Why Is Vedanta Ltd. So Generous with Dividends? A Closer Look at the Company

Imagine a company with a huge market value of ₹83,804.25 crore,  a healthy profit of ₹14,449 crore, and, above all, a hefty debt of ₹79,883 crore. Yep! It exists. What's more interesting is that they've declared dividend worth ₹37,730 crore! Now, who wouldn't want to know more about this company?

Get ready to explore Vedanta Ltd.'s money matters. We'll uncover why they're handing out such hefty dividends. This article packs a punch with loads of useful insights, and it's easy to follow along!

Well, I must admit that during my research on this company, my reaction at the end of every hour could best be described as ⤵️

Relax, I've dissected all the details to make it as clear as day, so you won't be scratching your head like I was. You can show your gratitude later! 😄

Following our usual pattern, we'll kick things off by exploring the broader economic context before diving into an understanding of the company's operations.

Economic Overview

In the year 2022, the world economy faced quite a few challenges. It all began with the Russia-Ukraine conflict, which triggered supply chain disruptions and led to high inflation. Central banks responded by raising key policy rates to control this inflation.

Inflation was a big worry globally, reaching a multi-year high of 8.7% in 2022. These developments had a negative impact on global economic growth. According to the International Monetary Fund, the world economy grew by 6% in 2021 but slowed down to 3.4% in 2022.

In 2022, commodity prices initially rose but later fell because supply chain issues and China's COVID-19 control measures disrupted the supply and demand for these goods. Metal prices also stabilised as China reopened its economy, and inflation in countries like the USA and EU started to come down.

Turning our attention to India's economy:

India stood out as a strong performer on the global stage. In the year 2023, it's expected to continue shining, potentially contributing 15% to the world's economic growth, as per the IMF. The Indian economy is predicted to grow by 5.9% in FY 2024, following an estimated growth of 6.8% in FY 2023, making it one of the fastest-growing major economies.

What's more, India took on the G20 presidency in December 2022 with an inspiring theme of "Vasudhaiva Kutumbakam", or "One Earth, One Family, One Future," reflecting its commitment to global unity.

Check: G20 Summit 2023: What does India’s Presidency Mean for your Finances? 

Now that we've got a handle on the global and local economic scenes, it's time to zoom in on the industrial landscape. But here's the twist: Vedanta Ltd. isn't tied to just one sector. It's got its fingers in many pies, which means that each product has its own unique demand and outlook.

Before we dive into the demand for these products, let's switch gears and move to know the company better.

About Vedanta Ltd.

Vedanta Limited, a subsidiary of Vedanta Resources Limited, stands as a global powerhouse in natural resources. Its core operations span a range of sectors.

What sets Vedanta apart is its impressive portfolio of top-tier assets. These assets are not only cost-effective but also scalable, consistently delivering strong profits and dependable cash flows. Vedanta's production includes:

1. Zinc-Lead-Silver
2. Aluminium
3. Oil & Gas
4. Nickel
5. Ferro Chrome
6. Iron Ore
7. Steel
8. Cement and Commercial Energy
9. Copper

This diversified portfolio is a key player in global decarbonisation and the transition towards energy sources that rely heavily on materials. Take a look at the image below ⬇️

See the image below. It's self-explanatory and will help you understand the company's operational structure.

Now, take a glance at the graph below to gain insights into the demand for these raw materials in both the Indian and global markets from 2022 to 2030, measured by their Compound Annual Growth Rates (CAGR).

I promise the "why" behind this data will make a lot more sense once you've taken a peek.

As it is clear from the image above the Indian market is the main focus of this company, and it holds enormous growth potential. The key reason is that the average metal consumption per person in India is much lower than the global average.

Why is this happening? Well, it's driven by urbanisation and industrialisation trends, backed by government efforts to boost infrastructure and housing. Plus, India's strong response to COVID-19 and increased spending outlined in the Union Budget for 2023-24 are all contributing to robust economic growth, which, in turn, is creating a growing demand for natural resources.

And yes, we've checked off all the boxes. The economic outlook is promising, the company shows significant growth potential, and the resources are in high demand. Everything seems to align perfectly.

But what about the company's financial performance? Let’s see.

Financial Performance

The company's revenue stands at ₹1,45,404 crore, marking an 11% increase year-over-year. 

However, the EBITDA is at ₹35,241 crore, which has seen a nearly 22% decline compared to the previous year. For a visual representation of these figures over the past three years, check out the graph below.

👉 The drop in EBITDA was primarily caused by lower prices for commodities like Aluminum, Lead, and Silver, as well as challenges in dealing with higher input commodity costs. On the positive side, this was partly balanced by the depreciation of the rupee, increased sales volumes for Zinc, Aluminium, and Copper, and gains from smart hedging strategies.

The Profit After Tax (PAT) for the year has also experienced a significant decline, dropping by 41% to ₹14,449 crore.

The company boasts a robust Return on Capital Employed (ROCE) of approximately 21%. This signifies that the company efficiently generates profits in relation to the capital it has invested.

As of March 31, 2023, the net debt stood at ₹45,260 crore, marking a substantial increase of ₹24,281 crore since March 31, 2022. In the previous fiscal year of 2022, it was at ₹20,979 crore.

👉 The increase in net debt can be attributed primarily to dividend payments and capital expenditures, which were somewhat balanced by cash flow generated from operations and the release of working capital.

The company boasts a sturdy Free Cash Flow (FCF) after capital expenditures, amounting to ₹18,077 crore. Additionally, it holds ₹20,922 crore in cash and liquid investments.

When we look at its financial position in comparison to its globally diversified peers, Vedanta stands out with a robust balance sheet. It shows strength in metrics like Net Debt/EBITDA and gearing.

However, the debt-to-equity ratio surpasses 2, which warrants attention.

👉 It's worth noting that Vedanta Resources Ltd. is actively addressing this issue by working on reducing its debt load, which currently stands at approximately ₹79,883 crore.

Now, let's shift our focus to the topic of dividends.

Exploring Dividends

As I mentioned earlier, the company recorded a profit of approximately ₹14,000 crore, but astonishingly, they declared dividends worth ₹37,730 crore in FY 2023. This translated to a dividend distribution of ₹101.50 per share.

Consistently paying out such generous dividends is no doubt a positive sign, indicating the company's sustained growth.This shows the company's dedication to sharing its success for the greater good and making sure that everyone benefits fairly from the value it creates.

This financial achievement was possible due to the company's steady operational performance and a favourable market environment, aligning with its historical trends. 

To gain a visual understanding of the dividends declared over the past five years, refer to the graph below.

Let's break down the total dividend amount:

28th April, 2022: 1st Interim Dividend of ₹31.50  19th July, 2022: 2nd Interim Dividend of ₹19.50 22nd November, 2022: 3rd Interim dividend of ₹17.50 27th January, 2023: 4th Interim dividend of ₹12.50 28th March, 2023: 5th Interim dividend of ₹20.50

What's worth noting is that the company has paid out a total dividend of ₹84,647 crore in the past 10 years.

Now, while it may seem like a great idea to buy shares of the company and enjoy these dividends, there's another side to the story.

The dividend payments come from the company reserves, which means the company’s savings take a hit when it pays out hefty dividends. This can affect the overall valuation of any company, causing it to decrease.

Additionally, when dividends are announced, the share price often drops by a certain percentage. Consequently, in the long term, the share price doesn't experience significant growth.

Ah, yes, let's not forget the classic case of ITC, the master of doling out generous dividends. It's almost as if they had a magic touch for keeping their share price comfortably cosy without those bothersome fluctuations.

Read here: What stops the stock price of ITC from rising?

Unfortunately, Vedanta Resources Limited, the parent company, heavily relies on dividends from Vedanta Ltd. This dependency is the reason why Vedanta's dividend yield is 40%.

In March 2022, Vedanta Resources Limited carried a massive debt load of over ₹1.1 lakh crore. However, they made a bold commitment to achieve a debt-free status within 2-3 years, which has reduced their current debt to roughly ₹52,000 crore.

Yet, there's a significant hurdle on the horizon. Vedanta Resources Limited is confronted with debt maturities of ₹16,000 crore within the next 12 months. This substantial debt pressure restricts their ability to reinvest capital back into their core business operations.

Let's unravel the company's ownership structure, shall we?

Shareholding Pattern

Check out the image ⤵️

However, it's crucial to note that 99.99% of the promoter's holdings are pledged. Now, you might wonder, what exactly is pledging? Well, in simple terms, it is when someone uses their shares as collateral to secure a loan. If they can't repay the loan, the lender can take ownership of the shares.

In addition to that, there are other financial uncertainties in the business, including exposure to foreign exchange fluctuations, interest rate variations, and commodity price volatility, just to name a few. 

For more in-depth financial information, you can always refer to Ticker by Finology.

The Bottom Line

In conclusion, while Vedanta Ltd. presents promising growth prospects and an impressive dividend history, it's important to keep an eye on its financial complexities and the broader economic landscape. 

Understanding the interplay of factors like debt, dividends, and market conditions is the key to making informed investment decisions in this dynamic business environment.

In the end, know that the adventure of investing can be just as fulfilling as reaching your financial goals. Happy Investing!

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.