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Vedanta Resources PLC (VED.L)
COMMENT
Cairn India decision expected soon
■
Action/Event: A decision on Cairn India could come soon. Whether
approved or not, it will provide greater clarity over the direction of the
company and group debt structure. High financial gearing is the key investor
concern and once a decision is made VED can move on to refinancing
needs. The company has been very active in both the corporate bond and
convert markets and we would not be surprised if the company were to look
again at these sources for financing.
■
Investment case: VED remains one of the higher risk stocks in our universe,
but given share-price underperformance (30% last 12 months) and
significant earnings growth potential risk/reward is strongly skewed to the
upside, in our view. Despite recent downgrades, VED still has strong growth
prospects (64% volume growth FY10–FY14E excluding Cairn India) and we
expect this, together with unwinding of debt, to drive significant earnings
growth over the next three years well in excess of UK listed peers.
■
Cairn India: The deal requires outright government approval however the
key stumbling block appears to be the royalty sharing agreement. If the
royalty agreement is changed this will have a material impact on the
valuation of Cairn India; VED will be able to pull out of the deal and not be
obligated to stick to the original terms. If the deal is approved concerns over
excessive financial leverage will intensify, however, the deal was struck
when oil was sub $80/bbl, will be immediately 30% EPS accretive and add
an additional layer of earnings diversification.
■
Catalysts: Cairn India decision, refinancing of debt facilities, potential listing
of the KCM copper operations and lifting of iron ore export ban.
■
Valuation: VED is trading on a PE of 5.9x, lowering to 4.1x/3.8x in FY12/13.
Including Cairn India, the FY12 PE would reduce to 3.2x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Vedanta Resources PLC (VED.L)
COMMENT
Cairn India decision expected soon
■
Action/Event: A decision on Cairn India could come soon. Whether
approved or not, it will provide greater clarity over the direction of the
company and group debt structure. High financial gearing is the key investor
concern and once a decision is made VED can move on to refinancing
needs. The company has been very active in both the corporate bond and
convert markets and we would not be surprised if the company were to look
again at these sources for financing.
■
Investment case: VED remains one of the higher risk stocks in our universe,
but given share-price underperformance (30% last 12 months) and
significant earnings growth potential risk/reward is strongly skewed to the
upside, in our view. Despite recent downgrades, VED still has strong growth
prospects (64% volume growth FY10–FY14E excluding Cairn India) and we
expect this, together with unwinding of debt, to drive significant earnings
growth over the next three years well in excess of UK listed peers.
■
Cairn India: The deal requires outright government approval however the
key stumbling block appears to be the royalty sharing agreement. If the
royalty agreement is changed this will have a material impact on the
valuation of Cairn India; VED will be able to pull out of the deal and not be
obligated to stick to the original terms. If the deal is approved concerns over
excessive financial leverage will intensify, however, the deal was struck
when oil was sub $80/bbl, will be immediately 30% EPS accretive and add
an additional layer of earnings diversification.
■
Catalysts: Cairn India decision, refinancing of debt facilities, potential listing
of the KCM copper operations and lifting of iron ore export ban.
■
Valuation: VED is trading on a PE of 5.9x, lowering to 4.1x/3.8x in FY12/13.
Including Cairn India, the FY12 PE would reduce to 3.2x.
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