Vedanta Resources (LSE: VED), rated a BUY by Deutsche Bank
In many respects India is a better home for investors’ money than China, where business practices are opaque and firms often lack corporate governance. And as a democracy, it is less prone to sudden U-turns on policy. India’s young population, half of whom are aged under 25, should also help propel GDP forward over the coming decades. One way of exploiting this secular trend is via the country’s indigenous minerals champion, Vedanta Resources.
The firm owns extensive copper, zinc, iron ore and aluminium assets in India, Zambia and Australia, and power generation interests across Asia. It has also just received final clearance to purchase a 58.5% stake in Cairn India for $9bn. That launches the group into onshore oil production and potentially increases output by 40% a year over the next two years.
For contrarians, the stock is cheap too, having fallen by more than 60% since reaching a high of £29.34 in 2010. If central banks decide to print money again, they could trigger a sharp devaluation in all major fiat currencies versus physical assets. Within this inflationary scenario, Vedanta could prove a very shrewd store of value.
Deutsche Bank is pencilling in revenues and earnings per share (EPS) of $17bn and $5 respectively for the year ending March 2012. On this basis, I would rate the stock on a through-cycle EBITDA multiple of seven. After adjusting for minorities and pro forma net borrowings of $11bn, that suggests an intrinsic worth of more than £15 a share.
Commodities are volatile and hence not everyone’s cup of tea. Moreover, the board acknowledges that the corporate structure needs to be simplified – as much to release cash held in subsidiaries and reduce debt as to improve transparency. Also note that, after spending around £36m buying shares, the company’s billionaire founder, Anil Agarwal, now owns a controlling 63% stake.
Vedanta owns some high-quality assets and is ideally placed to benefit from India’s growth and its shortage of power, oil and natural resources. Look out for second-quarter production figures that should have been released by the time this issue is published. Deutsche Bank has a target price of £21.50.
Rating: Buy at £10.26
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.