Goldman Sachs Rates Vedanta ‘Buy’ On Strong Zinc Outlook

Goldman Sachs initiated coverage on Vedanta Ltd. with a ‘Buy’ as it’s bullish on zinc—the largest contributor to the sales of billionaire Anil Agarwal-led metals-to-mining company.

Vedanta is one of the largest diversified miners globally, and would have an estimated 8 percent share in the global zinc production by financial year 2020, the investment bank wrote in a report. Zinc mining contributed 46 percent to the company’s earnings before interest, tax, depreciation and amortisation for the year ended March 2018.

Along with its ‘Buy’ call, Goldman Sachs set a target price of Rs 280 per share, implying an upside of 23 percent.

Out of the 22 analysts covering the stock, 20 have a ‘Buy’ and the rest suggest ‘Hold’, according to Bloomberg. The consensus target price is Rs 315, a potential upside of 36 percent.

Goldman Sachs attributed four reasons for its ‘Buy’ call:

• Attractive commodity exposure to zinc and oil.
• Strong volume growth across verticals.
• Strong dividend yield despite growth capex.
• Attractive valuations.

Support From Zinc, Oil Prices

Goldman Sachs estimates that zinc prices would move to $3,055 a tonne in the ongoing financial year from $2,475 in the spot market. But on the London Metal Exchange, zinc has fallen 26 percent so far this year because of concerns over increase in concentrate supply, trade tensions, emerging market growth and a strong U.S. dollar.

These worries are overdone and the demand-supply situation for zinc is likely to remain tight, according to the report. Moreover, the investment bank said crude is also likely to inch higher to $78 a barrel from the spot rate of $74.

Volume Growth

Vedanta is ramping up capacity in India and overseas for zinc and oil. That will aid its volume growth and operating performance, according to Goldman Sachs.

Here’s what the investment bank expects to drive value for Vedanta:

• Zinc: ramp-up of underground mine production in India.
• Oil & Gas: capital expenditure announced to increase production.
• Aluminium: Expansion at Jharsuguda, Odisha smelter.
• Power: stable plant availability factor at Punjab’s Talwandi Sabo Power Ltd.
• Others: higher iron ore production in Karnataka.

Dividend Yield

Vedanta will pay out the entire payout received from Hindustan Zinc and at least 30 percent of its the residual profits as dividend. Goldman Sachs expects a dividend payout ratio of 36 percent over next three years, implying a dividend yield of around 5 percent. That would provide downside support to the stock.

Cheaper Valuations

Vedanta is trading at 4.4 times the estimated enterprise value-Ebitda for 12 months ended March 2020, according to Goldman Sachs. That’s a 15 percent discount to diversified miners, and compares with the premium Vedanta enjoyed historically. Shares of the miner have fallen 30 percent so far this year.

Key Risks

• Weaker-than-expected commodity prices and a lower availability of domestic resources remain a risk for the miner, according to Goldman Sachs.
• So is the possibility of higher losses in the copper business. Its 400,000-tonne copper smelter in Tamil Nadu was shut after protests against alleged pollution.