Lanjigarh Train 2 And BALCO Expansion Will Advance Operations

Key Takeaways

• Expansion of aluminum production and resource integration will boost revenue and margins through increased capacity and reduced costs.
  
• Strategic demerger and debt reduction efforts aim to enhance financial stability, unlock long-term value, and improve earnings.
  
• Delays in projects, high net debt, and global volatility threaten Vedanta's operational flexibility, cost efficiency, and revenue, especially with U.S. tariffs impacting sales.

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.

• The commissioning of Lanjigarh Refinery Train-2 and the expansion of the BALCO smelter will significantly boost aluminum production capacity, potentially increasing revenue through higher output and enhanced asset utilization.
  
• The ramp-up of the Sijimali bauxite mine and new coal mines will enhance backward integration and reduce raw material costs for aluminum production, improving net margins by decreasing reliance on external suppliers.
  
• The demerger plans to create pure-play entities aim to enhance strategic focus and operational flexibility, potentially unlocking long-term value and positively impacting earnings through improved asset management.
  
• Continued ramp-up and optimization at Konkona copper mine and exploration opportunities in oil and gas fields, including OALP blocks, are expected to bolster production volumes, directly influencing revenue growth and operational cash flow.
  
• The focus on reducing net debt and improving the debt-to-EBITDA ratio through proactive financial management and deleveraging is expected to improve financial stability, leading to enhanced earnings through reduced interest expenses.

Vedanta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vedanta's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 14.4% in 3 years time.
• Analysts expect earnings to reach ₹272.1 billion (and earnings per share of ₹66.87) by about May 2028, up from ₹128.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹191.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from 12.7x today. This future PE is lower than the current PE for the US Metals and Mining industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 5.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.99%, as per the Simply Wall St company report.

Vedanta Future Earnings Per Share Growth

Risks

• The demerger process requires transferring mining leases, which could face delays or complications, potentially affecting operational flexibility and future revenue streams if not completed by the target of September 2025.
  
• The potential delays in commissioning critical projects like the Lanjigarh refinery and coal mines might hinder volume growth and cost reduction efforts, impacting future operational performance and earnings.
  
• The company's significant reliance on domestic and imported bauxite sources poses a risk, as uncertainties in sourcing can lead to higher alumina production costs, adversely affecting net margins.
  
• Global economic volatility and announced U.S. tariffs could disrupt international market conditions, negatively impacting commodity pricing and leading to decreased revenues, specifically in non-domestic sales streams of zinc and aluminum.
  
• The high net debt levels at Vedanta Limited and its parent company, despite efforts to reduce leverage, may strain financial flexibility, especially if global market conditions affect revenue, which could result in elevated interest costs impacting net earnings.

Valuation

• The analysts have a consensus price target of ₹524.867 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 ₹663.0, and the most bearish reporting a price target of just ₹445.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹1888.9 billion, earnings will come to ₹272.1 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹419.2, the analyst price target of ₹524.87 is 20.1% higher.
  
• 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.