Market Report: Vedanta hit as Footsie turns sharply lower

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The Independent Online

Vedanta Resources spent another session in the red yesterday, amid fears that, whatever the provenance of reports about a probe into the accounts and share price movements of its Indian business Sesa Goa, the recent period of outperformance in the miner's shares may have come to an end.

Barclays Capital said the market was "appropriately pricing in" Vedanta's organic growth potential, meaning that the recent run of strength may be over. The broker said that, despite continuing problems at Vedanta's Konkola Copper Mines unit in Zambia, and the potential for further delays to the opening of its bauxite mine on Niyamgiri mountain in the Indian state of Orissa, the company's stock had risen by more than 200 per cent since the beginning of the year, and had outperformed the mining sector and the wider market.

Barclays duly switched its stance on the British company from "overweight" to "equal weight".

Reports that Sesa Goa was being examined by India's Serious Fraud Investigation Office (SFIO) were not a factor behind the downgrade, Barclays said, but they "may prove to be an incremental overhang on the Vedanta share price, even if entirely untrue". In a statement to the Stock Exchange on Tuesday, Sesa insisted that it had yet to receive any notification or communication from the SFIO.

Barclay's said Vedanta's "complex corporate structure" was a topic of debate, adding: "It has made some progress in consolidating minorities, but its ability to move cash from cash-rich subsidiaries, such as Sesa Goa, to cash-hungry subsidiaries is debatable.

"Many investors have expressed to us their concerns about this structure due to lack of transparency." Vedanta, whose shares closed down more than 4 per cent, or 94p, at 2121p, was not alone. The rest of the mining sector fell back as investors, spurred by the negative impact of a stronger dollar on commodity prices, banked profits. Xstrata was among the weakest, declining 9.4 per cent, or 91.5p, to 882p, while Kazakhmys fell 9.1 per cent, or 111p, to 1113p. Lonmin lost more than 8 per cent, or 138p, to close at 1513p.

Overall, the FTSE 100 fell by 2.3 per cent, or 120.55 points, to 5,080.42 and the FTSE 250 was down more than 3 per cent, or 291.78 points, at 8,849.5. Sentiment suffered following weak economic news from the other side of the Atlantic, with traders growing increasingly nervous in advance of today's data about US gross domestic product.

News from Norway, where monetary authorities raised interest rates for the first time in more than a year, also prompted concern among UK traders, who said equities might suffer further losses if other countries also began to withdraw their respective stimulus measures.

Beyond the miners, financial stocks came under pressure, with worries about onerous regulatory demands continuing to weigh on Lloyds Banking Group, which fell 3.84p to 80p, and Royal Bank of Scotland, which closed down 1.205p at 39.6p. Lloyds remained the subject of chatter regarding the possibility of a capital-raising.

Barclays was also weak, declining by 20.8p to 319p following reports that European and US officials were investigating the German hedge fund K1 to determine whether it had engaged in circular transactions that could leave banks, including JP Morgan Chase, BNP Paribas and Barclays, facing millions of dollars in losses.

The insurer Friends Provident, up 2.5 per cent, or 2p, at 80.95p, was among the handful of blue chips that managed to close in positive territory. It rose thanks to the approaching deadline of 30 October, when investors will have to decide whether they want shares rather than cash in the company's takeover by Resolution. The supermarket group Tesco was also strong, gaining 7.55p to 403.4p, amid a rush for defensives and optimism about its banking venture.

Elsewhere, Ladbrokes ended 5.1 per cent, or 6.6p, weaker at 122.4p as Deutsche Bank resumed coverage on the bookmaker's stock with a "hold" recommendation, revising its target price upwards from 148p to 173p. Its sector peer William Hill was also weak, declining by 4.1p to 167p.

Greggs the baker managed to beat the downdraft, rising by 3.5p to 441p thanks to some positive comment from Evolution Securities, which reiterated its "buy" stance. "Notwithstanding a significant increase in capital expenditure, our new estimates highlight Greggs's strong cash generation," the broker said, as it raises its target price for the stock from 500p to 530p. "We estimate that [the company] can increase its dividend by 5 per cent per annum and add to its existing [cash pile of around £15m] by 2012."

Further afield, Hargreaves Services, the energy support services provider, was weak but proved more resilient than the wider market, easing by less than 1 per cent, or 6.5p, to 755p, after Panmure Gordon issued a "buy" note.

"We believe Hargreaves is a low-risk play, with strong positions in its UK markets and significant opportunity to drive additional growth through expansion into Europe," the broker said, setting a 924p target on the stock.