Vedanta Demerger: The case for Aluminium as another value unlocking trigger

Shares of Vedanta have seen a strong run over the last few years. From a delisting price of ₹87 back in 2020, the stock has gone up nearly 10x over the next six years.

But the big question on investors’ minds now is, can more value still be unlocked from here?

The street appears divided. On one hand, some investors are choosing to book profits after the rally. The stock is down 4% in the last three sessions

On the other, there’s a growing camp that believes the story isn’t over yet and that further upside could be on the cards.

Here are some tailwinds for the stock:

Currency

Vedanta benefits from a weaker rupee. In fact, every one-rupee depreciation against the dollar can boost its Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) by roughly ₹900 crore – ₹950 crore. But there's a bigger tailwind in play too:

Aluminium

The street has the next big question: will the Aluminium business be the next major wealth creator for Vedanta?

For every 10% move in LME aluminium prices, Vedanta’s EBITDA could increase by about $445 million. For the first nine months of the financial year gone by, average aluminium prices stood at around $2,634 per tonne.

However, supply disruptions in the Middle East have impacted smelting capacities and these aren’t expected to come back anytime soon.

Reflecting this, brokerages like Kotak have already raised their aluminium price assumptions. Despite that, those revised estimates still remain below current spot prices.

The Valuation Multiple

Currently, firms like Kotak and Nuvama are valuing the aluminium business at about 6.5x EBITDA. But there’s a view that it could command a higher multiple of closer to 7x.

If that rerating plays out, the contribution of aluminium to Vedanta’s overall valuation could rise significantly.

Based on all of this, the aluminium story, macro tailwinds and multiple assigned hold the key to Vedanta’s next leg of growth.

Shares of Vedanta have declined for three days in a row but remain close to record high levels. May 1 has been set as the record date for the demerger. You can read more on that here.