Why Street is divided on Vedanta demerger

 (Reuters)
(Reuters)

Summary

While the demerger allows investors to pick specific businesses for focussed investments and is seen to be beneficial in the long run, challenges on the debt, operational, and repayment fronts could linger.

Vedanta’s demerger plan has pushed analysts to opposite sides of the fence. Enthusiasm expressed through rating upgrades by CLSA, Nuvama Institutional Equities, and PhillipCapital is in contrast to the ‘sell’ recommendations upheld by Citi and Kotak Institutional Equities. On 29 September, Vedanta said it is demerging into six independent companies.

While the demerger allows investors to pick specific businesses for focussed investments and is seen to be beneficial in the long run, challenges on the debt, operational, and repayment fronts could linger. The main concern is the substantial debt repayment obligation of parent Vedanta Resources Ltd (VRL) and that is unlikely to be alleviated by this split.

Last week, CRISIL Ratings has placed long-term bank facilities and debt instruments of Vedanta under ‘rating watch with negative implications.’ Any delay in debt repayment by VRL could have a bearing on the financial flexibility of Vedanta, especially its access to capital markets, and may result in a downward rating action for Vedanta. On 26 September, Moody’s cut corporate family rating of the parent citing large refinancing needs and interest expenses.

Simply put, there are apprehensions about repayment of about $2 billion debt of the parent company due next year. Some investors believe the Vedanta demerger could unlock value for shareholders. “Others hold a more cautious perspective believing the impact to be neutral considering the de-merger won’t bring about significant operational changes, and the company’s ability to service debt still persisting," said Sanjay Moorjani, research analyst, SAMCO Securities.

The parent’s high leverage and impending bond maturities are a key overhang for Vedanta. Kotak believes divesting non-core businesses is crucial since the parent’s deleveraging hinges on divesting stakes in Vedanta or subsidiaries. “The demerger reverses Vedanta’s past efforts (during 2012-17) of consolidating stakes in different businesses and contradicts the rationale of past corporate actions," it said.

Though Nuvama sees debt issues sticking, it believes the demerger plan is a step in the right direction. While CLSA said this move could help the parent bring in strategic investors and thereby ease debt.

After upgrading Vedanta to ‘outperform’ rating, CLSA said nothing changes operationally in the near-term but this move could help the parent bring in strategic investors and thereby ease debt.

On 29 September, the metal conglomerate said it is demerging into six independent companies to create value and attract investment.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS