This High Dividend Yield Stock is Down 25% in 2023. Should You Buy the Dip or Stay Away?

This stock with a high dividend yield of a whopping 42.2% has fallen around 25% in 2023 so far.

Yes, you guessed it right! Its Vedanta Ltd.

Vedanta share price has corrected from Rs 319 to Rs 239. This is due to various reasons from debt restructuring plans to not-so-good quarterly results.

In this article, we have analysed the stock based on its fundamentals and valuation.

First, let's look at the stock price chart...

In the last one year, Nifty 50 edged higher from 18,409.7 to 19,675. 5 recording a 7% growth. Vedanta witnessed a de-growth of around 23% in the same period.

This underperformance was largely due to a lack of progress towards refinancing its debt worth US$ 1 billion maturing in January and August 2024.

Moreover, the adverse impact of the weakening commodity prices, especially of aluminium and zinc, affected its top-line numbers.

However, after hitting a 52-week low of Rs 208 on 28 September 2023, the stock began to head northwards. Strong Q2FY24 results led to this spike.

Quarterly Performance

Here's a table comparing Vedanta's quarterly numbers -

Vedanta Quarterly Results

Qtr. Ending	Dec-21*	Mar-22*	Jun-22*	Sep-22*	Dec-22*	Mar-23*	Jun-23*	Sep-23*
Net Sales	3,40,970	3,98,220	3,86,220	3,66,540	3,41,020	3,79,300	3,37,330	3,89,450
Other income	5,770	6,110	7,330	6,970	7,160	7,050	5,460	6,400
Turnover	3,46,740	4,04,330	3,93,550	3,73,510	3,48,180	3,86,350	3,42,790	3,95,850
Gross profit	1,07,050	1,32,970	1,01,970	79,330	79,700	81,230	82,000	1,27,020
Profit after tax	53,540	72,610	55,920	26,900	30,920	31,320	33,080	-9,150

Data Source: Equitymaster

The company's net sales increased 16% on a quarter on quarter (QoQ) basis and 6% on a year on year (YoY) basis.

Moreover, its gross profit jumped 55% and 60% on a QoQ and YoY basis, respectively. This was driven by improved operational performance, easing of input commodity prices, and a favourable arbitration award.

Speaking about segments, aluminium, steel and iron-ore businesses witnessed strong improvements in gross profit, while Zinc India, Zinc International, and copper saw pressure. Interest, on the other hand, seems to be concerning as it surged 54% on a YoY basis.

Consolidated Quarterly Metrics

	21-Dec	22-Mar	22-Jun	22-Sep	22-Dec	23-Mar	23-Jun	23-Sep
Gross profit margin (%)	31.4	33.4	26.4	21.6	23.4	21.4	24.3	32.6
Net profit margin (%)	15.7	18.2	14.5	7.3	9.1	8.3	9.8	-2.3
Diluted EPS	14.4	19.5	15	7.2	8.3	8.4	8.9	-2.5
Diluted EPS (TTM)	64.8	63.8	64.6	56.2	50.1	39	32.9	23.2

Data Source: Company Annual Reports, Regulatory Filings, Equitymaster
*Interim results exclude extraordinary / exceptional items

Gross profit margin has expanded from 24.3% to 32.6%. However, a contraction is seen in the net profit. This is broadly due to a one-time net tax impact of Rs 61.3 bn as a result of adoption of a new tax regime effective FY23.

Vedanta has around Rs 90 bn of debt that will be up for refinancing by Q4FY24 and has US$ 1 bn of debt that will be up for refinancing at the holding company level.

The holding company has approximately US$ 3.1 bn of debt maturing in FY25, including US$ 2 billion.

However, there was some relief as a recent arbitration case turned in favour of Vedanta. This will reduce the payout to the government by US$ 20 m per quarter in the oil and gas vertical.

Apart from this, Vedanta would also receive Rs 10 bn per quarter over the next five quarters which will increase the cash flow of the vertical.

Moreover, Vedanta has set aside approximately US$ 150-200 m as growth capex for its oil and gas vertical. This would be used for drilling new wells, helping manage the natural decline in the fields.

Vedanta is also likely to spend approximately US$ 1.7 bn as growth capex in FY24.

Vedanta's Valuations

Currently, the price to earnings (P/E) ratio of Vedanta is 10.4x (times). This is a little over its 3-year median P/E of 7.2x.

The same case is with its price to book (P/B) which is at 2.8x as against its 3-year median P/E of 1.9x.

However, other valuation metrics like marketcap to sales and enterprise value by earnings before interest, tax, depreciation, and amortisation (EV/EBITDA) are reasonable.

Its marketcap to sales is at 0.6x as against its 3-year median of 0.8. Similarly, its EV/EBITDA is at 4.3x as compared to its 3-year median of 4x.

Therefore, the overall valuation of Vedanta seems to be reasonable as of now.

A look at Vedanta's historical valuations

Consolidated	19-Mar	20-Mar	21-Mar	22-Mar	23-Mar
Adjusted PE (x)	9.7	0	7.3	8	9.7
Price / Book Value(x)	1.1	0.4	1.4	2.3	2.6
Dividend Yield (%)	10.3	6	4.2	11.2	36.9
M Cap / Sales	0.7	0.3	1	1.1	0.7
High PE	11.2	10.1	7.3	9.4	9.7
Low PE	5.9	0	0	5.7	4.2

Data Source: Ace Equity

Outlook

Vedanta's EBITDA (excluding the arbitration claim) has been in line with the street estimates. The company is focused on debt reduction.

Moreover, the demerger process is on track and is likely to be completed as per the timeline. However, Vedanta might face some headwinds in the global commodity market.

These are headwinds such as lower demand from China, a slowdown in China's real estate sector, uncertainties in the Middle East, and low London metal exchange (LME) prices.

Although the valuation seems to be reasonable, this stock has its own set of challenges pertaining to the global headwinds and debt refinancing.

There can be scope for value creation from Vedanta's demerger, but the company hasn't disclosed vital information.

It remains to be seen how Vedanta performs in the coming months.

We've shared all the facts and given reading and analysis of the whole situation. Now it is up to you to come up with your own estimates.

Have a proper, independent rationale irrespective of whether it turns out to be right or wrong. This way, you will develop a sound framework which would hold you in good stead over the long term.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...