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Vedanta Resources: Debt servicing risks already priced in, says Deutsche

Last updated: 09:13 25 Nov 2011 GMT, First published: 10:13 25 Nov 2011 GMT

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The question of whether FTSE 100 miner Vedanta Resources (LON:VED) will breach its covenants is key for investors but these risks are already priced into the share price, says Deutsche Bank, which rates the stock a 'buy'.

The key issue is whether the group's subsidiaries can service the parent level debt, analyst Grant Sporre said in a note.

But he added that he estimated that commodity prices would need to fall by another 15 per cent and stay at these levels for full year 2013 before the group was likely to breach the covenants.

"Much of this risk is priced in already in our view," said the analyst, who does, however, lower his target price for the stock to 1670 pence per share from 2100 pence previously.

The shares are currently trading at 914 pence.

Vedanta has wide-ranging interests in aluminium, copper, zinc, lead, iron ore and its main operations are in India, Zambia and Australia.

Sporre goes on to say that the 'cash cows' in the group's portfolio are Cairn India (once the acquisition of the controlling stake is approved), HZL and Konkola.

"Sesa Goa also generates spare cash, but is likely to hoard for its West African iron ore project. These cash cows can supply sufficient dividends to meet the interest payments of the cash hungry aluminium and power divisions, as well as meeting the substantial 700 to 800 million annual interest charge at the parent level, under our base case commodity assumptions," he said.

Downside risks for the shares include lower than expected commodity prices, and further delays in approvals for the company’s growth projects, and the final approval of the Cairn India acquisition, added  Deutsche.

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