Is Now the Time to Buy Vedanta?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Vedanta  (LSE: VED  ) to determine whether you should consider buying the shares at 1,220 pence.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look like a good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look like a good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-year EPS Growth

Projected P/E

PEG

Yield

3-year Dividend Growth

Dividend Cover

Vedanta

1,220p

(29%)

10.9

0.4

3%

22%

2.6

The consensus analyst estimate for next year's earnings per share is $1.80 (30% growth) and dividend per share is $0.55 (unchanged).

Firstly, there seems to be some confusion around the forward P/E figure for Vedanta -- some websites have the figure as low as 3.6 while others show a number as high as 27. However, based on the near-term earnings predictions I've seen, I believe the current projected P/E figure is closer to 11, which makes Vedanta look expensive compared to the mining sector average P/E of 7.

That said, Vedanta's relatively high P/E and high near-term growth rate give a PEG ratio of approximately 0.4, which implies the share price is very cheap for the near-term earnings growth the firm is expected to produce.

In addition, Vedanta offers a 3% yield, which is slightly above the mining sector average. Furthermore, Vedanta's dividend is currently just over two and a half times covered, giving plenty of room for further dividend growth.

Is Vedanta's predicted near-term growth sustainable?
Currently, Vedanta is managing to avoid the downward pressure on revenues that the rest of the mining industry is encountering. Indeed, Vedanta announced within its half-year results that underlying earnings per share were up 40%.

However, I believe almost all of this growth is down to Vedanta's large capital expenditure program of the past few years. In particular, the biggest contributor to Vedanta's earnings growth this year was the acquisition of Cairn India -- previously part of Cairn Energy. I believe this acquisition alone was responsible for Vedanta's earnings advancing 50%.

Unfortunately, I see the heavy capex spending has left Vedanta with a huge debt pile.

Vedanta currently has a net borrowing position of around $10 billion, although I believe the company is starting to benefit from its heavy spending. Cash flow this year is significantly greater than last year, which has allowed Vedanta to continue spending without further borrowing. In fact, Vedanta has started to reduce its debts.

Overall, although Vedanta is still managing to improve its earnings, the company has a significant borrowing position and, unfortunately, I believe this presents too much of a risk bearing in mind the current global economic uncertainties. As such, I believe now does not look to be a good time to buy Vedanta at 1,220 pence.

More FTSE opportunities
Although I feel now may not be the time to buy Vedanta, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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