15 June 2015
Update | Sector: Metals:
Vedanta
BSE Sensex
26,425
S&P CNX
7,983
CMP: INR184
TP: INR209 (+14%)
Neutral
Vedanta-Cairn merger:win-win for both
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val.INRm/Vol‘000
Capital structure improves; Target price cut 2% to INR209
VEDL IN
2964.8
315/176
-14/-12/-40
545.5
8.6
1641/6569
40.5
Vedanta-Cairn merger announced
Vedanta Limited (VEDL) and Cairn India (CAIR) announced the merger between
the two. Under the scheme for each equity share held, the minority
shareholders of CAIR will receive (a) one equity share of VEDL and (b) one 7.5%
redeemable preference shares (RPS) in VEDL with a face value of INR10, which
will be redeemable at par after 18 months. The transaction will require approval
of majority of the minority shareholders (VEDL cannot vote in CAIR), and other
regulatory approvals (Exhibit 4). The transaction is expected to be closed in
1QCY2016 (Exhibit 3). Shareholding of Vedanta PLC in VEDL would fall to 50.1%
from 62.9% pre-merger (Exhibit 5). The merger of wholly owned foreign
subsidiaries i.e. Bloom (and its step down subsidiaries such as TSML which hold
debt pertaining to acquisition of CAIR) will be considered at later stage.
Free float (%)
Financial Snapshot (INR b)
Y/E MARCH
2015 2016E 2017E
Sales
EBITDA
NP
Adj. EPS (INR)
EPS Gr (%)
BV/Sh. (INR)
P/E (x)
P/BV
EV/EBITDA
RoE (%)
RoCE (%)
737.6 761.0 846.8
159.5 160.8 179.8
60.2
20.3
-20.3
9.1
1.0
6.5
17.2
9.9
64.0
17.2
65.7
17.7
Material improvement in capital structure; win-win for both
The transaction materially improves the fungible flows of cash/debt across
diversified set of commodities. Net Debt to EBITDA will improve from 14.2x
earlier to 4.6x among the fungible cash flow businesses (Exhibit 6). CAIR
shareholders will now get additional exposure to low cost high quality
diversified set of metals and power business thereby reducing the risk to single
commodity. Accumulated cash on CAIR’s balance sheet will now yield better
returns. There will be no more need for VEDL to service interest payments
through dividend from subsidiaries. The merger will help in optimizing the
capital structure of group and reducing cost of funding. The merger is a win-win
for the shareholders of both VEDL and CAIR, in our view. A pure oil play investor
would have rather liked the deployment of CAIR’s capital in organic/inorganic
growth. However, we do not see risk to either organic or inorganic growth of oil
business. Our sum-of-the-parts valuation (SOTP) will adjust marginally to
INR209/share (from INR213). The book value will increase from INR147 to
INR179, EPS will dilute from INR17.8 to INR17.7 and RoE will dilute from 12.7%
to 10.2% for FY17E (Exhibit 7).
0.3 -13.0
10.7
1.0
6.9
11.9
9.6
10.4
1.0
5.8
10.2
11.0
121.7 168.3 179.0
Shareholding pattern (%)
As on
Mar-15 Dec-14 Mar-14
Promoter
59.5
59.5
55.0
DII
FII
Others
5.7
24.8
10.0
5.8
24.5
10.1
7.5
26.4
11.2
FII Includes depository receipts
Stock Performance (1-year)
Vedanta
Sensex - Rebased
350
300
250
200
150
Maintain Neutral
We believe VEDL has high quality assets of zinc, lead, silver, copper TCRC,
aluminum, oil, iron ore and power spread across India. VEDL also owns small
copper mines in Australia and zinc lead assets in Africa and Lisheen. Our SOTP
of INR209 factors metal prices (Ali of USD2000/t, Zinc USD2200/t and crude oil
of USD70/bbl, full assumptions in Exhibit 22)) and implies upside of 14%. If we
were to value on spot commodity prices, our SOTP would fall to INR163. We
maintain
Neutral
rating on the stock, in view of weak commodity prices.
Sanjay Jain
(SanjayJain@motilaloswal.com); +91 22 3982 5412
Harshad Borawake
(HarshadBorawake@MotilalOswal.com) /
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com)
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.