The Vedanta group’s atempt to simplify the holding structure of its businesses has baffled investors and analysts alike. At the end of a long day, and after two conference calls, some analysts were still grappling with questions such as why the promoter group’s stake in its biggest aluminium company (in terms of assets), Vedanta Aluminium Ltd, should rise after the restructuring.
Some others were content figuring out what has actually changed from a minority shareholder’s perspective. The adjoining chart shows how a Sterlite Industries Ltd minority shareholder’s economic interest will change at the end of the three-stage restructuring.
The effective holding of minority shareholders comes down in each of the businesses, and in compensation they will get a 21.44% stake in Zambia-based Konkola Copper Mines Plc (KCM). This firm reported a profit of $211 million in the last financial year, which is minuscule compared with the profit of more than $2 billion Sterlite had reported on a consolidated basis.
But Vedanta has stressed that KCM is still in a growth phase, and one should consider its profit for financial year 2009-10 to assess valuations. A foreign broker says KCM has been valued at $2.4 billion according to his estimates, which isn’t cheap even using forward earnings.
More importantly, he is cautious about the promoter’s decision to take a higher share in the Indian assets, while compensating minority shareholders with stakes in an African unit.
KCM has recently faced problems from its unionized workers, who resorted to a one-day stoppage of work. Given such uncertainties, one would normally put a premium on the Indian assets, he says.
So, have minority shareholders been short-changed? Well, only time will tell. According to Vedanta, the valuation of all the businesses has been done by discounting future cash flows. As a result, the net result of the changes in shareholding will be fully known only in about three years, by which time its aggressive expansion plans will also have completed.
According to the Vedanta group, the deal is neutral to all shareholders, with the only difference that minority shareholders will have a lower exposure to zinc post-restructuring, compensated by a higher exposure to copper.
The share price movement of Sterlite and Madras Aluminium Co. Ltd (Malco) on Tuesday suggests that shareholders also believe the deal is neutral for now. While Sterlite shares fell, the loss was almost made up by a large gain in Malco’s shares, which the former’s shareholders will now own. But as pointed out earlier, only time will tell whether it’s a prudent move to increase allocation to copper vis-a-vis zinc and to a mine in Zambia against assets in India. The promoters, after all, have done just the opposite with their stake holding.
Shares of 2-wheeler manufacturers on firm ground
Shares of two-wheeler manufacturers have been on a roll in the recent rally, rising at nearly double the rate at which benchmark indices have risen. Valuations of the top three players have risen 29-35% since the lows of 16 July, at a time when the Bombay Stock Exchange’s Sensex and Auto indices have risen about 18.5% each.
This has been backed by strong volume growth numbers in recent months and the return of pricing power. Some of the volume increases in recent months have been due to a build-up in inventory ahead of the festival season. But that doesn’t take away the fact that things are looking up for the industry. In 2007, the industry was reeling under the pressure of intense price competition, rising raw material costs and tighter financing norms. Since most vehicle purchases are funded by banks and other financial institutions, this had impacted volumes. As a result, shares of industry leader Hero Honda Motors Ltd had fallen by 11% in 2007, at a time when the Sensex rose 45%.
Financing still remains tight — in fact, ICICI Bank Ltd, a top two-wheeler financier, has withdrawn from the segment. But underlying demand is much stronger this year, which is leading to volume growth despite constraints in financing.
According to Credit Suisse, only 30% of two-wheelers are financed now, compared with about 55% two years ago. Besides, the low base last year is resulting in decent growth. Rural demand has been spurred by monsoon and the farm loan waiver, while the approval of the Sixth Pay Commission is estimated to have led to demand from government employees.
According to Credit Suisse, pricing power is decisively back for two-wheeler makers with strong brands. The price competition of last year has made it evident that capturing market share from established brands is a difficult task, and as a result, discounts have practically disappeared. Instead, manufacturers have been raising prices to offset raw material cost increases. The fact that major players have new facilities in tax havens means they would be able to extract decent cost savings as well. If the new-found pricing power sustains, the re-rating of these stocks could continue for some time.
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