Vedanta shares jump following rally in global commodity prices

NEW DELHI: Shares of Vedanta surged 11.58 per cent to close the day at Rs 103.6 on Friday following a recovery in copper, aluminium and zinc prices globally after minutes of the Fed’s September 16-17 policy review showed the US policymakers were concerned over the slowing world economy, even though they did not rule out a rate hike in 2015.

LME copper rose 0.9 per cent to $5,183 a tonne while aluminium and zinc gained between half a per cent and one per cent.

“Nothing has changed on the ground in terms of demand and supply, which should be driving these commodity prices. At best you can point to the fact that you had pretty bad jobs data in the US, which has pretty much spread across markets that the liftoff is still very uncertain. To that extent, it is a more liquidity-driven sentiment and has nothing to do with any change in underlying demand or supply. I would think this would be shortlived,” said Pramod Gubbi, VP-Institutional Equities, Ambit Capital.

Goldman Sachs commodities team has cut its forecasts for zinc LME prices by up to 29 per cent for CY15E-CY17E, mainly on weak demand and cost deflation.

“We believe the recent weakness in the three key commodities that Vedanta is exposed to (zinc, crude oil and aluminium) has already been priced in. In our analysis, the current stock price builds in 15 per cent lower zinc/aluminium prices versus our new base case,” the foreign brokerage said in a note.

While the brokerage has cut the target price for the stock to Rs 135 from Rs 192 citing lower zinc prices and lower valuations for Cairn, it believes the risk-reward is favourable as the stock is trading at an attractive valuation at FY17E attributable EV/Ebitda and P/B of 5.1 times and 0.5 times, respectively.

This is against the miners’ average of 7.2 times (EV/Ebitda) and 1.0 times (P/B) globally, it said. The brokerage believes the forthcoming mining auctions could be a catalyst for the stock.

“If Vedanta wins bauxite mines under the new Mining Act, it would help revive the Lanjigarh refinery/VAL smelter projects. Vedanta has spent close to $0.7bn/$2.1 billion in these two projects,” it said.

Meanwhile, commodities giant Glencore said on Friday it would cut 500,000 tonnes of zinc production, or around 4 per cent of global supply, in its latest move to withstand weak commodities prices, said a Reuters report.