Vedanta shares fall 2% on weak Q1 earnings; Citi downgrades metal major to sell

Vedanta posted a 40 percent YoY drop in consolidated net profit for April-June whereas revenue also fell 13 percent on year to Rs 33,342 crore.

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Shares of Vedanta slid 2 percent on July 24 as downgrades chased the metal major after Q1 FY24 earnings disappointed investors. At 9:25 am, shares of the company were trading 1.7 percent lower at Rs 273.5 on the BSE.

The metal major posted a 40 percent YoY drop in consolidated net profit for April-June on July 21 at Rs 2,640 crore. In the same quarter last year, the company had reported a consolidated profit of Rs 4,421 crore. The decline was mainly because weaker commodity prices weighed on various segments, particularly zinc and aluminium. Besides, Vedanta also reported one-time gain of Rs 1,780 crore in this quarter.

Revenue also fell 13 percent on year to Rs 33,342 crore.

Revenue was adversely impacted by the reduction in commodity prices and lower volumes, which was partially offset by higher premiums and favourable exchange rate movement, according to Motilal Oswal Financial Services. The brokerage firm has reiterated its ‘neutral’ rating on shares of Vedanta with a target price of Rs 280.

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Meanwhile, the company has estimated a capex of $1.7 billion for FY24, which is higher than $1.2 billion in FY23.

Citi downgraded its recommendation to ‘sell’, while slashing its target price on the stock to Rs 225. It believes that the sale of proposed semiconductors and display business from Vedanta Resources is hurting the company’s leverage.

Vedanta and electronics manufacturing giant Foxconn on July 10 called off their joint venture, which planned to invest $19.5 billion to set up a semiconductor manufacturing unit in Gujarat. However, Vedanta said that it plans to go ahead with its semiconductor business venture despite Foxconn pulling out of the JV. It is even awaiting the government’s approval to begin work on semiconductor, display fabs plant.

Further, dividend upstreaming in excess of inflows from Hindustan Zinc and brand fee to Vedanta Resources is another negative, Citi pointed out.

Read more | Vedanta to begin semiconductor plant after govt approval for revised plan

Besides, Vedanta’s net debt, excluding Hindustan Zinc, increased by 37 percent QoQ to Rs 595.7 billion due to higher dividend payment. With lower cash generation, the metal major has to take external debt to finance its parent’s debt by way of dividend.

With the rising debt, Nuvama Institutional Equities believes risk-reward is not favourable, which has prompted the brokerage firm to downgrade its rating on the stock to ‘reduce’ from ‘buy’ with a target price of Rs 249 against Rs 367 earlier.

“We do appreciate management’s commitment to repay VRL’s (Vedanta Resources) debt, but it affects VEDL’s (Vedanta) minority shareholders adversely,” said Nuvama Institutional Equities.

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