Merger a long-term positive for Vedanta: Rakesh Arora

In a move that would remove the last major hurdle in the way of a mega merger between Vedanta and its group firm Cairn India, public shareholders of Cairn India have voted overwhelmingly in favour of the deal. In an exchange filing, Cairn said that in a court-convened meeting, 65.41 percent of shareholders present, representing 92.86 percent in value, voted in favour of the merger. The scheme has also been approved by a majority of the minority shareholders. The public shareholders of the company have casted 72.43 percent of votes (in value) in favour of the resolution.Speaking to CNBC-TV18 Rakesh Arora, an Independent Analyst, said that it is a long-term positive for Vedanta. "They have a chance to rectify the balance sheet."
He believes Vedanta could be debt-free in two years. He adds that it is not a question of EPS upgrade or downgrade, but it is more to do with the quality of balance sheet becoming better.

Vedanta is into a lot businesses. Zinc, copper, iron ore, among others. Arora says shareholders with a long-term view wouldn’t be looking at individual commodities.  "Cairn India is a single asset, one location, it is good for a punter who is betting on commodities for the short-term.”

He also spoke on Tata Steel numbers, saying that the last quarter was one of the best quarters for steel prices. “Raw material prices were lower, and finished product prices ran up. Now, raw materials are catching up. Ebitda margins are peaking.”

Going forward, he expects we will return to slightly low numbers.Below is the verbatim transcript of Rakesh Arora's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: Given that the news flow is now behind us and the fact that global commodity prices are under pressure, do you reckon that in the near term these stocks could be under pressure, both Cairn and Vedanta? A: The stocks have run up quite handsomely in the last six months. Vedanta has more than doubled and Cairn has also appreciated quite a bit. So, I think it is a sell on news that kind of action can play out. However, in the long-term I think it is a bit positive for Vedanta. They have a chance to rectify their balance sheet and that will be a big positive. Latha: How would you rate Vedanta, what is your target price, what is your buy or sell advice? A: I don’t really cover Vedanta as an analyst so I can’t give you those specific numbers. However, my view is that after this deal, there is a realignment of its cash flows. Earlier the cash flows were packed within two subsidiaries which is Cairn India and Hindustan Zinc. Now at least one half is going to contribute. So, I think Vedanta has a good shot at reducing its debt and probably becoming debt free in next few years. So, that will be a big positive going forward which I think investors will appreciate. I don’t think there is any earnings per share (EPS) upgrade or downgrade of any material size going to happen because of this deal. It is more to do with quality of balance sheet becoming better. Anuj: The problem with Vedanta now would be that it is now sum of so many parts, oil, zinc, copper, iron ore and so many moving parts. Do you think maybe shareholders would be better placed to look at individual businesses and you have large listed companies in all these spaces?A: I don’t think in the current environment or rather in any environment long only investors would look at single commodity because it is too risky. We have seen what happened with Sesa Goa. The iron ore mining business collapsed with the ban coming in and the value was tending to becoming zero. So, in hindsight, Sterlite did a favour to Sesa Goa shareholders by merging it before that. Similarly, Cairn India is a single asset, one location, one commodity, highly risky. It is good for a punt if you are just punting on commodity for short-term. However, for a long-term investor, a diversified portfolio with multi-location, multi-commodity it becomes much more investable. Vedanta was already holding 60 percent in Cairn India so nothing is going to change much except that leakages of earnings are going to reduce now. Sonia: I wanted to also ask you Tata Steel's numbers. This time looked good, not just domestic but their Europe EBITDA per tonne has reached USD 50. What is your view on that and on the stock as well? A: I can generally tell you that last quarter was one of the best for the steel industry because commodity prices, or rather raw material prices were much lower and finished product prices had ran up quite significantly. However, now, raw material prices are catching up. We have already seen peak in terms of EBITDA margins for some of the steel companies and we will return back to slightly lower numbers in next few quarters. So, I don’t think market is appreciating that probably margins have peaked out. I see little bit downside in most of these steel stocks. Latha: What about Nalco, how did that number look to you? A: I haven’t looked at the numbers.