What should you do with your Vedanta shares now?

NEW DELHI: After the delisting fiasco, focus of Vedanta shareholders has again shifted to operational performance and capital allocation, which they are hoping will make money for them in the long run.

Commodity prices have been recovering, which bodes well for the company, believe analysts. Meanwhile, what the company will do with $3.15 billion that it borrowed from the market to fund delisting will also be keenly watched.

“Discussion around capital allocation will dominate investor concerns, while the operating performance of mining companies is getting better due to firm commodity prices globally,” said Hemang Jani, Head – Equity Strategy, Broking & Distribution, Motilal Oswal Financial Services. “Historically, for companies with failed attempts at delisting, share price tends to reach the levels before the buyback, which in case of Vedanta was around Rs 85-90.”

The prices have already kissed that level, and now analysts believe it could be a good opportunity for investors to grab them at a low level. During Tuesday’s trade, shares of Vedanta rose nearly 3 per cent to Rs 99.50, which is 33 per cent below the March 31 book value of Rs 147.

Apart from being valued at less than book value, there are two more reasons for buying Vedanta shares at this level, say analysts. The first is, the promoters of the company are in dire need of cash and a hefty dividend may also be coming soon, especially given that it is also sitting on a dividend of Rs 4,500 crore from its subsidiary Hindustan Zinc.

“A generous dividend can be expected given the strong cash on the balance sheet and the need for liquidity by promoters. But, any increase in inter company loans will be a negative,” said Jani.

Even after a failed attempt at delisting, there is one more way by which it can cut public shareholding--massive buyback of shares, which is the second reason to accumulate Vedanta. And, given the price discovery during delisting, buyback can happen at a much higher price.

“If minus the impairment that the company did in the books, probably you stand a good chance for Rs 225 as a fair price as far as the stock is concerned. So that means that next buyback, if at all it happens, could be around that price,” said Deven R Choksey, MD, KR Choksey Investment Managers.

He said, once the speculators who bought the stock in hopes of hefty gains exit, some accumulation at lower levels could start taking place and with the improvement in the metal cycle, the stock probably will find its bottom somewhere close to current levels of price.

Sandip Sabharwal and Ambareesh Baliga, two Mumbai-based independent analysts, also believe it is a good opportunity for buying Vedanta and the fair price is definitely around Rs 150-160, at which many were hoping delisting will take place.

Vedanta has been tight-lipped about what they will do next, but Jani believes buyback may not be considered. He has a ‘neutral’ rating on the stock with a target at Rs 148, which means a potential upside of around 50 per cent.

“We have factored in the post-Covid recovery in commodity prices in our estimates. Vedanta’s cost reduction in aluminium, completion of capacity expansion in zinc, and expected ramp-up in oil & gas should also support earnings growth in FY22. Over FY20–22, we estimate an 11 per cent CAGR in EBITDA and 32 per cent CAGR in EPS,” said Jani.