Buy Vedanta, target Rs 425: Edelweiss Financial Services

Edelweiss Financial Services has a buy call on Vedanta with a target price of Rs 425.

The current market price of Vedanta is Rs 305.

Time period given by the brokerage is one year when Vedanta price can reach the defined target.

Investment rationale by Edelweiss Financial Services
At the right price, at the right time with upside potential: We view VEDL’s acquisition of ELSS as its first step in the ferrous space, which has come at the right price and time. At a relatively inexpensive USD546/t, the acquisition cost is significantly lower than USD750/t capex already incurred in ELSS’ plant and comes at a juncture when its existing product range is gaining demand traction. We perceive upside potential of USD30-35/t in current EBITDA/t of USD65-70 through: i) capacity ramp up to 1.51mt; ii) potential captive iron ore sourcing from VEDL’s nearly 10mtpa mine in Jharkhand; and 3) capacity increase to 2.51mtpa through an estimated USD170-200mn investment.

Lenders to take 60 per cent haircut; existing ELSS shareholders get diluted: VEDL’s resolution plan entails Rs 53.2bn payment to creditors against outstanding claims of nearly Rs 132bn (implying haircut of 60 per cent) by infusing Rs 18.1bn equity (90 per cent share in equity post transaction) and Rs 35.1bn debt in ELSS. The balance 10 per cent equity will be shared by creditors (in proportion to their outstanding) and existing shareholders. We estimate lenders and existing shareholders ending up with 9.2 per cent and 0.8 per cent, respectively, of the equity post transaction with benefits of potential capital appreciation thereon.

Outlook and valuations: Marginally EPS accretive; maintain ‘BUY’: We view VEDL’s acquisition of ELSS as marginally EPS accretive. Assuming EBITDA/t of Rs 6,500-7,000/t post capacity ramp up to 1.5mtpa and securing captive iron ore base, we believe returns for VEDL’s shareholders can be 20-25 per cent. We see additional benefits of economies of scale if VEDL decides to expand the plant further as it has sufficient iron ore capacity in Jharkhand to support a 5mtpa plant. We maintain ‘BUY/SO’ with TP of Rs 425 on FY20E EBITDA.