BackWith its demerger, Vedanta is going for broke
But it’s too early to say if the restructuring will make it any easier for the conglomerate to solve its debt problem
PremiumAnil Agarwal’s Vedanta Group is demerging the natural-resources conglomerate Vedanta Ltd (Vedl), which is listed in India, into six separate companies. The group has said it aims to complete the reorganisation by September 2025 and list at least five of the new entities by March 25. Since the group also controls Hindustan Zinc its share price is sure to be affected, too.
The group aims to carve out its various divisions – aluminium (Vedanta Aluminium), power (Vedanta Power), ferrous (Vedanta Steel), copper and zinc (Vedanta Base Metals) and Vedanta Oil & Gas – into separate, listed entities. Vedl will continue to hold the stainless steel unit, Facor, the new semiconductor unit, and the stake in Hindustan Zinc. The board of directors has approved this but it still needs the approval of 75% of shareholders by value (the promoters own 63.7%) and creditors.
The restructuring is Vedanta’s attempt to solve a looming debt issue. The group must pay creditors between $1.3 billion to $1.4 billion in the next six months, and has bond payments worth$ 1 billion due in January 2024. It will also have to repay or refinance debt worth about $3 billion in FY25, in addition to servicing the interest.
This won’t be easy. Interest rates are high and the credit rating of the holding company Vedanta Resources (VRL) is low. (VRL is UK-listed and suffered a recent credit rating downgrade). The Fed’s hawkishness rules out an easy-money regime for much of this period so refinancing will be expensive.
Commodities such as industrial metals have seen price drops due to weak global demand, reducing realisations and reducing cash flows. The main source of income for VRL to service debt is brand fees ($327 million in FY23) and dividends ($2.5 billion in FY23). FY24 revenues from these sources are likely to be lower.
The spin-off is a “mirror", meaning every shareholder in the India-listed Vedanta Ltd (Vedl) will receive the same number of shares in each of the new entities. The debt will also be divided between the new entities. This is the primary issue investors must reckon with. Will the new entities – separately or in aggregate – have the cash-flows or the assets to service their debt? Valuations will hang on those assessments.
In theory, and probably in practice, the move is nonetheless positive. The holding company continues to face debt stress and the reorganisation won’t necessarily help with this. But these new entities will be pure-play businesses with independent management (the CEOs have already been announced). Hence, while the prices of industrial metals do tend to move broadly in conjunction, each business will have different characteristics and can look for focussed strategies to generate revenue growth and margins. The demergers also give the parent some flexibility to offload assets if it needs to. It may for example, sell out its stake in one of those new entities or bring in a strategic investor.
Vedanta is currently trading at a big discount to its intrinsic value because of the debt issue and the fact that it’s a conglomerate. The current market capitalisation of Vedl is less than the market value of its shareholding in Hindustan Zinc (Vedl holds 64.9% in Hind Zinc and will retain this stake after demerger). The demerger should therefore lead to a positive rerating even if the debt overhang remains.
Opinions are divided on whether VRL will manage to service its debt without defaulting or paying ruinous rates to refinance it.
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