Vedanta VED S
August 27, 2013 - 2:02pm EST by
value_31
2013 2014
Price: 12.00 EPS $1.33 $0.91
Shares Out. (in M): 267 P/E 14.0x 21.0x
Market Cap (in $M): 5,025 P/FCF 0.0x 0.0x
Net Debt (in $M): 8,961 EBIT 2,816 3,144
TEV ($): 13,986 TEV/EBIT 13.0x 10.0x
Borrow Cost: NA

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  • Commodity exposure
  • Holding Company
  • Premium to NAV
  • Mining

Description

There are a number of charts and tables in the write-up that don't translate well to the VIC format so a formatted copy of the full write-up is available here: https://www.dropbox.com/s/doj12z2zh2bqsvs/Vedanta%20Write-Up.pdf
 
A summary of the Thesis and Situation is provided below (however there is much more data, background and other information available in the full write-up if you follow the link above). 
 

1. THESIS

Vedanta currently trades at a material premium to the value of its (predominantly publicly listed) assets.  Vedanta’s financial leverage makes it reliant on dividend receipts from (less than 100% owned) subsidiaries (which also have material financial leverage) to service its high debt load.  A moderate decline in either commodity prices (zinc, copper, iron ore, aluminium or oil) or the ability to repatriate capital from India (most of the assets are in India) will result in a material impairment to Vedanta’s valuation (equity and potentially credit impairment). 

Two potential trades to exploit the current mispricing in Vedanta:

  1. Outright short Vedanta (equity or credit)
  2. Short Vedanta (holding company listed on London Stock Exchange) / Long Sesa-Sterlite (operating company listed in India with US ADRs) to exploit the equity market valuation differential that has opened up recently as a result of the market sell-off of Indian equities which has not been reflected in the London listed Vedanta (Vedanta equity has thus far escaped the Indian equity sell-down despite having the large majority of its assets located in India and listed on the Indian stock exchange)


2. INVESTMENT / SITUATION SUMMARY

  • Vedanta Plc. (“Vedanta”) is a holding company with no operating assets.  Vedanta’s only assets are[1]:
    1. a 58.3% shareholding in (publicly listed) Sesa-Sterlite (valued at US$4.4bn[2]);  and
    2. a 79.4% shareholding in (non-publicly listed) Konkola Copper (estimated value US$0.6bn to US$1.4bn)
  • Vedanta’s Total Asset value is US$5.0bn to US$5.8bn
  • Vedanta (holding company) has pro-forma net debt of US$3.2bn[3] resulting in Total Equity Value of US$1.8bn to US$2.6bn
  • Vedanta’s current market valuation (LSE listed) is US$5.0bn[4], or a 96% to 187% premium to Vedanta’s Total Equity Value (of US$1.8bn to US$2.6bn)
  • Vedanta’s assets are in the (cyclical and volatile) mining (zinc, copper, iron ore, aluminium) and oil & gas industries and are predominantly located in India (India is currently suffering material capital outflows, currency depreciation and sovereign credit de-rating)
  • Compounding the underlying volatility of its asset portfolio Vedanta is highly leveraged.  The holding company has US$6.4bn of gross external debt outstanding (bank debt and bonds).  The Loan-To-Value of Vedanta’s (holding company) debt vs. asset value is 71% to 78%
  • Vedanta (holding company) relies on dividends from its operating subsidiaries to service its US$6.4bn debt load (Vedanta owns less than 100% and therefore is limited in its ability to repatriate cash flows to the holding company).  Any impairment in the on-going access to this dividend stream will cause financial distress at Vedanta (holding company) as it will be unable to service its external debt.  Specific issues to consider:
    • Both of Vedanta’s operating subsidiaries have material financial leverage;
    • Commodity price falls have reduced earnings / cash flow at operating subsidiaries;
    • A variety of regulatory issues have impaired operational performance.  For example: 
      • a ban on Iron Ore mining has reduced the Group’s iron ore sales to zero[5]
      • inability of the Group to secure bauxite mining licenses has materially impacted profitability of its Alumina/Aluminium operations[6]
      • environmental concerns resulted in the closure of the Group’s copper smelter[7]
    • Sesa-Sterlite (India) has upcoming debt maturities and requires on-going access to capital markets to refinance debt. This has become more challenging in the current market environment in light of the current issues in India;
    • Ability to repatriate capital from India could become more challenging going forward (there has been talk of potential capital controls to address capital outflows and a rapidly depreciating currency[8]


Vedanta: Asset Value, Market Value & Leverage

VEDANTA: ASSET VALUE Low High
(A) Sesa-Sterlite (US$) $4.4bn  $4.4bn
(B) Konkola Copper (US$)(1) $0.6bn $1.4bn
Total Asset Value (US$) $5.0bn $5.8bn
Net Debt (US$)(2) ($3.2bn) ($3.2bn)
Total Equity Value (US$) $1.8bn $2.6bn 
     
VEDANTA :EQUITY VS. MARKET VALUE    
Equity Value (US$) $1.8bn $2.6bn
Current Market Value (US$) $5.0bn $5.0bn
Market Value Premium vs. Total Equity Value 187%  96%
     
VEDANTA: LOAN TO VALUE    
Vedanta: Net Debt (US$)(3) $6.4bn $6.4bn
Vedanta: Total Asset Value (US$)(4) $8.1bn $8.9bn
Vedanta: Loan-To-Value 78% 71%
 

Vedanta: Subsidiaries' Financial Leverage

KONKOLA COPPER (79.4% O/SHIP)  
* Copper mining operations in Zambia  
   
LTM EBITDA (US$M) $257
Total Debt / LTM EBITDA 3.0x
Net Debt / LTM EBITDA 2.9x
   
SESA-STERLITE (58.3% O/SHIP)  
* Portfolio of metals and mining assets  
   
LTM EBITDA (US$M)(5) $1,850
Total Debt / LTM EBITDA(5) 5.1x
Net Debt / LTM EBITDA(5) 3.5x
 

Notes to tables above:

(1)     Equity value based on 6.0x – 10.0x EV/LTM EBITDA and Net Debt at 31-Mar-2013 (more details in section 6 – “Valuation” – of the full write-up)

(2)     Vedanta (holding company) net debt at 31-Mar-13 adjusted for: (i) Debt transferred to Sesa-Sterlite as part of group reorganization; and (ii) Intercompany receivable from Sesa-Sterlite created as part of the Group reorganization.  Both adjustments described in section 5 – “Financial Leverage Post Reorganization” of the full write-up

(3)     Represents Vedanta (holding company) pro-forma external debt outstanding.  Calculated as net debt (per note (2) above) excluding intercompany-receivable from Sesa-Sterlite.  The Intercompany-receivable is treated as a Vedanta asset in the LTV calculation (as this calculation reflects external debt relative to Vedanta’s (holding company) total assets)

(4)     Calculated as the (i) market value of Sesa-Sterlite; plus (ii) estimated value of Konkola Copper (calculated as 6-10x EBITDA per note (1) above); plus (iii) Inter-company receivable from Sesa-Sterlite (per note (3) above)

(5)     Based on proportional consolidated Debt and EBITDA (see sections 4 and 5 of the full write-up for more details on calculation of proportional EBITDA and proportional debt and why this is an appropriate representation of Vedanta’s economic interest in this asset portfolio)

 
 


[1]Post business reorganization which became effective on  26 August 2013 (per company announcement dated 19 August 2013) 

[2]Market value as at 27 August 2013

[3] US$9.0bn of Debt at 31 March 2013, adjusted for (i) debt transferred to subsidiaries as part of the business reorganization (US$2.6bn) and (ii) an inter-company receivable due to Vedanta from Sesa-Sterlite which will be created as part of the business reorganization (US$3.1bn)

[4] Market value as at 27 August 2013

[5] http://articles.economictimes.indiatimes.com/2013-08-23/news/41440754_1_iron-ore-glenn-kalavampara-goa-mineral-ore-exporters and more generally http://en.wikipedia.org/wiki/Mining_scams_in_India

[6] http://www.livemint.com/Companies/ZNlmBdg6rur3VOR7UvAmFN/Villages-reject-Vedantas-proposal-to-mine-bauxite.html

[7] http://www.moneycontrol.com/news/business/sterlites-smelter-woes-tribunal-orders-health-panel-probe_932492.html

[8] http://blogs.wsj.com/economics/2013/08/22/fears-of-capital-controls-rise-as-indian-rupee-falls/

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 Over time the valuation of Vedanta and Sesa-Sterlite should converge.  However, there are a number of catalysts that could cause this to occure rapidly which are described in more detail in the full write-up.  
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