Vedanta shares hammered

Shares of Indian mining company Vedanta fell to a fresh low after analysts at Morgan Stanley initiated their coverage of the company with a stark warning of the risks faced by investors.

The shares, which were sold to investors at 390p in last month's float, fell to 11 to 333p. They have underperformed other mining companies, such as Rio Tinto and BHP Billiton, by around 15 per cent in the past six weeks. The float was sponsored by JP Morgan.

In a note giving an "underweight" recommendation, Morgan Stanley's Paul McTaggart and Amos Fletcher said yesterday the balance of risks and rewards was "not favourable," adding, "We think there is a significant risk that its key growth project, the Green field Orissa alumina refinery, could go over time and budget or indeed not go ahead at all."

"The company is also exposed to further falls in tariffs, commodity prices, copper treatment and refining charges, the Indian rupee, undiversified political risk and litigation contesting ownership of its key zinc business."

They added that, since last month's float, "Vedanta has already lowered earnings guidance" to reflect the Indian government's decision three weeks ago to cut import tariffs on key commodities by about 5 per cent, which came quicker than expected.

Cutting tariffs makes Indian minerals, which account for 97 percent of Vedanta's production, less competitive against foreign imports.

Morgan Stanley calculates each 5 percent tariff reduction

hits Vedanta's 2005 net earnings by 21 per cent.

The note follows last Friday's first formal briefing to analysts, when chief executive Anil Agarwal let chairman Brian Gilberston do most of the talking.

The briefing did nothing to rally the shares, which are yet to trade above the price at the float, when Vedanta raised £507 million pounds and Agarwal's near-54 per cent stake was valued at more than £500 million.

Plans to issue £76 million more shares were abandoned because of poor share price performances.

Vedanta reports third-quarter results on Wednesday.

Questions have been raised about the stunning share price performance of Vedanta's main majority-owned subsidiary - Sterlite Industries - prior to the London float.