Wednesday, February 22, 2017

An AIM International Fund: Vedanta (VEDL) by Chengbin (Henry) Liu. “No Vendetta Against Vedanta"

Vedanta Limited (VEDL, $14.90): “It’s all about the future economy growth in India”
By: Chengbin (Henry) Lu, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Vedanta Limited. (NYSE: VEDL) Vedanta Limited (Formerly known as Sesa Sterlite Ltd.) is a global diversified natural resources company, with operations across zinc-lead-silver, oil & gas, iron ore, copper, aluminum and commercial power.
• Vedanta posted a strong second quarter result in October 2016, which was mainly contributed by the commodity prices recovery and the company’s consecutive cost-saving process.
• The company’s board appointed a new CFO - Arun Kumar in September 2016. He is now focusing on generating increasing free cash flows with optimized capital allocation, de-levering the balance sheet and continuing the cost-saving program.
• Due to its continuous strong financial performance, the stock price has been soared more than 235% since the beginning of 2016.

Key points: As one of the largest natural resources companies in India, Vedanta dominants the domestic markets of zinc, copper, and aluminum. Because of the depressing material market, the company has experienced a decrease of 15% in revenue for the first three quarters of 2016 compared to 2015. However, in the third quarter of 2016, strong commodity prices and lower oil price helped the company improve its EBITDA for 31% over the previous quarter from $512.3MM to $668.6MM. Additionally, Vedanta has been continuously focusing on its cost-saving program. For the entire year of 2016 and the fourth quarter 2015, the company achieved cumulative saving of $421 MM and is on the track to achieve its final savings target of $1.3B.

To continuously expand its market and diversify its portfolio, Vedanta decided to merge with Cairn India, which is an India oil and gas exploration and production company. The diversified portfolio has significantly reduced the volatility and increased the company’s overall EBITDA margin regardless of the volatile commodity prices over the last year. At the same time, Vedanta aims at improving its ability to allocate the capital to its highest return projects and its financial stability to sustain strong dividend distribution.

What has the stock done lately?
During 2016, the company continuously posed strong financial results. Consequently, the stock price went up more than 235%. Beside of its strong financial results, recovering material prices and lower oil price have been helping raise the stock price as well. The stock price bottomed at $3.432 in February 11th 2016. Since then, the stock soared over 300%.  

Past Year Performance: Vedanta did very well across different business segments. For the zinc segment, it was well-positioned to reap benefits due to deficiency of zinc supply globally. For the oil & gas segment, the company had been focusing on ramping up RDG Gas project while keeping the cost in the modest level. The iron ore and copper segment also did relatively well in both production and cost-saving. Overall, higher profit margin caused by recovering material prices and dedicated cost-saving program had helped Vedanta become one of the best performing stocks in the material sector.

 Source: FactSet

My Takeaway
Benefiting from higher material prices in the market and the company itself the effort on optimizing the cost structure, Vedanta was truly one of the best performing stock in the stock. Additionally, the “Trump effect” also helped boosted the stock price in last November and December. Currently the company is focusing on ramping up several projects to increase the production and on optimizing its capital cost efficiency. However, considering that 67% of the company’s revenue came from the India domestic market last year, I think the overall economy condition in India will have bigger impact on the company’s financial performance going forward.  

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