A fall of more than 20 per cent in valuation and the merger of its cash-rich subsidiary Cairn India with itself has made analysts bullish on the counter.A fall of more than 20 per cent in valuation and the merger of its cash-rich subsidiary Cairn India with itself has made analysts bullish on the counter.
Global commodity prices have been under pressure for some time. The turmoil arising out of the sharp fall in the Chinese stock market has only severed the situation. Naturally, companies in the commodity business have been at the receiving end. For instance, in the past one month, Vedanta has seen its stock plummet by more than 20 per cent.

Though weak commodity prices will continue to be an overhang on this counter, investors should not ignore positive developments in the company, most importantly, the merger of its cash-rich subsidiary, Cairn India, with itself. The boards of Vedanta and Cairn India have already approved the merger and the entire process is expected to be completed by end of 2015-16. This merger is will increase Vedanta’s earnings per share. Also, Cairn India, as of March 2015, had a cash balance of more than Rs. 16,000 crore, and this merger will help reduce the debt on Vedanta’s balance sheet.

The share price fall in Cairn, due to the fall in crude prices, is also working out in favour of Vedanta and it will have to issue less number of preference shares to Cairn shareholders.

With a price crash and fall in valuation, Vedanta is an attractive buy

This merger will simplify the group structure further and, therefore, is consistent with the stated strategy of Vedanta Group. It will also result in a diversified portfolio of metals and minerals and help Vedanta reduce earnings volatility and have stable cash flows. Since each commodity usually moves in a separate cycle, a centralised structure will help Vedanta allocate capital to the highest-return projects across the portfolio. In addition to the merger, organic growth is also picking up. Vedanta is increasing its production of zinc and aluminium businesses and is also ramping up its power business.

With a price crash and fall in valuation, Vedanta is an attractive buy

After the recent 20 per cent cut in price, analysts are getting bullish on the counter mostly because of favourable valuations. For instance, Vedanta holds 64.92 per cent in Hindustan Zinc and its market value works out to be Rs. 43,000 crore, higher than the current market capitalisation of the Vedanta Group, which is valued at just Rs. 42,000. Possible triggers for the counter are the acquisition of the central government’s stake in Hindustan Zinc, winning bauxite mines in auction and completion of the proposed Cairn India merger.

With a price crash and fall in valuation, Vedanta is an attractive buy

Selection Methodology: We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.