Vedanta: Ambitious plans; delivery is key

28 Feb 2024 , 11:12 AM

Recommendation: Add

Target Price: ₹296

The management is looking to achieve VDL level EBITDA of ~US$5.6bn (up 35% YoY) in FY25 and US$7.1bn in the medium term. This forms the key to: (i) Strong value discovery post demerger into six listed entities. (ii) ~US$3bn deleveraging at promoter VRL over three years. (iii) No increase in VDL level debt from the current ~Rs624bn, despite planned annual capex of ~US$1.6bn needed to achieve the volume/CoP targets. Analysts at IIFL Capital Services like the plan, but await delivery.

Ambitious near-term and medium-term targets

VDL’s management expects FY25 to be a transformative year with 35% YoY EBITDA growth to ~US$5.6bn (on adjusted FY24 base), US$3.5-4bn FCF (pre-growth capex), and group ND/EBITDA of <2x (versus 2.7x currently). Over the medium term, it expects EBITDA to further rise to US$7.5bn; led by strong volume growth and reduction in CoP across all key businesses as it raises growth capex given improved flexibility from restructuring of VRL level debt maturities.

Banking on demerger to drive value discovery

Management expects the vertical demerger process to form six listed entities to be complete by the end of 2024. This, combined with strong expected delivery in terms of volumes and CoP, forms the base for optimism on healthy value discovery post the demerger. Management also highlighted post demerger structure wherein group-owned Konkola Copper Mines in Zambia and Copper operations in Middle East would be integrated in the base metal listed entity (structure, valuations not disclosed).

Expects US$3bn deleveraging at VRL without higher debt at VDL

Management highlighted intent to achieve further deleveraging of US$3bn at VRL (vs US$6.2bn FY24E) through brand royalty (US$1.5bn over three years, can be higher as well) payments by VDL to VRL and cumulative dividend payout of US$4.5bn (VRL share of ~US$2.5bn) by VDL. It expects VDL debt to not increase from ~Rs620bn level despite annual capex of over ~US$1.6bn. Key to this would be delivery on volume expansion and reduction in CoP.