Sunday, May 6, 2018

A current AIM International Fund Holding: Vedanta Limited, Inc. (VEDL) by Clarence Darrow. "Full Control"

Vedanta, Ltd. (VEDL, $): “Full Control”

By: Clarence Darrow, 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 (NYSE: VEDL) is a diversified natural resources company engaged in oil, gas, silver, copper, iron, etc. Vedanta is located across India, South Africa, and Namibia. The company was founded in 1965 and is headquartered in Panaji, India.
• Strong 2017 4Q performance with a near record setting sales of $3.8 billion, numbers not seen since September of 2013.

• Highest interim dividend declared by the company ever at $1.28, representing a 7.2% dividend yield

• Vedanta recently began their Gamsberg project which has the potential to take zinc production from 250,000 tons to 600,000 tons per annum

Currently on a mission to contribute 50% of India's crude oil production

Key points:
Vedanta is on track for strong year following its 2017 performance. Revenue increased by 7% to $11.5 billion, representing a 7% increase. EBITDA increased to $3.2 billion, representing a 37% increase. Net debt was reduced by 8.5% to $3.8 billion. Going forward, Vedanta is increasing revenue, profit, earnings per share, and cash flow while reducing debt. Vedanta's stock price has been gaining positive momentum having outperformed over 85% of its peers in the most recent year.

VEDL is well positioned to continue its success in India as India has very strong growth potential and its commodities will likely increase exponentially along with India’s GDP growth, 7.1%. The company is uniquely positioned to serve this demand being the only diversified natural resources company in India.

Additionally, VEDL is likely to succeed as it is the second largest zinc-lead producer globally. VEDL also possesses the largest aluminum capacity in India and is India’s largest copper and oil producer. There is a structural power shortage in India which VEDL is poised to benefit from given its industry advantage in India. In addition, China has recently curtailed its aluminum production, limiting competition. VEDL is likely to maintain its industry positions as there are no real competitors and VEDL has a low asset cost base.

The company’s board of directors agreed to issue a quarterly dividend of $1.28 per share effective as of 03-22-18. VEDL has a robust dividend policy in place which entails a minimum 30% dividend payout. VEDL clearly has a large amount of money on hand given this disbursement of cash and dividend policy.

What has the stock done lately?
Vedanta has increased 21.62% over the last year. However, VEDL has shown some volatility in price as it is down 13.32% since the start of 2018. In the last week, the stock decreased by 10.78%. The volatility experienced in the past three was most likely caused by investors responding to the interest rate hikes as well as Donald Trump’s recent tariff proposals. VEDL mirrored the overall market which both suffered a rough week. In addition, zinc prices have fallen which have hurt one of VEDL’s core segments.

Past Year Performance: 2017 was a very strong year for VEDL. As commodity prices increased specifically crude oil which increased from $45/bbl in mid-2017 to $60/bbl. In addition, India’s population continued to grow leading to a further increase in demand for these higher priced commodities. VEDL was in position to take advantage. This drove the stock price up 25% over the past year.

My Takeaway

Kuldip Kaura has served as the CEO of Vedanta, Inc. since 2017. Although Mr. Kaura has plenty of experience having held several senior management and leadership roles with the company for over 15 years. Looking forward, it will be important to see how commodity prices change as well as how much India grows, and how soon China will ramp up aluminum production among other commodities. A “buy” is still recommended as VEDL is likely to maintain its industry position as the largest commodity distributor and producer of commodities in India, and should see its stock price correct itself after falling 10.78% this past week.