Vedanta demerger, pharma tariffs & gold prices hurt gold stocks
Hey Big Bulls,???
This week, let’s dive into:
Disclaimer: Not investment advice.
And just a reminder that you can watch video version of Bull's Eye by subscribing to our YouTube channels.
Now let's dive in.
A survival kit
Vedanta shares have been an outperformer, delivering strong returns of over 50% in the past year, which is way more than the Nifty 50. Yet, the ride hasn't been easy.
With over five decades in business, Anil Agarwal has weathered countless challenges, from raising capital to battling debt and attempting multiple business restructures.?
And, Vedanta's troubles have been rooted in a constant struggle between rising costs, heavy debt, and shrinking cash flow. So, what went wrong?
A big misstep was the expensive 2011 acquisition of Cairn India for $9.6 billion. Add to that, the volatility in the commodity markets — especially in sectors like iron ore, aluminum, copper, and zinc — made things tougher. Operations in sites like Sterlite in Tamil Nadu and the Lanjigarh refinery in Odisha faced major hurdles and protests.?
Vedanta is also known for big dividend payouts, most of which go to its global parent, Vedanta Resources (which owns over 56%), and even retail investors get in on the action.?
Its 5-year dividend yield is 65%. And even in Q3, the company generated ?3,300 crore in free cash flow, all paid out as dividends. When so much of the cash flow is given to shareholders instead of being reinvested in growth or used to reduce debt, it does raise concerns for growth.
That said, the company’s net debt in Q3 dropped to 1.4 times EBITDA from 1.7x last year. Plus, its credit rating has improved to AA, meaning it's seen as more financially stable.
Now enter the demerger plan, which the board gave the green light to back in 2023, just got the thumbs up from creditors this week.?
The idea is to simplify and streamline its operations, creating 17 focused companies, each dedicated to a specific commodity. These include aluminum, oil, gas, power, steel, and even electronics.?
The hope is that by breaking up into separate entities, Vedanta can unlock greater value for investors, each business standing more independent than before.
A bitter pill
The US is a huge market for Indian pharma.
For most Indian generic drugmakers, it’s their top market, with exports reaching $8.7 billion in 2024. This was up 16% more last year and made up about 31% of the industry’s total (according to Pharmexcil data).
In fact, Indian companies are responsible for over 40% of all generic prescriptions in the US, proving how crucial they are in making affordable meds available.?
For instance, Sun Pharma made 32% of its revenue from the US in fiscal 2024, while Dr. Reddy’s got 47% of its sales from North America and is also banking on new generic weight-loss drugs to boost growth in the US. Cipla, Lupin, and Zydus are also in the same boat, with over 30-40% of their sales coming from the West.
So when Trump this week floated the idea of a 25% tariff on imported drugs, Indian pharma stocks like Dr. Reddy’s, Aurobindo Pharma, and Lupin took a hit.?
Of course, this is the latest in a string of trade moves by Trump, who’s been pushing tariffs to cut the US’s reliance on imports and boost local manufacturing. However, he didn’t specify when these new tariffs would be implemented, saying he wanted to give companies enough time to set up factories in the US to avoid the penalties.
Shrikant Akolkar, a pharma analyst at Nuvama, told Reuters that even if these companies set up shop in the U.S., they’d still face challenges like getting new approvals and dealing with higher labor costs compared to India.
So, the tariffs on pharma imports would make Indian-made drugs more expensive in the US, and our exports less competitive. This could hurt their revenues in that region. This is why the investors reacted negatively this week with concern over higher costs and potential supply chain issues.
Though, Sun Pharma’s MD, Dilip Shanghvi, said earlier this week that any additional tariffs would likely be passed on to consumers.
An inverse relationship?
There's one graph that's been – that of gold prices. But then, on the flip side, you've got the graph of jewellery stocks, that have been dropping.?
That’s because India’s gold jewellery demand has dropped and has even been declining for three years straight (as per data from the World Gold Council).
The main reason is, of course, the crazy-high gold prices. In 2024, gold prices shot up by 15%, making jewellery way more expensive. On top of that, making charges can add another 10-25%, which is enough to turn people off.
One jewellery company feeling the pinch is Senco Gold, whose stock has dropped 27% in just the past five days. A big part of that drop is tied to their Q3 results, where profits plummeted by 69%.?
The company attributes this mainly to the higher costs of setting up new subsidiaries, along with rising customs duties and fluctuating gold prices over the last few quarters. Despite the recent hurdles, Senco Gold is expecting a rebound in its profit margins.
It is branching out into new product categories. They've launched a fully owned subsidiary, Sennes Fashion, to dive into the consumer lifestyle market. This new venture will focus on premium leather accessories, lab-grown diamond jewellery, and perfumes.
By jumping on emerging consumer trends, Senco Gold is looking to create fresh revenue streams beyond just traditional jewellery sales.
By the way, on the flip side of rising metal prices: Gold ETFs (exchange traded funds), which track gold prices without owning the physical metal, have been gaining popularity.?
AMFI data shows net inflows into gold ETFs soared 216%, jumping from ?2,919 crore in 2023 to ?9,225 crore in 2024. This makes sense, as Gold ETFs are easier to buy and sell, with no making charges or storage hassle, making them really convenient for urban and younger investors.