Fundamental Analysis Of Vedanta: The mining and metals industry stands as a cornerstone of global economic development, catering to a multitude of sectors, from infrastructure to technology. Within this dynamic landscape, Vedanta emerges as a key player, renowned for its diversified portfolio encompassing zinc, lead, silver, copper, iron ore, aluminum, and oil & gas.
In this fundamental analysis of Vedanta, we’ll look into its positioning in the industry amidst the backdrop of evolving market conditions.
Fundamental Analysis Of Vedanta – Company Overview
Vedanta is a well-diversified metals and mining company headquartered in India. Its operations span multiple continents: South Africa, Liberia, the UAE, and Namibia. Established in June 1965, it has gone from humble beginnings to becoming a global powerhouse in the natural resource sector.
The company’s diverse portfolio positions it strategically to capitalize on shifts in global demand patterns and commodity prices. More than ninety percent of Vedanta Ltd.’s profits are derived in India. Over the years the company has poised itself to grow exponentially and focus on large-scale expansions in India.
In addition to its mining activities, Vedanta is a leading producer of aluminum and copper in India. With a market capitalization of Rs. 1,47,982 (Cr), it is the second largest compared to all its competitors. It has also committed to reducing carbon emissions to zero by 2050 or sooner. The organization has pledged $5 billion over the next 10 years to accelerate the transition to net-zero operations.
Demerger
By September 29, 2023, they announced the demerging of their business units into independent “pure play” companies for them to have greater freedom to grow their business and achieve its true value via independent management. As these newly listed companies will have their own directors and board members and they will be able to chart their own strategies with investors.
The Vedanta Ltd board has announced that in the upcoming 9–12 months, they will result in a demerger that will result in six separate listed companies, namely:
- Vedanta Aluminium
- Vedanta Oil & Gas
- Vedanta Power
- Vedanta Steel and Ferrous Materials
- Vedanta Base Metals
- Vedanta Limited
The demerger is planned to be a vertical split, where for every single share of Vedanta Ltd the shareholders will additionally receive 1 share of each of the 5 newly listed companies. As they are trying to overcome and solve some of their legal compliances and debtor/investor problems, it is best to assume that the demerger will happen during Q1 FY2025.
Segment Analysis
Vedanta has a unique portfolio of assets among Indian and global companies with metals and minerals (zinc, silver, lead, aluminum, chromium, copper, nickel), oil and gas, a traditional ferrous vertical including iron ore and steel, power, including coal and renewable energy, and semiconductors and display glass. Here we have seen the overview of the company in this Fundamental Analysis Of Vedanta in detail.
| Segment Name | FY2023 (in Cr.) |
|---|---|
| Zinc (India) | Rs. 17,474 |
| Zinc (International) | Rs. 1,934 |
| Oil & Gas | Rs. 7,782 |
| Aluminium | Rs. 5,837 |
| Power | Rs. 851 |
| Iron Ore | Rs. 988 |
| Steel | Rs. 316 |
| Copper | Rs. (4) |
| FACOR | Rs. 149 |
| Others | Rs. (86) |
| Total | Rs. 35,241 |
Fundamental Analysis Of Vedanta – Industry Analysis
The projection for the demand indicates a notable upsurge in commodity as the nation forges ahead with its effort to construct top-tier infrastructure and strives towards transitioning to renewable energy, which in turn will require a lot of resources from the mineral and the mining industry.
In India, the short-term and long-term demand for natural minerals remains robust. Primary aluminum and zinc demand is expected to have increased by 16 – 17%. The demand is expected to remain strong in upcoming years due to thriving infrastructure, manufacturing, automobiles, and EV/Renewable sectors.
The global demand for these minerals on average is expected to only grow to 2%–3%, whereas in India, these demands are expected to grow by almost 5%–9%.Due to the upcoming projects and innovations in technologies such as AI, the semiconductor industry is also expected to grow exponentially, around 9% by 2024–2027. The upcoming infrastructural development in India will also result in a growing industry.
The upcoming renewable and electronic vehicle industry is expected to grow its sales by around 66%, and it is expected that a third of the country will be using EVs and other sources of renewable energy. This is where the rise in demand for non-ferrous metals and other metals comes into play.
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Fundamental Analysis Of Vedanta – Financials
Revenue and Net Profit
Vedanta’s operational revenue had an increase of 10.98% from Rs. 1,32,732 (Cr) in FY2022 to Rs. 1,47,308 (Cr) in FY2023, but at the same time, the net profit has seen a decrease of 38.82%, where in FY2022 it was recorded at Rs. 23,709 and in FY2023 it was at Rs. 14,506.
The main reason for the net profit taking a dip even though the revenue from operations has increased is that the operating expenses have increased from FY2022 at Rs. 87,908 crore to FY2023: Rs. 1,12,877 crore. Subsequently, the interest expense has also increased by around 29.76% from FY2022 at Rs. 4,797 crore to FY2023 at Rs. 6,225 crore, which has directly affected the operational and net profit of the company.
This can also be partially credited to its subsidiaries, such as Hindustan Zinc Ltd., where its quarterly net income dropped by 35% and missed its estimates.
| Fiscal Year | Revenue from operations (Cr.) | Net profit (Cr.) |
|---|---|---|
| 2023 | 1,47,308 | 14,506 |
| 2022 | 1,32,732 | 23,709 |
| 2021 | 88,021 | 15,033 |
| 2020 | 84,447 | -4,743 |
| 2019 | 92,048 | 9,698 |
Profit Margins
As observed, the EBIT margin has fallen to 17.99% for FY2023 from 28.45% in FY2022. Likewise, the net profit margin has also dramatically dropped from 17.86% in FY2022 to 9.85% in FY2023.
The main reason for such drastic changes will include the increase in operational and interest expenses of the company, as well as the fact that the company’s debt is increasing year over year, which therefore increases the company’s interest rate.
| Fiscal Year | EBIT Margin | NPM |
|---|---|---|
| 2023 | 17.99% | 9.85% |
| 2022 | 28.45% | 17.86% |
| 2021 | 25.47% | 17.08% |
| 2020 | 16.77% | 17.16% |
| 2019 | 20.91% | 10.54% |
Return Ratios
The return on equity and return on capital employed have both seen a dip from the previous year, where the RoE in FY2023 is at 22.74% from 37.14% in FY2022, and the RoCE in FY2023 is at 19.89% from 29.37% in FY2022.
This can mainly be correlated with the amount of debt they are taking on, while their sales volume and profitability also decreases at the same time.
| Fiscal Year | RoE | RoCE |
|---|---|---|
| 2023 | 22.74% | 19.89% |
| 2022 | 37.14% | 29.37% |
| 2021 | 25.72% | 17.83% |
| 2020 | 0% | 0% |
| 2019 | 15.44% | 14.49% |
Debt Analysis
The debt-to-equity ratio of the company has increased to 1.15 in FY2023 from 0.87 in FY2022. This suggests that almost 50% of its activities are being financed with debt for its long-term and short-term activities.
While the debt-to-equity ratio is rising, the interest coverage ratio has also fallen from 7.87 in FY2022 to 4.26 in FY2023. This suggests that the company is taking on more debt while its ability to repay has been decreasing.
| Fiscal Year | Debt-to-Equity | Interest Coverage Ratio |
|---|---|---|
| 2023 | 1.15 | 4.26 |
| 2022 | 0.87 | 7.87 |
| 2021 | 1 | 4.3 |
| 2020 | 1.07 | 2.85 |
| 2019 | 0.99 | 3.38 |
Fundamental Analysis Of Vedanta – Key Metrics
| Particulars | Amt | Particulars | Amt |
|---|---|---|---|
| CMP | Rs. 398 | Market Cap (Cr.) | Rs. 1,47,889 |
| Stock P/E (TTM) | 40.4 | EPS (TTM) | Rs. 11.4 |
| RoE (TTM) | 10.40% | RoCE (TTM) | 23.40% |
| Public holdings | 15.90% | Promoter holdings | 62% |
| Debt-to-equity | 2.37 | Interest Coverage ratio | 2.86 |
| Current ratio | 0.66 | NPM | 6.73% |
Fundamental Analysis Of Vedanta – Future plans
- Vedanta’s capacity expansion plans for 2024–25 are set to see a significant change in its business because the refinery expansions at Lanjigarh will be effectively completed by the end of FY2025.
- They are also completing the expansion of their value-added products. By adding billet capacity and capacity for foundry alloys, they are increasing the capacity of their rolled products business, which will increase from 44,000 metric tons to about 100,000 metric tons.
- On top of that, they are also planning to expand their Balco smelter, essentially going from 5,50,000 metric tons to a million metric tons.
- The company’s additional three coal mines, Kuraloi, Radhikapur, and Ghogharpalli, will start production in about nine to 18 months.
- The debt restructuring exercise was successful, resulting in a structural improvement in the overall capital structure.
- The demerger process is ongoing, with the expectation that by the end of QI in FY2025 they will be able to achieve their demerger.
- In the Oil & Gas segment, the company intends to undertake new growth capex projects worth $687 million.
- In the aluminum segment, it intends to incur a $1.4 billion growth capex over 2 years.
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Conclusion
As we approach the end of the Fundamental Analysis Of Vedanta, we have concluded that the demand for non-ferrous metal has increased in India, and other sectors such as the semiconductor industry are also rapidly growing. We have also seen a massive surge in demand in the renewables and EV industries.
While the company takes on debt to finance its operations, its main goal is also to focus on growing and increasing its capital expenditure. Its plans for a demerger also suggest the company’s growth potential and various possibilities.
Written by Rithesh Balaji
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