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Tall goals, past not the best reflection: Mgmt. states $6b of investments (vs. $8.4b stated in Q3FY24, including inorganic growth), which could offer incremental revenue/EBITDA at $ 6/2.5-3b, with implied pay-back of <3years. Also, co. guides for ~$7.5b EBITDA at group level by FY26E (Vs. InvE at VED India at $5b). We dissect stated goals segment wise (factoring Q3 commentary), further on per unit basis vs. current operational run-rate, a stiff ask in our view. Looking at VED’s past guidance vs. actual performance, we see more misses vs. wins (Fig2/3), partly a reflection of changing business heads. VED B/S to remain in focus: Co. indicates investment of $6b, which we presume is over FY24-27E and increase our annual capex estimate to ~$2b (vs. $1b earlier). Factoring InvE EBITDA profile vs. mgmts. guidance, we find our leverage ratios ahead of mgmt.’s guidance (<1.0x at group level). VRL CF gap – more pronounced now: VRL’s recent liability management exercise extended its maturity profile and increased coupon. The average maturity drops from $1.6b over FY25-26-27 to now ~$1b at a higher cost, which implies a pay-out ask of Rs50/sh for FY25-26. Based on VED’s current CF profile, higher investment (now assumed at $2b p.a.), implies need for external variables to bridge the CF gap. We find VED could look at divesting assets, upstream payouts after GR to RE at VED/HZ, incremental APSA amongst others. Demerger – magic wand, we don’t think so? VED board had approved a pure-play asset owner business model that will eventually result in six separate listed entities. We see this as a smart move as majority of minority approval is not required, company gets to apportion debt, and eventually paves the way for promoter to tap the (relatively) easier option of monetizing/de-listing. While one could argue for a (theoretical) case of multiple expansion on peer-benchmarking, we cite risks of inter-group restructuring, carbon heavy assets, CF burn in new ventures amongst others. Await clarity on debt profiles.
Vedanta Resources Vedanta Limited
Dividends – a welcome move, short of expectations: VED has announced a first interim dividend of Rs17.8/sh, record date of 9th Sept 21. VED’s announced dividend, along with prior dividend of Rs9.5/sh (28th Oct 20) sums up to Rs27.8/sh, which equates to HZ’s pay out due to VED minority. However, it does not take into account a minimum 30% of attributable VED PAT excluding share of profits in HZ for the year and hence short of expectations. Expect more dividends: Based on the debt maturity profile at VRL, we highlight dividends thus far still imply a CF gap at VRL. This implies the need for a larger pay out at VED-HZ. If we assume $2.7b of total maturity over FY22-23, it would imply HZ would need to provide Rs75/sh more, which translates to an additional Rs55/sh at VED level. Where could we go wrong? If VRL draws more from the Oak Tree credit line, say, up to $500m, implied ask on upstreaming cash would reduce. As we are not aware about the cost of funds or end-use, we cannot be certain for sure. What next? a) Given payout bifurcation at VED isn’t known and with a visible CF gap on maturity profile, we expect more dividends. b) Govt. of India / CBDT has announced relaxation on ITR filings by a month. Hence, under Sec. 80M, VED has leeway to announce more dividends (claim tax shield via HZ) prior to 31st Oct (vs 30th Sept earlier). c) Incremental stake purchase? Assuming 26 weeks from the last offer, i.e. by mid-Oct, one could argue that promoters could go for a creeping acquisition and consequently announce a payout. d) Potential divestments in core assets to upstream cash needs to be watched.
Financial highlights; no payout, a disappointment: VED’s Q4 EBITDA stood at Rs90b, in-line with InvE. Lower operating profits at Power was offset by O&G and Ally. On B/S, Net debt increased marginally to Rs244b (vs Rs214b CPLY), despite strong FCF, thanks to Rs70b of loans & advances to parent. Interestingly, despite healthy CF generation, there is no final pay-out, a disappointment. Mgmt. has outlined $1.1b of capex for FY22. Capital allocation priorities: Mgmt.’s capex of $1.1b includes $400m O&G, $300m Ally, $100m Zinc (doesn’t reconcile, needs clarification) and balance to the other segments. Mgmt. cited projects under oil refining and downstream ally were under evaluation and refrained from commenting on further. Based on HZ commentary, the growth capex included copper smelter and fertilizer plant, both variables aren’t captured in the flexible capex at VED level. VRL’s stake, economics: Promoters have increased stake in VED IN by 10% to ~65% now. Mgmt. refrained from commenting on the future course of action (towards 75%), steps to do away with pledge/encumbrances created at HZ/ VED, maturity profile at VRL and what it could mean on incremental payouts. VRL debt stands at $10.2b and we highlight if not for ICD’s, dividend payouts are the most likely way to service interest cost. On HZ arbitration: As per mgmt., HZ stake should be up for auction and final verdict is expected. We find this event a +ve for VED’s cash fungibility. Valuations: We increase TP to Rs241/sh as we bake in Q4, and reflect FY22 volume guidance. Deviation on incremental capital allocation is a key risk.
RBB fails: Vedanta has announced failed RBB given no. of shares tendered (~1.25b shares) stood lower than necessary threshold (1.34b), consequently, VED shall continue to trade. While, total bids exceeded the watermark, lack of conversion on ‘yet to be confirmed’ bids (123m) pulled the process off. Debt maturity profile vs. inter-co. loans: VED tied up a loan facility of upto Rs100b via pledging 14.82% of HZ’s equity, with specific end-use to re-fi NCD/CP. VED also raised Rs35.2b of NCDs. However, at the parent level, based on bond prospects (due Aug 23), debt repayments in the next 21mths stand at $6.6b incl. $2.2b at the Company level. While we don’t see concerns at Co level, we find mgmt.’s strategy calls for reduced dividends from subs and favouring inter-co loans. Other mitigating variables includes APSA, extension of WC, roll over of CP’s. At parent, co. had one breach of financial covenant as at 31st Mar, 20, wherein, co. has sought waivers on covenants for multiple facilities now until Mar’21. Dividend payouts? While pay-outs aren’t the most efficient way to upstream cash, it can mitigate CF issues at the VED/parent level, w/o any CG flags. However, it needs to be seen if mgmt. decides on dividends or favours inter-co loans (adequate cushion as per Sec.186). As per div. policy, HZ pay-outs, if under special dividend, can be excluded for pay-out math at VED level. Attractive valuations vs CG: VED 13/7% FCF/div. yields and 4.5x EV/OP on an FY22 basis are attractive. Management’s ability to restore minority shareholders confidence is key to retaining / re-rating trading multiples. We find failed delisting is an additional scar, in addition to recurring CG issues (recurring inter-company loan instances including recent $1.05 inter-co. loan with limited disclosures, BV plunge, CIHL–Anglo txn, etc.).
Bolstering ammunition, but, running out of levers too… VED’s potential $1.05b of inter-co. loan is well within the limits defined by Sec.186 of Co. Act. Headline math of $3.15b +1.05b+potential upstreaming dividends indicate an exit price well beyond our TP. In the process of raising funds, promoters have pledged all shares held by Vedanta Jersey ($1.4b bond, due 2023) and of VED Holdings Mauritius, Mauritius II on incremental 40-49.9% stake (if taken private), while raising $1.75b (3m facility). This implies Mgmt. is running out of options. Debt maturity - well placed, post pledges, NCDs: VED tied up a syndicated loan facility of upto Rs100b via pledging 14.82% of HZ’s equity share capital, with specific end-use to re-fi NCD/CP’s at VED. In addition, VED raised NCD’s of Rs35.2b. Post aforesaid measures, we don’t find any concern on maturity. VED’s Net debt stands at Rs248b (Rs35b qoq incr.), on the back of increase in debt at HZL. Net debt/EBITDA stands at 1.2x vs 1.05x as of March’20. Operating metrics: EBITDA stood at Rs39.9b, i.e. a 23% yoy decline, 22% ahead of InvE. Beat was largely driven by ally on the back of lower COP at $1268/t. All other segments reported either in-line or marginally better ests. View on VED: With commodity prices hovering near decadal lows, attractive valuations, and HZL’s potential 2nd call option, Ved promoters have sought a de-listing, an opportunistic move on both valns and timing. We expect RBB derived threshold price will be at a significant premium to the offer price. An unsuccessful delisting will add one more scar to VED’s minority (squeezed multiple); minorities would be better off seeking an exit closer to TP.
Change in BV for counter-offer: As per the press release, “the book value of VEDL’s equity shares as per Delisting Regulations, for YE Mar,20, is Rs89.38/sh”. BV has been reviewed per Section 2(57) of the Companies Act. Implications: Based on a definition of net worth, revised BV now stands at Rs89.38/sh, calculated on free reserves only. Hence, the minimum counter-offer prices declines from Rs147/sh to Rs89.38h (vs our math of ~Rs85/sh, details on Pg1). Though this appears to be a good move, with other parts of the equation unchanged - minorities can still go aggressive on the RBB, thus stalling the process. Consequently, promoters could then choose to place a counter-offer. Reduced BV only implies the implied premium would look higher on a lower base. HZ’s 2nd call option/ arbitration offers hope on delisting as well as provides ammunition to VED’s minority, unless VED goes for a HZ-VRL ICD. We highlight the promoters could choose to reject the offer and the approval stands valid for one year. Strike ask-rate, implied exit based on bond raise, timelines: VED de-listing requires an 81% strike-rate on ex-promoter, ex-ADR share count in the RBB process (90% threshold). The $3.15b raise isn’t a sacrosanct cap, in our view, and implies an exit rate of Rs135/sh (vs a minimum counter price of now Rs89.3), on complete buyout (including ADR). Adjusted for FX, exit-rate will inch down a bit. On timelines, including a counter-offer, we are looking at 25-30 working days from application to exchange until receipt of funds (Pg2). VED’s recent move to pledge part HZ equity and raise up to Rs150b to refinance NCD / CP’s takes care of its debt maturity profile.
Exceptionals matter more vs operating metrics: EBITDA stood at Rs45.5b, reporting a 26% yoy decline, 21% below InvE. Exceptional items for Q4’20 came in at Rs170b primarily due to impairment of assets at O&G, Copper and IO operations. Post losses, VED’s book value now stands at Rs147/sh (Vs. Rs168/sh). The reverse book build (RBB) process will indicate the price at which the maximum number of shares are tendered by public shareholders. Based on a recent amendment, a promoter can make a counter offer (less than BVPS), if the price discovered under the RBB is not acceptable. No dividends: Post HZL’s Rs16.5/sh dividends, one could expect Rs12.5/sh of dividends for VED minority (as pass-thru) over the year. However, there is no final dividend for VED minority as of now. Our prior note details concerns on pay-outs at VED minority and VED’s dividend distribution policy. HZL is our alpha idea for this quarter. Debt maturity vs. CF: VED’s Net debt stands at Rs210b (Rs56b yoy decline), on the back of a) repayment of debt, b) unwinding of WC partially offset by dividend payment by Cairn India. Net debt/EBITDA stands at 1.05x. Based on debt maturity, VED has debt of Rs91b + Rs34b of CPs due over FY21 (vs. debt maturity of Rs133b/71b in FY22/23). Mgmt. cited comfort on debt re-fi. View on VED: With commodity prices hovering near decadal lows, attractive valuations, and HZL’s potential 2nd call option, Ved promoters have sought a de-listing, an opportunistic move on both valns and timing. We expect RBB derived threshold price will be at a significant premium to the offer price. An unsuccessful delisting will add one more scar to VED’s minority (squeezed multiple); minorities would be better off seeking an exit closer to TP.
Proposed delisting offer: Vedanta Resources Ltd. (VRL), promoter group co. has proposed voluntary delisting of Vedanta India (VED IN) equity shares with delisting offer price of Rs87.5/sh (9.9% premium over prior day close). VED’s promoter holding (including ADS) stands at 50.14% (1863m sh). Why we deem this opportunistic: Rewind to June 2015, when crude prices had slumped and so had Cairn India stock price, then trading at a steep discount to 52-wk high and cairn merger stood proposed. Concerns lingered around its cash being utilized to retire the Twin Star acquisition debt, as well as inherited Vedanta aluminium issues. Eventually, the deal had sweeteners of redeemable preference shares and the transaction sailed through. Come May’20, VED’s stock price reflects the market slump and promoters propose to de-list vs. options such as creeping acquisition, open offer, and pref. allotment. Regulatory road ahead: The Board of directors will: a) consider and approve the Delisting Proposal, and b) seek approval of the shareholders by way of a special resolution, i.e. 75% majority of public shareholders. Also, for the delisting process to be successful, promoters need to acquire a) 90% of entire equity shareholding and b) 25% of the number of public holding shares in demat mode. However, the latter clause has an exception and can be made inapplicable, if the acquirer can demonstrate that all public shareholders were reached out to. Reverse book build, ‘counter-price’: The reverse book build (RBB) process will indicate the price at which the maximum number of shares are tendered by public shareholders. Based on a recent amendment, a promoter/ acquirer can make a counter offer, if the price discovered under the RBB is not acceptable. This has to be done within 2 working days of price discovery and should not be lower than its book value.
Economics of auctions – a function of the angle you look at it from: Odisha has successfully auctioned five mines so far - four designated captive, and one for merchant (captive users may also bid). Of the four captive mines, JSW Steel has won 3 mines with cumulative resources of 1101MT, 12.8MT EC, 7.9MT FY19 annual off-take and paid premiums ranging from 95.2-132%. We believe this is unjustifiably high, based on prevailing IBM notified price and regulations (double taxation, royalty payments for ‘crushed fines’ as if they were ‘lumpy ore’) vs NMDC pricing (~20% premium). While the premiums paid seem expensive; when we use current import parity equation (spot basis), derived auction costing (assuming 100% premium, 62% Fe Lumps) stands at 17-25% discount, which isn't too bad a proposition. We expect mills to challenge existing regulatory subjects, and the gradual shift in the ore market (reduced merchant share) will favour mills with captive mines on back of lower IBM pricing.”. Right law could aid economics: We don't rule out steel mills potentially litigating the 'double taxation' issue; where a successful bidder has to pay royalty, DMF and NMET on IBM notified prices (which already includes above variables). Assuming Rs2500/t IBM base price, and a 100% premium, mills successfully litigating double taxation could enable savings of ~Rs503-585/t (otherwise costing Rs4150/t). In addition, royalty payments on ‘crushed fines’ could be challenged. Based on the quantum of ‘crushed fines’, the savings would vary from mine to mine. Evolving market dynamics to aid economics: We expect merchant prices to reduce on the back of a) increased share of captive mined output hereon - it has already increased to 30% (vs 21% on 2019 Odisha mined output). Hence, as captive reliance on merchant markets reduce, one could expect merchant rates, and consequently, IBM pricing to reduce over time. Other variables, which could pull down merchant pricing, are - b) Based on auction wins so far, JSTL (Ex-Dolvi Expansion) and MT (Erstwhile Essar) are already in surplus on Odisha sourcing. JSP, post favourable Sarda verdict has adequate ore for 12-15months, c) increased output from Serajuddin (which paid a premium), d) Orissa Mining Corporation increasing off-take, d) SAIL monetizing inventory (if possible), d) short term volume contracts by MT, JSTL with merchant miners (from stockpiles) for supplies until April-May, could see mills move away from merchant markets. View, Recommendations: Post successful auctions and stabilization, we expect the merchant market share to reduce, a negative for NMDC. Lower merchant market (consequently lower IBM prices) and potential rectification on double taxation /royalty payments in Odisha will make current high premiums viable in the long run.
VED VEDL ACNV XLRN ACN AXDX AC ARAY AWWC ACCR ACCO ACS AX1 AX8 ACN ACCB ACCON ATSX ACBL AXE ACD ANA ACUN 002281 AXDX ENER ACEL A4Y ATHC ACCB BBVAE ANA ACCON AC ALACI APF ACSO ACC AXS ACRL ABG HDGE ACLN ACCL ACC ACCORD ACCEL EVRM ACCURACY ACCELYA AFS 4813 4395 7042 ACCEL ARB 950130 1283 ACCD AC8 ARAY AEL ACCELSAB ACCESSCO AAC AGL ACCELERA ACUT ACCO AAQC ACC ABTC 2345 AWWC ACCR ACNV ATHC ACEL CAVG ASII ACC ONEC ACEM HZ JSP JKLC JSTL PRSMJ TRCL SRCM STRCEM SAIL SI TATA TATASLPL TSTH UTCEM BBVAI
Zinc India: HZ’s Q3 EBITDA (reported earlier, note) tracked estimates on volumes and COP with marginal deviation on the back of lower premiums. We trimmed FY refined volumes for Zn+Pb, Ag, acknowledging slower ramp-up. With SK and RAM shafts commissioned – we expect higher output from Q1’21E); in addition, mine digitization, and focused approach on grades, should gradually reduce COP. We retain BUY on HZL with TP of Rs267. Zinc international: Disappointed with higher costs, and lower volumes as a result of slower ramp-up at Gamsberg and closure of scorpion. Improvement in recovery rates and grades at Gamsberg were positives. Mgmt. trimmed FY’20 guidance. Oil & Gas: Production nos. yet again missed ests. Surprisingly, despite lower drilled (240) and hooked up (120) wells vs. prior guidance, mgmt. maintains H2’20 exit rate of 225kboepd. Volume ramp up will kick as liquid handling project gets commissioned. On PSC, Mgmt. expects petroleum profit to be extended w/o any changes to sharing ratio, even as final outcome is awaited. Aluminium: Better coal availability, higher alumina production aided sharp reduction in COP, a positive. Revision in RPO reduced COP further. Higher local bauxite sourcing, alumina sourcing from Nalco, could aid COP further. Ore, Steel: Karnataka had record ore output, whereas, mgmt. continues to engage with Goa govt. on resumption of mining. At ESL, steel spread stood at $55/t and co. has acquired FACOR via NCLT to aid steel making oprns. FACOR has 72kt FeCr plant, two chrome ore mines, 100MW PP. Financials, B/S: Adj. for one-offs (RPO, O&G recovery), EBITDA stood at Rs47.8b, in-line with consensus. Net debt incr. qoq by Rs33b qoq to Rs234b. Ex-HZL, net debt stands at Rs429b. We marginally tweak ests and retain TP.
Effective from today, Vedanta Resources (hereafter Vedanta) has been delisted from the London Stock Exchange. Now, the group should be 100%-owned by Volcan Investments – which is controlled by the Agarwal family. As of the last reporting period (i.e. June-ending quarter), Vedanta had total borrowings of $15.9bn, and cash and liquid investments of $5.2bn – of which the majority was held at the Indian subsidiaries.
Vedanta Resources
Volcan Investments – Vedanta Resources’ (hereafter Vedanta or the company) largest shareholder and Anil Agarwal’s family trust – and an Independent Committee of Vedanta’s board have reached an in-principle agreement for a cash offer from Volcan to buyout Vedanta’s free-float shares (33.47%), thereby proposing to delist the Indian natural resources giant from the UK. The offer price of 825p per share (28% premium on 29 June 2018 closing price) values Vedanta at £2.3bn, and would require a cash outlay of £778m. Moreover, the shareholders would also be entitled to a FY2018 dividend of US$0.41 per share – to be paid on 22 August 2018. The following have been stated as the rationale behind the offer: 1/ offer price is attractive, given Vedanta’s recent share price movements and in the context of relevant precedent minority buy-outs in the UK; 2/ cash offer provides certainty to investors; 3/ simplification of group structure, thereby removing a ‘duplicative stock exchange listing’; 4/ given the improving maturity (and depth) of the Indian capital markets, the very purpose of creating Vedanta Resources (to access UK and global capital markets) is no longer as compelling; and 5/ investors can remain invested with the group via its majority-owned (50.1%) and listed Indian subsidiary, i.e. Vedanta Limited. A firm offer has to be made by 30 July 2018. Today, Vedanta’s shares have galloped (c.26%) to 816p per share.
A strong pricing rebound for most commodities has helped the group maintain strong dividend flows across key businesses and, as a result, avert a debt crisis. However, a series of disruptive events could take a near-term toll on India’s commodity appetite and, hence, on Vedanta’s prospects. The recent iron ore mining ban-induced impairments is an added pain.
In 2017, Anil Agarwal (Vedanta Resources’ Chairman) via his family trust, Volcan Investments (Vedanta’s largest shareholder – c.69% stake), acquired a 19.4% stake in Anglo American. The stake was amassed in two tranches during April 2017 and October 2017. The deal structure (details in our latests dated 17 March 2017 and 6 October 2017) was intriguing, with the funding requirements being fulfilled via issuance of mandatory exchangeable bonds. Volcan did, however, securitise c.92m Vedanta Resources (hereafter Vedanta) shares, 34% of the share capital and c.50% of its holding in Vedanta, with JP Morgan – the sole book runner for exchangeable bond issuance. While Volcan eventually emerged as Anglo’s largest shareholder, followed by the Public Investment Corporation (PIC) holding a 13.3% stake (as of 2016 end), Anil Agarwal has been reiterating that the stake purchase is a personal investment and there is no intent to initiate a takeover bid and/or to go for a Board seat. But is there a (bigger) hidden agenda behind his aggressive pursuit of the diversified miner? Current situation latest-_Image_1.jpg" alt="" />
According to the regulatory release filed with the London Stock Exchange on 20 September 2017, Volcan Investments Limited – Vedanta Resources’ largest shareholder (c.70% stake) – announced its intention to invest £1.25-1.5bn in Anglo American’s (Anglo) shares. This would be in addition to its earlier c.£2bn investment in April 2017 – which translated into a 12.43% voting interest (excluding shares for which voting rights have been waived). Similar to the last investment, the transaction would be financed via issuance of mandatory exchangeable bonds (details in our note ‘_Vedanta’s promoters eyeing a (strategic?) stake in Anglo American_’ dated 17 March 2017) – with the issuance again being led by JP Morgan (JPM) as a sole book runner – on or around 10 October 2017 (i.e. the closing date). The bonds would be secured by Anglo’s shares. Volcan has already securitised c.33m shares (12.4% of Vedanta’s share capital) with JPM, thereby increasing the total number of shares securitised to c.92m (34% of share capital, i.e. close to one-half of Volcan’s holding in Vedanta). At yesterday’s (i.e. 5 October 2017) closing price, a £1.25-1.5bn investment should help Volcan garner a 6.0-7.3% incremental stake, thereby increasing its total stake to 18.5-19.7%.
After a strong turnaround in FY17, when Vedanta managed to achieve operating margins of 19% (comparable with the prior year’s) and trimmed its net losses to just $23m (vs. $1.8bn in FY16), even FY18 embarked on a promising note. The continuation of strong commodity markets (particularly zinc: +35% yoy and aluminium: +21% yoy) resulted in Q1 sales coming in at $3.1bn (+32% yoy). Although qoq sales were down 14% due to both subdued volumes (with zinc impacted by an exceptional Q4 FY17, power due to a fire incident, copper on account of (un)planned shutdowns, and iron ore due to early monsoons and temporary stoppage of mining in some areas of Goa) and some pricing normalisation. Similarly, Q1 reported EBITDA was up 48% yoy (but down 28% qoq) to $778m. The company does not report any performance numbers, other than sales and EBITDA, during quarterly (i.e. Q1 and Q3) releases. Borrowings were down 7.7% (vs. FY17 end) to $16.8bn. In August 2017, the group also managed to refinance $1.84bn of borrowings through a mix of bank loans ($840m) and bonds ($1bn). After a wait of close to two years, closure of the Vedanta Limited and Cairn India merger came into effect on 31 March 2017. Now, Vedanta Resources has a 50.1% stake in Vedanta Limited.
This Morning’s News Millennial Lithium (ML CN) Vedanta (VED LN)
This Morning’s News Millennial Lithium (ML CN) Vedanta Resources (VED LN)
Citing personal reasons, Tom Albanese (Vedanta’s CEO) has decided not to extend his contract, which was due to expire on 31 March 2017. Although he will continue to hold the position until 31 August 2017, while his replacement is being identified. Some of the news articles about Tom’s exit also mention that Cynthia Carroll left Vedanta last month. We are surprised since the company never released any official statement regarding her exit, while it did issue a press release when she joined the group back in September 2015. Although the company’s IR (after raising a clarification) did acknowledge that her departure happened in February 2017, as her contract had ended.
Vedanta Resources’ (Vedanta) largest shareholder – Volcan Investments (c.70%), a company owned by the Anil Agarwal (Vedanta’s Chairman) family trust – is reportedly buying shares worth £2bn in Anglo American (Anglo). This development has been confirmed by Vedanta, with the clarification that the group is ‘not’ a participant in the proposed investment. So far there has been no official comment from Anglo. Based on Anglo’s 15 March 2017 closing price, a £2bn investment would translate into a 13% stake.
After two gruesome years (FY15-16), Vedanta Resources’ H1 FY17 performance should finally help calm a lot of nerves. The recovery in profitability across (most) divisions was the key highlight. The top-line remained weak ($4.9bn; -15% yoy; -3.4% hoh), as: 1/ zinc output was still below potential (-37% yoy; -29% hoh); and 2/ yoy average copper and oil prices were down 16% and 18%, respectively. Fading sequential (hoh) pressure was largely attributable to a broader rebound in most commodity prices. Unlike FY16 (H2 in particular), when profitability had slumped to record lows, H1 FY17 witnessed reported operating profits galloping to $720m (+25% yoy; +137% hoh). Source – H1 FY17 Press Release In spite of below par production, zinc continued to generate healthy profitability (65% of group EBIT) as ample cushion came from the strong zinc and silver prices, and a weaker Indian rupee (INR). In the case of power, cost efficiencies and healthy volumes helped more than offset the impact of weaker prices. While improvements in iron ore (driven by mining normalisation at Goa) and oil & gas (facilitated by strong cost controls) continued, aluminium and copper were stable sequentially. Besides cost efficiencies and lower input costs, producer currency depreciation (primarily in the INR) resulted in a >$60m favourable (yoy) impact on profitability. Interest burden ($652m in H1 FY17) remained stubbornly high, while the materially higher stakes of minority shareholders (35% in Hindustan Zinc – HZL) meant that hardly any profits (after interest and taxes) were available to shareholders of Vedanta Resources. Consequently, the group reported an attributable net loss of $64m vs. $325m and $1.5bn (marred by oil & gas impairments) in H1 FY16 and H2 FY16, respectively. As anticipated, extraordinary working capital releases of FY16 reversed (use of $161m in H1 FY17 vs. release of $1bn and $135m in H1 FY16 and H2 FY16, respectively), which along with higher cash tax payments resulted in reported OCFs plummeting to $223m (-87% yoy; -66% hoh). Capex came in at $504m (-8.8% yoy; +58% hoh), while net debt (excluding liquid assets of Cairn and HZL) was marginally higher (+0.8% vs. H2 FY16) at $16bn. The group announced an interim dividend of USc20 per share – after it was suspended in H1 FY16. Besides the operational turnaround, approval for the Carin-Vedanta merger in September 2016 from the two companies’ shareholders was a major milestone. Management targets to close this deal by Q1 CY17.
This Morning’s News Vedanta Resources (VED LN)
This Morning’s News Lonmin (LMI LN) Vedanta Resources (VED LN)
Vedanta Resources Lonmin
After more than a year since the merger between Vedanta Limited and Cairn India was announced in June 2015, Vedanta has finally revised the deal terms. While Cairn’s minority shareholders would still get one share in the merged entity for every share held, the number of redeemable preference shares (@7.5% coupon, 18 months tenure and face value of INR10) has been increased from one to four. As mentioned in the press release, this revised offer translates into a 20% premium over Cairn India’s one month volume weighted average price.
The impact of extreme market difficulties was evident in Vedanta Resources’ FY16 (March-ending) results. While the company achieved record production in most commodities, lower prices (most severe in oil – down 44%) led to a 17% correction in full-year sales to $10.7bn. The impact of pricing pressure was more acute in H2 with the top-line correcting 22%. Similar to other miners, profitability slumped to record lows, with adjusted EBIT of $303m (-57%) and $881m (-49%) in H2 and FY16, respectively. While Oil & Gas losses widened (to $223m in H2 vs. $33m in H1 FY16), all other businesses (except for Copper India and Power, and a feeble recovery in Iron Ore) struggled in varying degrees. Even Zinc, Vedanta’s most profitable business (operating margin of 35%), witnessed a full-year operating profit correction of 21%. Amidst all this mayhem, $325m of annual cost savings were overshadowed. Similar to last year, Oil & Gas assets were further impaired by $4.9bn and, consequentially, attributable net loss came in at $1.8bn (after deducting $1.7bn of minority interest losses) – comparable with the FY15 losses. With the recognition of these losses, Vedanta’s book value of equity (excluding minority interests) has turned negative – to a deficit of $713m. Surprisingly, the board declared a full-year dividend of USc30/share (vs. USc63/share in FY15), which would amount to an $83m cash outflow (o/w $58m would go to the promoter group). Despite abysmal profitability, reported OCFs were down only 4% to $2.4bn – mainly supported by $1.2bn of working capital release vs. $131m in FY15. Even cash outflow on account of capex spend was slashed 62% to $872m. Gross borrowings on 31 March 2016 stood at $16.3bn – down just 2% yoy as the majority of the free cash flows were parked in liquid investments (+8%).
Vedanta Resources (VED LN) has reported weak full year FY 2016 results. The previous announcement demonstrated a mixed operational performance in line with expectations and this was not sufficient to offset weaker commodity prices. Zinc International performance was impacted by the closure at Lisheen as well as maintenance at Skorpion. Meanwhile Zinc India posted moderate increases in zinc and lead production. Aluminium production reached record levels while copper also posted robust gains.
Vedanta Resources’ (VED LN) full year FY 2016 production results were largely in line with expectations and guidance. Attributable oil and gas production of 48mmboe was down 3% YoY due to the natural decline of the offshore assets. Zinc India production of 759kt zinc was up 3% YoY while lead production was up 14% YoY to 145kt due to increased throughput. Silver production meanwhile, was up 30% YoY to record levels of 13.65moz. As expected, Zinc International production was down 27% to 226kt due to the closure of Lisheen, although this was worsened by poor performance at Skorpion post the restart after planned maintenance.
With commodity prices failing to find a bottom, Vedanta’s operating performance has continued to dwindle with Q3 sales falling 27% yoy (and 11% qoq) to $2.4bn. So far, during 9m FY2016, group sales are down 17% to $8.1bn, with the most severe impact emanating from oil & gas – down 46%. Reported Q3 EBITDA is down 51% (and 23% qoq) to $494m while for 9m FY2016 it is down 43% to $1.8bn. Apart from struggling oil & gas (EBITDA collapsing 65% during 9m FY2016), aluminium too has given up most of its operating gains realised in FY2015. At the end of December 2015, total borrowings stood at $16.8bn vs. $16.5bn at the end of September 2015.
VED LN | BLT LN |
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Vedanta Resources’ share of problems have compounded over the past few years. While an indecisive Indian polity had been weighing on the group’s diversified asset base, a worsening commodity price environment (especially for oil) has amplified the issues. As a result, the group’s dismal performance continued in H1 FY2016 as well. H1 sales were down 12% yoy (-11% hoh) to $5.7bn, with the impact of plummeting oil (down 47%) and diminishing metal premia being most severe. In fact, weaker prices completely overshadowed much higher volumes at the zinc, copper, aluminium and power businesses. Profitability erosion has continued with adjusted EBIT coming in at $578m (-44% yoy; -18% qoq). The biggest pain point has been a material erosion of the oil and gas segment profitability – which at one point was the group’s second most profitable business after zinc. Oil and gas reported an operating loss of $33m vs. an operating profit of $333m in H1 FY2015. Additionally, $308m of regulatory costs (o/w $105m were in oil and gas) exerted more pressure. Even $170m of cost savings were dwarfed in the current environment. Further down, a charge of $174m on account of increased taxes in Zambia, ensured that bottom-line pain remained with a net attributable loss of $325m vs. a loss of $13m in H1 15. Despite abysmal profitability, working capital release of $1bn (although driven by a material increase in payables) vs. a use of $347m in H1 15 resulted in OCFs galloping 73% to $1.7bn. At the same time, H1 capex was slashed 51% yoy. Nevertheless, net debt remains at stubbornly high levels of $16bn. Consequently, FY2016 capex has been reduced materially to $700m (vs. an initial guidance of $2bn) and the interim dividend has been suspended with the decision on the final dividend to be taken at the end of FY2016.
Pursuant to the 14 June 2015 announcement of a merger between Vedanta Limited and Cairn India, the market situation has changed markedly, thereby casting doubts on the fate of this deal. According to the terms of the deal, for every share held, Cairn India’s minority shareholders would be entitled to following in the merged entity – 1/ One equity share 2/ One 7.5% redeemable preference share (face value of INR10). Subsequently, Vedanta Limited’s shareholders would own 79.8% of the merged entity, while the residual 20.2% stake would be held by Cairn’s minority shareholders. Given that Vedanta Resources Plc owned a 62.9% stake in Vedanta Limited (prior to the deal announcement), its post-deal stake is estimated to come down to 50.1%. Interestingly, close to the announcement of this deal, Vedanta Limited’s and Cairn India’s share prices were trading at INR184 and INR179, respectively. However, as of today, the differential between the two stocks has increased materially, with Vedanta Limited trading at a 29% discount to Cairn India’s share price. Such a staggering difference highlights the economic disadvantage to Cairn India’s minority shareholders – based on the proposed deal terms.
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