Vedanta Ltd’s shares fell around 9 percent on the National Stock Exchange (NSE) on Thursday, a day the broader markets were also weak. On Wednesday, after market hours, the company said its board is evaluating various alternatives (including demerger(s), spin-off(s), strategic partnerships, etc.) to unlock value and simplify the corporate structure. Vedanta intends to house its aluminium, iron and steel, and oil and gas businesses in standalone listed entities.
Analysts point out the stock has risen 11 percent in November prior to Thursday, perhaps in anticipation of the development. Even so, there are some concerns.
“Vedanta’s latest intention to demerge and separately list different entities to unlock value prima facie appear to contradict its past corporate actions,” pointed out analysts from Kotak Institutional Equities in a report on November 18. Vedanta had merged its several listed entities such as Sesa Goa and Sterlite Industries in 2012 and further, Sesa-Sterlite and Cairn India in 2017.
Commenting on Vedanta’s announcement, Deepak Jasani, head of retail research, HDFC Securities, said, “Adani group had undertaken a similar exercise in 2015 to split ports, power, transmission, alternate energy and incubation initiatives into separate entities. Over the last six years, Adani has created billions in value.” Jasani added, “The only question for Vedanta is that as these businesses are all in commodities, how much value unlocking can happen over time?” Investors should note that commodity businesses are generally cyclical in nature and, as such, do not fetch higher valuation multiples.
Analysts from Kotak believe that promoter leverage is a key overhang for Vedanta and that needs to be addressed to unlock value. “The stock has seen de-rating due to concerns on parent debt and maturities. VRL (Vedanta Resources), parent of Vedanta, has a standalone debt of about $8.5 billion as on 1HFY22, annual interest liability of about $0.7 billion and +$3 billion of debt maturing in FY2022-23E. Dividends from Vedanta can support interest liability but principal repayments would likely depend on inter-cooperate loans from Vedanta,” the analysts said. Note that Vedanta had extended a loan of $956 million to VRL in fiscal 2021.
To be sure, some do believe Vedanta’s plans to list its businesses separately will unlock value and is positive from a long-term perspective. Amit Dixit, analyst at Edelweiss Securities, said, “(The restructuring) might unlock value as investors in various commodities have different return and risk expectations. From an oversight perspective, it would be better as every business will have to run its own show and be accountable to the shareholders.”
According to Kotak analysts, “A demerger of all businesses could unlock value (1) with lower holding company discount on Hindustan Zinc’s stake of Vedanta (25 percent, or Rs 60/share in our SOTP) and (2) if followed by divestments to reduce promoter debt.”
SOTP refers to sum-of-the-parts valuation methodology where the value of each division is ascertained separately and added together to arrive at the total value of the firm.
Notwithstanding the drop in the share's price on Thursday, investors are sitting on handsome gains of nearly 90 percent so far in 2021, helped by tailwinds from commodity prices.