Vedanta: 120-130 May Be A Big Hurdle As Recent Commodity Rally May Not Be Sustainable Amid Deteriorating Debt Profile

Trading Idea: VEDL

CMP: 117

Sell either around 118-122 OR on rise around 130-135

TGT: 112*-105-94*-84-76-65-58*-45

TSL> 125 OR >140

Note: Consecutive closing (3 days) above 140 zone for any reason, VEDL may further rally up to 150*-158-168-181* & 196-220 in the near to long term (alternative bullish case scenario from the present trading level).

VEDL already rallied by around 100% from its recent low amid improving outlook for the commodity cycle and lower input costs.

But, going forward, the recent rally in various commodities has not changed the basic demand supply dynamics on the physical market and in reality this rally may be a result of excessive speculation and position sizing (short squeeze) and China credit concern may be a hang over in the months ahead.

VEDL has huge debt of around Rs.71356.56 cr as on March'16 and its average EBITDA for the last three years is around Rs.18792.65 cr. and interest liability of around Rs.5485.89 cr.; i.e around 30% of its EBITDA is being used for interest payment alone.

Despite possibility of use of Cairn's cash in book for its debt repayment (subject to various approval even after merger), VEDL is highly leveraged. Any significant downturn in commodity prices may affect its debt profile in the coming days.

For VEDL (Consolidated): Taking into core operating EPS (EBITDA/share) as normal EPS are in negative amid various exceptional items & other income.

Q4FY16 TTM EPS : 49.14 (FY:16/Actual)

Projected FWD EPS: 54.15-62.26-71.60 (FY:17-19/Estimated, if there is further commodity rally; otherwise there may be 5% contraction in EPS instead of assumed 15% CAGR)

Average PE: 2 (Considering the EBITDA EPS, debt profile and present outlook of the metal/natural resources sector)

Fair Value:98 (FY:16/TTM)

Projected fair value: 108-125-145 (FY:17-19/FWD)

FY 16 BVPS: 132.46

Average PB: 0.75

Fair Value: 99 

As par BG metrics and current market volatility:

Present median value may be around: 105 (FY:16/TTM)

Projected fair value might be around: 110-115-125 (FY:17-19/FWD)

 

VEDL	EPS	BV	P/E	Low	High	Median	200-DEMA	10-DEMA
Q4FY16/TTM	49.14	132.46	2	101.88	103.46	102.67	105.62	108.91
FY17/FWD	54.15	119.85	2	106.95	108.60	107.78	105.62	108.91
FY18/FWD	62.26	124.55	2	114.68	116.45	115.57	105.62	108.91
FY19/FWD	71.6	143.25	2	122.98	124.88	123.93	105.62	108.91

Analytical Charts: