The Investment Column: Unloved Vedanta could prove the City wrong with Indian expansion

Carphone founder joins the family at Cosalt, but don't follow him in - Investors should wash their hands of PHS
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Vedanta Resources has a rocky relationship with the City. The India-focused mining company came to the stock market in a difficult flotation in 2003 and its shares crashed straight afterwards. A second equity fund raising had to be scrapped; the company's maiden results were delayed because of administrative cock-ups; there has been boardroom musical chairs and almost every appointment appears to come with an accusation of corporate greed, nepotism or some other breach of governance codes.

Vedanta Resources has a rocky relationship with the City. The India-focused mining company came to the stock market in a difficult flotation in 2003 and its shares crashed straight afterwards. A second equity fund raising had to be scrapped; the company's maiden results were delayed because of administrative cock-ups; there has been boardroom musical chairs and almost every appointment appears to come with an accusation of corporate greed, nepotism or some other breach of governance codes.

These issues serve to amplify the health warnings on this share, and it won't ever be an appropriate investment for widows and orphans. The natural resources sector almost never is. However, we tipped Vedanta back in October and the shares have risen 24 per cent since then.

The development of the Indian economy is, along with the emergence of China, one of the long-term economic stories of the age. The demand for the metals produced by Vedanta - including copper but, most notably at the moment, zinc - is very high and increasing. The mining industry is bringing more into production, but there is no sign of it catching up.

Vedanta, for its part, is more than $1bn of the way through a $2.2bn investment programme to develop its Indian assets. Zinc production was a high point in yesterday's mixed production report for the financial year just ended. Its non-Indian assets, the Konkola copper mines in Zambia, were disappointing, though, and the company admitted a lot of work needs to be done to improve output and costs there.

The full financial results for the year will be out on 2 June, and soaring commodities prices guarantee a strong uplift in pre-tax profits. Changes to the Indian tariff regime have shaved a little from what was originally expected, however, and there were further modest downgrades yesterday.

The long-term buy case on Vedanta shares is this: industrial revolutions in China and India will keep commodities prices high for the foreseeable future; Vedanta's own dramatic increase in production over the next few years guarantees earnings growth; and it has lucrative options to mine other areas in India which are not even yet being factored in. The risks are that growing environmental awareness may slow the development of new projects further.

Because of the rocky relationship with the City, Vedanta shares are not accorded a high valuation. Disappointment is priced in; success is not. Buy.

Carphone founder joins the family at Cosalt, but donÿt follow him in

Shares in Cosalt, the Grimsby-based conglomerate which makes caravans, school uniforms and life jackets, jumped 8 per cent to 316.5p yesterday after it emerged that David Ross, the co-founder of Carphone Warehouse, is to join the board after buying a 12.6 per cent stake.

The market chatter was that Mr Ross could bring his undoubted business acumen to the task of breaking up the group, which only last week issued a profits warning because of poor sales of caravans.

The speculators may be getting carried away. Mr Ross has something of a romantic attachment to Cosalt, since his father and grandfather were chairmen. His share purchase is not (just) a hard-headed investment judgement.

The caravans business will probably be put up for sale, but perhaps not until trading has improved. With overcapacity in the industry proving worse than originally believed, that may take some time yet. Even Cosalt's house broker cannot bring itself to advise buying the shares for the moment.

Investors looking for capital gains need not chase Cosalt shares yet, but it is worth holding for a dividend that yields just below 6 per cent at the current share price.

Investors should wash their hands of PHS

PHS Group is often described as a "mini-Rentokil". The company, based in Caerphilly, South Wales, rents out and maintains hand driers, paper towel dispensers and air fresheners to the office and public toilets of Britain.

It also has more modest businesses providing tropical plants and doormats for office foyers, and crates for use if a company is moving to new premises.

Unlike Rentokil, PHS has pleased rather than horrified the stock market with its results over the past few years. It confounded sceptics who believed the market for washroom services is so competitive that profit margins would collapse.

But margins have contracted. The company is spending more on customer service and training for its employees. A trading update yesterday said PHS Washrooms delivered improved margins in the second half of the financial year compared with the first, but they are down year on year. At the moment, prices are stable, it said, but price rises look unlikely. It is difficult to identify exactly what has gone wrong inside the sprawling Rentokil - it is not yet ratcheting up the competitive threat and PHS is currently the more dynamic company - but new management may revitalise Rentokil in time, and it is difficult to see PHS doing much more than just holding back the tide on margin erosion.

There are still economies of scale to come from bolt-on acquisitions, but most of this work has been done. Share buy-backs are keeping the share price up, but at 88.5p yesterday, on 13 times earnings, it is not especially attractive.

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