Attempt to delist failed previously as investors like LIC didn’t wish to tender shares at low price
Investors will not settle for the ₹235 on offer, as the company fundamentals have been on an upswing
After a failed delisting attempt last year, London-based parent Vedanta Resources Ltd (VRL) has upped its offer price to increase its stake in Vedanta Ltd by buying a 17.51% stake in it at ₹235 per share.
This is significantly higher than the previous offer price of ₹160 apiece, but only marginally more than the prevailing price of ₹227.
The delisting attempt by the promoters had failed previously as influential institutional investors such as Life Insurance Corp. of India (LIC) were not willing to tender shares at the low price. LIC had suggested a per share price of ₹320 in the reverse book building process last year.
It is not likely that investors will settle for the ₹235 on offer, especially as the fundamentals of the company have been improving with rising base metal prices.
The company’s shares had earlier traded much higher and were near the ₹300 level during the peak of the commodity cycle. Hence, analysts said investors will expect a higher price for an exit.
Aluminium and zinc prices on the London Metal Exchange (LME) are up 21-28% from the September-October lows.
Favourable China trade data, rising demand, and low inventory indicate that base metal prices may continue to remain firm. The Chinese authorities are determined to slash output as part of efforts to formulate a carbon emission programme, according to analysts. This should support base metal prices and, in turn, boost profits of Indian metal companies.
Even crude prices are on a rise and that is improving Vedanta’s earnings and cash flow expectations further. The oil and gas business contributed 31% to Vedanta’s FY20 operating profit.
The per barrel crude oil prices have rebounded to around $70 levels now from sub-$20 levels in March 2020.
Analysts at IIFL Securities Ltd recently said that with prices of zinc, aluminium and crude rallying sharply after Q2FY21, they are upgrading Vedanta’s FY22-23 Ebitda by 19-14%. The longer the prices sustain, the healthier will be the cash generation and deleveraging at Vedanta, they said. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.
However, concerns on high debt at the promoter level persists. Considering full tendering of shares in the open offer at ₹15,300 crore, analysts at Edelweiss Securities Ltd expect total debt (standalone) of VRL to increase to $8.2 billion. “While the increased shareholding in Vedanta would fetch them additional cash distributed through a dividend, we believe that debt servicing concerns still persist," said analysts.
VRL plans to service the debt required to buy the additional stake through the higher dividend received from the downstream investment. Looking at persisting concerns related to the group’s debt, another analyst at a domestic broking firm said the offer price may be reasonable. Investors may, thus, need to weigh concerns, too, before taking a call on whether or not to tender shares in the latest offer.
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