Q & 43% Y-o-Y, primarily due to higher volume at Aluminium vertical and improved commodity prices. Revenue for FY21 was at Rs. 86,863 crore, higher 4%, mainly due to higher volume at Zinc, Aluminium, Iron ore & Steel business, higher commodity prices & rupee depreciation in FY21. EBITDA for Q4 FY21 was at Rs. 9,107 crore, higher 18% Q-o-Q & 88% Y-o-Y, while EBITDA for FY21 was at Rs. 27,341 crore, higher 30%. PAT before exceptional items for Q4 was at Rs. 7,013 cr. while it is at Rs. 12,151 crore for FY21. EPS for FY21 before exceptional items, is at Rs. 32.80 against Rs. 10.78 in FY20.


Consolidated Gross debt is at Rs. 57,028 crore on March 21, with Net debt at Rs. 24,414 cr. Tax credit for Q4 FY21 stood at Rs. 1,886 crore, with normalized ETR at 28% (excluding tax on exceptional items and deferred tax asset of Rs. 3,111 crore recognized on carry forward losses in ESL). The normalized ETR for FY21 is at 27% (excluding tax on exceptional items, tax on intra group dividend and deferred tax asset of Rs. 3,111 crore recognized on carry forward losses in ESL) against 34% in FY20, due to change in profit mix and adoption of new tax regime by Hind Zinc.


Aluminium cost of production fell to 7 year low, at $1,347 in FY 21, which was at $1,690 in FY20. Alumina cost fell by 15% YoY to $235 per tonne. Iron Ore production rose in Goa to 2.1 MT from 0.9 MT in FY20. It is interesting to analyse Standalone Q4 numbers, wherein Aluminium EBIT rose to Rs. 1,590 crore from Rs. 1,137 crore QoQ, Iron and Steel EBIT to Rs. 730 crore from Rs. 536 crore QoQ and Oil & Gas EBIT rose to Rs. 388 crore from Rs. 269 crore, as being indicated by us for last 2-3 months.


What does the future hold? Is the joy ride over?

Well, not really. The commodity cycle is still on a roll and Vedanta has 2 major corporate events lined up over the next 3 – 9 months, which could provide new legs to the rally. So, are we still recommending the stock with the same vigour as in Nov. 2020? Zinc, Silver, Aluminium and Iron Ore verticals are seen having clear tailwinds for the next 3 quarters of FY22 as well.  So, commodity cycle and expected 2 corporate events has kept positive view on the stock, for this calendar year. So, do keep track of these events in Big Gems as well as Stock Query section of the Member Zone for our insightful analysis, as always.


Before we end, a small note from us - such stocks are portfolio boosters and we need to understand the market dynamics of corporate events, coupled with the fundamentals, to find such gems. Always rely on an unbiased and trustworthy market expert to provide you with the right analysis. There are enough frauds in every market segment that are ready to fleece you at the first opportunity. So keep your money safe and keep your portfolio healthy.


This is not a buy or sell recommendation, while stock recommendations are provided exclusively to our paid members in the Member Zone.

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