Huge dividend payout expectation lifts Vedanta to highest intra-day gain since mid-September

"From feeding them Indian food to going on cycling trips, I did it all to make our investors see the potential of my company and my country," writes Vedanta chief Anil Agarwal. (Image credit: @AnilAgarwal_Ved/Twitter)

Vedanta shares jumped over 7 percent intra-day on Indian exchanges on November 4 , amid expectations of a higher dividend payout by the Indian subsidiary to fund its indebted parent.

“Expectations of big dividend, rebound in commodities, and a peaking dollar index led to an uptick for all metal stocks, including Vedanta,” said Rakesh Arora, commodity analyst and founder at Go India Advisor.

This comes after the company’s London-based parent, Vedanta Resources (VRL), discontinued its rating engagement with Moody’s Investor Services, as stated in a press release dated November 3 on the Singapore exchange. VRL has also asked Moody’s to withdraw all the outstanding ratings. Moody’s Investor Service had slashed the rating on Vedanta Resources’ debt deeper into junk and said fundraising efforts are taking longer than expected.

Following this development, Vedanta Resources’ (VRL) dollar bonds were set for their worst weekly drop since July, reported Bloomberg.

Shares of the Indian listed entity last saw a bigger intra-day high on September 14, according to Bloomberg data, when they rose more than 13%.

Vedanta is the top gainer on the Nifty Metal Index, which is currently trading at an intra-day high of more than 2%. Having said that, the entire Metal pack on Nifty is trading in the green.

Meanwhile, in a post earnings note, Ritesh Shah, an analyst at Investec Securities, suggested that Vedanta is expected to pay up to Rs 32/share from now until March 31, 2023, meaning, there is another 11% yield in the offing. This is based on VRL’s debt maturity profile, combined with interest outgo, Inter Corporate Loan (ICL) maturity, and assuming required cash flows would be catered to only by up-streaming of dividends (and no re-financing).

Vedanta had announced two interim dividends of Rs 31.5 and 19.5/ share in April and July, as per the exchanges.

Moody’s termination follows rating action

Moody’s Investor Service had slashed the rating on Vedanta Resources’ debt deeper into junk. VRL had disagreed with the rating, saying it is in a “very comfortable position” to honour all its debt maturities, has robust liquidity at its operating units and a strong track record of raising funds via banks, according to the Bloomberg release on Friday.

In its October 31 note, Moody’s Investor Service had downgraded the corporate family rating (CFR) of Vedanta Resources (VRL) to B3 from B2. At the same time, Moody’s downgraded the ratings on the senior unsecured bonds issued by VRL, and those issued by Vedanta Resources Finance II Plc and guaranteed by VRL, to Caa1 from B3.

The note said, “The rating action reflects VRL’s rising refinancing pressure given that the company has yet to obtain funding for its large maturities due in April and May 2023, which is taking longer than Moody’s earlier expectations of completion by October 2022.” It added, “The negative outlook reflects holding company VRL’s persistently weak liquidity profile and our (Moody’s) concerns over the elevated refinancing risk arising from its looming debt maturities."

VRL’s burgeoning debt

VRL’s operating subsidiaries — 69.7 percent-owned Vedanta Limited (VDL) and VDL’s 64.9 percent-owned subsidiary Hindustan Zinc Limited (HZL) — have paid a dividend of $1.6 billion in the first half of the financial year. But Moody’s expects such dividends to fall substantially short of the holding company’s large cash needs until March 2024.

These needs include external debt maturities of around $3.8 billion comprising almost half of holding company VRL’s debt as of September 2022; $450 million of an intercompany loan; and an annual interest bill of around $600 million.