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Why did Vedanta shares drop by nearly 9% on D-Street today

Vedanta shares were under pressure due to a lack of clarity on the Anil Agarwal-backed mining company's involvement in the  ₹1.54 lakh crore semiconductor plant project. (MINT_PRINT)Premium
Vedanta shares were under pressure due to a lack of clarity on the Anil Agarwal-backed mining company's involvement in the 1.54 lakh crore semiconductor plant project. (MINT_PRINT)

  • The semiconductor chip factory project envisages an outlay of 1.54 lakh crore and is expected to employ about 1 lakh people. The Vedanta-Foxconn JV is expected to set up a semiconductor manufacturing plant in the next two years.

Vedanta shares slipped nearly 9% on Friday due to a lack of clarity on the Anil Agarwal-backed mining company's involvement in the 1.54 lakh crore semiconductor plant project. The large-cap stock snapped its six-day winning streak and nosedived the most in nearly three months. Also, broad-based selling pressure in the market further added to woes in Vedanta's performance. Vedanta shares gained nearly 18% in the previous four trading days.

On BSE, Vedanta shares dropped by 23.50 or 7.48% to end at 290.60 apiece. The shares have touched an intraday low of 287 apiece -- resulting in an overall plunge of 8.6% compared to the previous day.

Its market valuation is currently around 1,08,021.73 crore.

Vedanta's chairman Anil Agarwal earlier this week announced the biggest investment of 1.54 lakh crore for setting up the country's first-ever semiconductor chip plant in Gujarat. This led to a strong buying on stock exchanges that drove Vedanta to rise nearly 18% this week. However, on the last trading day of the current week, Vedanta shares pulled back and slipped by at least nearly 9% on BSE after the company said, the semiconductor plant project is not under their ambit but will be undertaken by Volcan Investments.

On Thursday, in its regulatory filing, Vedanta said, " we reiterate that the proposed business of manufacturing semiconductors is not under Vedanta and we understand that it will be undertaken by the ultimate holding company of Vedanta, Volcan Investments."

This week, in a statement, Vedanta said the company signed two Memorandum of Understanding (MoUs) with the Gujarat government to set up a semiconductor fab unit, a display fab unit, and a semiconductor assembling and testing unit in the Ahmedabad district of the state.

To set up the plant, Vedanta will form a joint venture with Taiwanese multinational electronics contract manufacturer, Foxconn. Vedanta will hold a majority stake of up to 60%, and the remaining 40% will be held by Foxconn in the JV.

The project envisages an outlay of 1.54 lakh crore and is expected to employ about 1 lakh people. The JV is expected to set up a semiconductor manufacturing plant in the next two years.

As per a Bloomberg report, Kranthi Bathini, a strategist with WealthMills Securities said, "the rally in Vedanta shares happened following euphoric statements from the founders about their new line of business. But, this is not going to benefit the shareholders of Vedanta," adding, "this is resulting in selling pressure."

Should you buy Vedanta shares?

Recently, Phillip Capital met Vedanta's management to understand its volume growth prospects, capital allocation and strategy to manoeuvre through volatile times.

In his research note, Vikash Singh, Research Analyst at Phillip Capital said, "VEDL is a pure commodity play. A recent sharp fall in commodity prices due to inflationary risk and recession fear would mean further deterioration in performance in 2Q, which we expect would bounce back in 2H on lower CoP (expecting coal situation to improve as linkage supply is gradually improving). While Zinc India continues to act as an anchor business and earning majority of cash flows, aluminium remains a promising prospect on three-fold improvement strategy (expansion, integration, value addition). Strong cash flows will continue to drive good dividends (yield expected in double digit) as well since parent has huge debt repayment obligation."

Singh added, "If Vedanta management maintains its promise on better corporate governance, it may see some re-rating as well. We maintain our Buy rating on the stock with a SOTP of 340."

Also, analysts at Edelweiss met with Sunil Duggal, CEO of Vedanta (VEDL) to get insights into the company’s strategic initiatives, ESG endeavours, and growth prospects.

Edelweiss note said, "We find Vedanta’s aggressive ESG approach and prudent capital allocation framework are the key differentiators. Key takeaways: i) Firm decarbonisation (encompassing green aluminium and copper), water positivity and waste management targets. ii) Debt reduction at parent likely to be achieved through upstreaming of dividend with no intention of Intercorporate deposits (ICD). iii) Committed to $4 bn deleveraging at VRL iv) Disciplined capital allocation framework balancing both growth and cash returns. We find the three-pronged focus on earnings growth, ESG and cash returns comforting."

Analysts Edelweiss raised volume growth estimates across divisions, resulting in a 15–16% increase in EBITDA over FY23–25E. Besides, it expects Vedanta Ltd to deliver superior RoE of 31% on average through FY25E (global diversified players at 20%). The brokerage maintained a Buy rating on the stock and has raised its target price to 355 apiece (up from 265).

Kaustubh Chaubal, senior vice president, Moody’s Investors Service in the latest note said, "We do not expect Volcan to extract any cash from Vedanta to fund this investment. Any deviation from this expectation, such that Vedanta is used as a financing vehicle for Volcan, will weigh on the company’s weak liquidity profile and pressure its B2 negative corporate family rating."

Notably, Anil Agarwal's Vedanta Resources is the parent company and the majority stakeholder in Vedanta. While Agarwal's family trust Volcan is the ultimate parent of Vedanta Resources.

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