Shares of Vedanta opened 2.27 percent higher on October 3 after the company announced a plan to demerge its businesses into six companies, including a holding company. At mid-day, the stocks were trading at Rs 232.30, 4.3 percent higher on the NSE. The spin-off will result in the creation of one residual holding company, including Hindustan Zinc, and five more entities in aluminium, oil and gas, ferrous metals, base metals, steel and ferrous, and power.
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The demerger of Vedanta entities will result in dismantling of the debt problem at the group level, said Deven Choksey, promoter and Managing Director, DRChoksey Finserv Pvt Ltd , in a note. At a consolidated level, Vedanta group’s debt stood at $9 billion, of which 60 percent is on the books of VEDL.
This will be allocated to the demerged entities.
Additionally, businesses having larger debt and lower Earnings before Interest, Depreciation and Amortisation (EBITDA) contributions may be divested to improve capital utilisation. According to Choksey, the current valuation of Rs 82,726 crore will improve "as the corporate structure is simplified". The holding company discount may still continue for Hindustan Zinc, it said.
"By demerging our business units, we believe that will unlock value and potential for faster growth in each vertical. While they all come under the larger umbrella of natural resources, each has its own market, demand and supply trends, and potential to deploy technology to raise productivity,” Vedanta Chairman Anil Agarwal said in a statement after the board meeting.
Also read: Vedanta announces demerger to split business into six listed entities
For Q1FY24, Vedanta reported a 40 percent on-year decline in the net profit to Rs 3,308 crore. Revenue also fell 13 percent to Rs 33,242 crore during Q1FY24.
Vedanta Demerger: 5 Key takeaways
What brokerages say
Citi has given a ‘sell’ call for Vedanta with a target price of Rs 225, while CLSA has upgraded Vedanta to ‘outperform’ and reduced the target price to Rs 230 from Rs 255. Investec on the other hand has given a ‘sell’ call with a target price of Rs 180.
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