Vedanta shares plunge to a fresh 52-week low after the company disclosed that it is investing $500 million to buy an economic interest in a structured investment in Anglo American from promoter holding company Volcan
Vedanta shares plunged nearly 20 percent to hit a fresh 52-week low as, though the December-quarter numbers were mostly inline with estimates, the Street was taken aback by Vedanta's cash allocation. The company disclosed that it has paid $200 million towards purchase of an economic interest in a structured investment in Anglo American Plc from its parent, Volcan Investments Ltd. The company will be investing an additional $300 million over the next 20 months in this structure.
Vedanta shares slumped as much as 19.8 percent intraday to Rs 158.35 per share on the BSE. The stock was the biggest loser on both the indices. At 9.57 AM, the Vedanta stock traded at Rs 165.05 per share, down 17.95 percent from its previous close, while the benchmark Sensex traded 0.33 percent up at 36,375.69 points.
"Vedanta’s returns on this investment would depend on Anglo’s stock performance, while underlying shares and voting interests would remain with Volcan. The use of Vedanta’s cash to fund investments for promoter holding company raises concerns of related party transactions as well as potential use of cash in the future," noted CLSA.
CLSA downgraded the stock to 'sell' from 'buy' and slashed the target price to Rs 170 per share from Rs 250 per share, saying that the related party transaction not only raises concerns on use of cash but these concerns are likely to drag down Vedanta’s valuations as well.
Macquarie has lowered its multiple as they have cut the standalone EV/EBITDA multiple by 20% from 6x to 4.8x FY20E. The brokerage maintain 'Outperform' rating on the stock, but cut the TP by 14% to Rs 223. Additionally, they have trimmed FY19 volume guidance for Oil and Zinc International division post managements comments.
BofA Merrill Lynch has also reduced the TP to Rs 200 per shares from Rs 223 per share. "Instead of going for related-party investment they could have gone for other alternatives like deleveraging, shareholder returns - which we believe are more beneficial for shareholders," it added.
Vedanta on Thursday reported a 25.54 percent fall in its consolidated net profit at Rs 1,574 crore for the December 2018 quarter, on the back of higher expenses and drop in commodity prices. It had posted a consolidated net profit of Rs 2,114 crore in the year ago quarter.