Tactical Renewables Partnership And Expanded Refinery Capacity Boost Future Profitability

Key Takeaways

• Strategic partnerships and capital projects could reduce costs and enhance margins, supporting revenue and profitability growth across Vedanta's operations.
  
• The demerger process targets value creation by unlocking potential and improving leverage through focused business units.
  
• Reliance on coal and alumina, regulatory issues, and market competition could challenge Vedanta's operational stability, market share, and profit margins.

Catalysts

A diversified natural resources company, explores, extracts, and processes minerals, and oil and gas in India, Europe, China, the United States, Mexico, and internationally.

• Vedanta's strategic partnership with Serentica Renewables for massive renewable energy projects could lead to reduced energy costs across its operations, potentially enhancing future net margins.
  
• The ongoing ramp-up of the Lanjigarh alumina refinery and upcoming commissioning of additional refinery capacity is set to increase Vedanta's self-sufficiency in alumina, which may help lower the cost of production and positively impact earnings.
  
• Vedanta's aluminum and zinc businesses, being in top cost quartile and decile positions respectively, are well positioned to benefit from operational efficiencies and volume growth, potentially increasing future revenue and earnings.
  
• The planned capital projects such as BALCO smelter expansion and zinc production enhancements are likely to drive capacity increases, supporting revenue growth and profitability over the next few fiscal years.
  
• The demerger process aiming for completion by FY '25 is expected to create value by unlocking potential in strategic areas of business, enhancing future valuations, and improving leverage metrics through focused business units.

Vedanta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vedanta's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 15.3% in 3 years time.
• Analysts expect earnings to reach ₹270.9 billion (and earnings per share of ₹50.07) by about November 2027, up from ₹52.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2027 earnings, down from 34.3x today. This future PE is lower than the current PE for the US Metals and Mining industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 11.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.62%, as per the Simply Wall St company report.

Vedanta Future Earnings Per Share Growth

Risks

• The company's reliance on coal and alumina as key inputs for its aluminum business could pose a risk, especially with the fluctuations in alumina prices and potential delays in coal block operations, potentially impacting production costs and net margins.
  
• The iron ore business faced production issues due to regulatory and weather-related disruptions, which could affect future revenue forecasts and operational stability.
  
• The Entry of new players or the expansion of existing competitors in the zinc and aluminum markets could challenge Vedanta’s market share, impacting revenue growth and profit margins.
  
• Delays in environmental clearances and regulatory approvals for new projects or expansions, such as the coal blocks and aluminum refinery capacity, could impact the planned increase in production capacities, affecting future earnings.
  
• The ongoing geopolitical and supply chain uncertainties, particularly related to global bauxite sourcing, could increase procurement costs and operational risks, which may squeeze profit margins in the aluminum segment.

Valuation

• The analysts have a consensus price target of ₹503.6 for Vedanta based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹600.0, and the most bearish reporting a price target of just ₹390.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹1772.2 billion, earnings will come to ₹270.9 billion, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 15.6%.
  
• Given the current share price of ₹457.9, the analyst's price target of ₹503.6 is 9.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.