Vedanta raises guidance on hopes of merger with Cairn

Industry: Oil and Gas 2016-08-25

MUMBAI: Things seem to be falling in place for Vedanta group, India’s largest mining conglomerate. After the bounce back in commodity prices, especially base metals, the Cairn-Vedanta merger too, should happen smoothly , the management told ET. The merger is expected to reduce debt on Vedanta’s balance sheet and improve cash flows.This and higher commodity prices, as compared to a year ago level, have prompted the company to raise production and capital expenditure guidance across vertical.

All this should auger well for the company’s share price, which has gained 140% in the past six months but still has some steam left, according to the analysts.

Vedanta shareholders will be benefited from the cash-rich balance sheet of Cairn while Cairn shareholders will hold a more diversified portfolio of metals apart from crude oil assets.Besides, with a higher number of shares in Vedanta, the liquidity too should improve.

Year-to-date, the aluminum price is up 13%, Zinc 49%, and crude 15%.Vedanta and its subsidiary Hindustan ZincBSE 0.15 % will be ramping up production. According to the management, demand for aluminium in India is growing at 12% and export is growing at 13%. The company will participate in the auctioning of bauxite mines.

Last year, Cairn IndiaBSE -0.63 % had cut down its capex. But, with the rebound in oil prices, it will be investing in developing a gas project and production enhancement at two of its oil projects.The company is in talks with ONGCBSE 0.60 % for a joint venture, the details of which it did not share. All these projects will have an IRR of 16% to 18% assuming $50 a barrel price.

“Any ramp up in production will be taken positively . A rise in production along with higher crude oil prices will improve the earnings of the company,” said Sumeet Pokharna, oil sector analyst with Kotak securities. “But we believe the merger may not be as positive for Cairn shareholders as much as it is for Vedanta shareholders as the cash flows from the oil business will go into repaying Vedanta’s debt,” he added.

On the other hand, analysts tracking Vedanta see the merger as a big positive for the company . Large brokerages such as CLSA and Macquire have given a `buy’ rating on the stock in their recent reports. “This is led by no holding-company discount and higher valuation of Cairn India,” said Sumangal Nivetia of Macquire.

The CLSA report said that Vedanta should report a sharp improvement in operating performance in the balance of FY17 as prices of Vedanta’s key commodities bottomed in early 2016 and have recovered in recent months, with fundamentals improving particularly for zinc.