Stock of the day 06/10/2015 – Vedanta Resources PLC

It an already struggling sector Vedanta Resources has been having a tough time of it lately.

Can its Q2 2016 earnings release on Friday produce some good news?

At this point the key reasons behind Vedanta’s 2015 troubles hardly need explaining: the global commodity price slump combined, more recently, with the rusting great machine that is the Chinese economy. Yet unlike the heart-stopping drop seen by the stock (and, indeed, all commodity stocks) in the second half of 2014, 2015 has been a far choppier year for Vedanta.

After starting 2015 at £5.74, the miner swiftly fell to a 7 year low of £3.54 by the beginning of February following a Q3 production release at the end of January that saw Vedanta’s EBITDA fall 11%to $1.02 billion, with the company promising ‘hundreds of millions of dollars’ in spending cuts in the wake of this news.


(Source: IT-Finance.com 06/10/2015)

As commodities recovered the stock managed to climb to £6 across the rest of February and the start of March, only to fall back to £4.40 by the middle of the latter month. Continuing its inconsistent trading pattern, Vedanta then jumped by 25% in a few days as the company denied tax claims regarding the restructuring of its Cairn India subsidiary.

The stock managed to keep climbing across April and the first half of May, reaching a 2015 high of £6.95 in the process. However, the announcement of a 24% fall in underlying full year operating profit to $1.7 billion, alongside a whopping $6.6 billion in impairment charges, soon took the spark out of the stock, putting it back below the £6 mark by the end of June, a drop aided by the news that the company was controversially planning to merge its subsidiaries Vedanta Ltd (previously Sesa Sterlite before a name change April) and Cairn India.

News in July that Vedanta had seen a 38% fall in Q1 operating profits (to $644.6 million) did the stock no favours, and by the start of August it was back near its lowest point since February, at £3.80. Then, in another sign of the erratic nature of the commodity sector at the moment, Vedanta weathered the Chinese chaos of August well, rising to £5.79 by the start of September.

However, these gains were soon lost as Standard & Poor’s put Vedanta on its credit watch list, referring to the merger of its Indian divisions Vedanta Ltd and Cairn India as ‘critical’ for the company’s ability to deal with the commodities price slump, yet at the same time throwing doubt on the deal’s ability to be completed. The fact the company itself failed to comment on the report made things worse, and leaves Vedanta Resources at a current trading price of £4.33 (IT-Finance.com, 06/10/2015).

A statement that doesn’t adequately address the issue could have a negative effect on Vedanta’s price; however, positive progress could see a big boost, and may put an end to the stock’s dismal run of trading.

Vedanta Resources has a consensus rating of ‘Hold’ with an average target price of £5.55.