Anil Agarwal-led Vedanta Resources Ltd (VRL) has largely addressed the funding gap for its fiscal 2024 debt maturities through various one-time measures, including front-ended large dividends and brand fees, a 6 percent stake sale in Vedanta Ltd (VEDL), and deferment of a $450 million intercompany loan from VEDL.

Share Market Live

NSE

However, VRL's high leverage and a funding gap of $3 billion in FY2025E are key areas of concern and overhang, said analysts at Kotak Institutional Equities in a research note.

"We note that debt repayments of $3.6 billion due in FY2025, including $2.2 billion bonds, pose a significant funding gap of $3.1 billion, equivalent to 29 percent of VEDL's market cap. Refinancing of bonds, given the bleak macros, should be challenging and this could force VRL to opt for less desired alternatives," it said.

Kotak noted that large dividends are no longer possible and VRL might be forced to further divest stake or assets in VEDL. "Hefty dividends by VEDL/Hindustan Zinc in FY2022-23 shifted VRL's debt to VEDL. Entire surplus cash of HZ has been given out as dividends. VEDL’s net debt/EBITDA has increased to 4.7 times in FY2024E (2 times FY2022). High leverage and negative FCF (free cash free) due to growth capex suggest that large dividends are largely behind at VEDL," the brokerage said.

Vedanta is evaluating the divestment of the iron-steel division, but given scale and earnings profile, it is unlikely to resolve VRL's funding gap. The company is also considering a separate listing of different businesses, which is unlikely to unlock much value, as per Kotak.

"Divestment of other businesses or a further stake sale are last resorts, with VEDL/VRL to address the FY2025E funding gap," it said.

As per a report by Axis Securities, Vedanta Ltd has delivered a dividend of Rs 69 per share with the highest dividend yield of 29 percent in the last 12 months. Hindustan Zinc is next player in the list with a dividend yield of 19 percent. The company gave a dividend of Rs 61.50 in the past 12 months.

Kotak also said that the bleak commodity cycle suggests a downside risk to Vedanta's earnings. The brokerage has trimmed earnings and target price to Rs 200 from Rs 215 earlier, maintaining 'Sell' rating, given the unfavorable risk-reward.

"We cut our consolidated EBITDA by 3 percent/3 percent/4 percent for FY2024E/25E/26E, factoring in lower aluminum prices and a delay in new projects. Our EBITDA estimates are 13-14 percent below consensus estimates for FY2024-26E and we expect significant downgrades. Maintain sell on rich valuations," it said.

Vedanta shares are trading 0.21 percent higher at Rs 241.90 apiece on NSE in Wednesday's trade. The stock dipped 23.47 percent so far this year while it fell 8.32 percent in the last one year.

First Published:Sept 6, 2023 1:40 PM IST