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BofA positive on Vedanta on improving credit profile, attractive valuation
The firm's report follows allegations by a US-based short seller Viceroy Research of Vedanta Resources' structural subordination, reliance on brand fees/dividends to service debt and frequent changes in senior management.
Vedanta Group has strongly rejected the allegations.
"Even so, the holding company's liquidity risk has been reduced with a reduction in its debt to $5.3 billion by end of financial year (FY) 2025, driven by dividends and brand fees from its majority-owned Vedanta Ltd, and a 12 per cent stake sale in the latter (ownership reduced to 56.4 per cent as of FY25), and lower repayments ($450-650 million per annum) over the next three years with recent refinancing," the firm said.
It also noted the moderation in interest cost at Vedanta Resources to 11 per cent in FY26, compared to 14 per cent in the last financial year (FY25).
BofA estimates that there will be a reduction in Vedanta Resources Ltd's debt servicing needs.
"We estimate the holding company's FY26 debt service need will reduce to $1.1 billion, compared to $1.8 billion in FY25 but its dependence on brand fees and dividends will continue." While the brand fees will stay $400 million as 2-3 per cent of revenue from certain operating companies, the dividends requirement can be lower at $800-900 million in FY26 ($1.1 billion in FY25, post-$1.1-billion stake sale).
On the short seller questioning the rationale and level of brand fees, BofA said the fee is in line with India's legal framework.
Vedanta Resources had raised $485 million by selling 2.63 per cent in Vedanta Ltd during FY25.
While Vedanta Resources continues to focus on deleveraging, free cash flow at its subsidiary Vedanta Ltd is also expected to improve. BofA expects Vedanta Ltd's higher free cash flow to reduce dependence on debt and stake sales.
"The higher free cash flow will be led by FY26 EBITDA of $5.5 billion, up by $0.5 billion YoY on higher volumes, and an increase in aluminium/silver price, partly negated by lower zinc/ oil price, per our estimates," the brokerage said, adding that any reduction in production cost will be further cash accretive for the company.
As a result, BofA has said the yield curve on securities issued by Vedanta Resources/its subsidiaries looks attractive.
Vedanta Resources Finance II PLC curve looks to us attractive compared to regional and emerging market (EM) peers.
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