Vedanta’s shares gain after Q2 results; leveraged parent co, unpaid dividend remain key overhangs

Vedanta Ltd’s share price shot up over 2% to trade at Rs 96.7 per share on Monday morning even though the company reported a 40% on-year fall in net profit. Vedanta reported a marginal fall in total income to Rs 21,744 crore against Rs 22,814 crore in the same period last year, beating estimates. EBITDA was higher at Rs 6,531 crore, a 48% on-year jump. Analysts remain cautious about the stock as uncertainties stem from persistently high debt obligation at the parent level and lack of clarity on distribution of dividend already received from Hindustan Zinc. 

The operating performance of Anil Agarwal’s Vedanta was better than consensus estimates.  Continued cost control at the Aluminium and Zinc-International divisions helped the company, EBITDA was up 48% on-year and volume ramp-up gave hopes of a better profitability. “We expect Vedanta’s performance to improve driven by production ramp-up at Zinc International and the oil & gas division, sustained cost efficiencies, and a stable outlook for commodity prices,” said Edelweiss in a note. However, cash allocation was termed as an overarching concern by Edelweiss. With a Hold rating on the stock, analysts at Edelweiss said that cash returns to shareholders would be the most critical enabler for the stock.

Hindustan Zinc, a subsidiary of Vedanta Ltd has so far declared a dividend of Rs37.8 per share. Of this Vedanta has received over Rs 10,300 crore, equivalent to Rs 27.89 per share. However, the company has only distributed Rs 9.5 per share among shareholders. “As expected, the inter-company loan from CIHL to promoters hit the$956mn limit set by the board. Vedanta has also made tax provision for dividend received from Hindustan Zinc and has not redistributed it, raising CG concerns again,” said Emkay Global.

Outlook for non-ferrous metals remains robust that could help Vedanta, along with the steady recovery across the globe. “This should support a strong pricing environment. With the promoters in need for cash, we expect the company to improve performance operationally,” Emkay Global said while giving a ‘Buy’ call on the stock with a target price of Rs 119 per share.

The lack of clarity on capital allocation and dividend payout continues to remain a key overhang on Vedanta’s shares. “Moreover, high leverage and scheduled debt repayments at parent VRL remains an additional overhang for Vedanta,” said brokerage and research firm Motilal Oswal.