Vedanta: shareholders’ activism

Vedanta: shareholders’ activism
Comment E-mail Print Share
First Published: Thu, Sep 25 2008. 12 35 AM IST

Updated: Thu, Sep 25 2008. 12 35 AM IST
Indian shareholders normally vote with their feet when they disagree with major proposals initiated by a company’s promoters. When it seemed to most investors that the Vedanta group’s recent restructuring proposal was loaded against minority shareholders of India-listed Sterlite Industries India Ltd, many of them sold their holdings, leading to a 28% drop in the stock. True, the broad markets have also fallen during this period, but at a much lower rate of 8%.
Institutional shareholders of the Vedanta group have shown a better way for shareholders to express displeasure with the proposal. According to news reports, one of these shareholders even threatened legal action, which seems to be the main reason the company has abandoned its restructuring plan. As a result, Sterlite shares gained by more than 8% on Wednesday.
This is one of the rare cases of shareholder activism, where shareholders of an Indian company have benefited. Indian shareholders need to take a leaf out of the books of their foreign counterparts, especially since it’s not uncommon for minority shareholders to be short-changed in our markets.
The main contention of Sterlite’s minority shareholders was that their stake in the core Indian assets would come down, in exchange for a piece in Vedanta’s copper mine in Zambia. To start with, this asset is unproven yet. Besides, according to Citigroup Inc.’s estimates, the Zambian copper mine has been valued at nearly double the rate at which its analysts had last valued it.
Although it’s good that the Vedanta group has shelved its proposed restructuring plans, its stated objective of simplifying shareholding across its various companies should hopefully not take a back seat.
For instance, the group’s interests in aluminium is spread across three firms, and with big investments planned in this sector, shareholders of at least one of the three firms are likely to feel short-changed. It would certainly be better for the entire aluminium business to be housed under one company. But clearly, the share exchange ratios would have to be more reasonable.
While concerns about the restructuring have been settled for now, the uncertainty of the global economy and the related hazy outlook for zinc and aluminium prices could continue to weigh on the stock. The outlook on treatment charges and refining charges in the copper business is also weak.
The positives, on the other hand, include the impending purchase of the government’s stake in Bharat Aluminium Co. Ltd and Hindustan Zinc Ltd, which will boost consolidated earnings.
Smaller companies unable to take advantage; sales, profits dip
Most of the smaller listed companies have been unable to participate in the economic boom of last year. That message comes through clearly in a Mint analysis of the annual results of 1,578 companies for financial year 2007-08.
The study splits these companies into segments on the basis of their sales.
Firms with annual net sales between Rs1 crore and Rs25 crore saw their profits shrink by 19.95% in 2007-08 while their combined sales revenue shrank by 11.70%.
Also See Performance Review (Graphic)
Apart from the lack of revenue growth, other reasons for the poor performance of small firms were higher interest costs and lower “other income”. While interest costs increased 26.7%, other income fell by 29.5%.
The performance of the next segment, that is, companies with net sales between Rs25 crore and Rs100 crore, was however, much better.
Although revenue growth at these companies was not very high at 10.8% in 2007-08, growth in profits after tax was much higher at 66.6%. In fact, this segment notched up the highest rate of growth in profits after tax in 2007-08, as seen in the chart.
While interest costs rose for companies in all the segments in 2007-08, depreciation costs rose significantly for larger companies.
Strong growth in other income, however, for all segments except the Rs1-25 crore segment, offset these increases.
Looking ahead, the smallest companies are likely to be hit even more in the current year, as the slowdown starts to bite and as interest costs rise and inventories and receivables start to pile up.
Write to us at marktomarket@livemint.com
Comment E-mail Print Share
First Published: Thu, Sep 25 2008. 12 35 AM IST