After being combined into a single unit a decade ago, Anil Agarwal, the mining billionaire of the Vedanta Group is on the verge of separating the single unit into six different entities again.
The mining conglomerate has merged entities between 2012-2017 and also flirted with the idea of having different listed entities in November 2021. However, they did not go through with the plan. On Friday, they announced a six-way vertical split for the listed entity to "unlock significant shareholder value."
The plan is to split the entities with a focus on their core competencies. Shareholders will now get one share each of the newly listed entity for every one share of the currently listed Vedanta Ltd. that they hold.
Here's how the demerged businesses would look like:
The management says that the demerger will simplify their corporate structure, gives investors the option to invest in the commodity of their choice and also provide a platform for individual units to pursue their strategic agenda.
Interestingly, this was the same rationale highlighted when the group had merged the entities a decade ago.
Subject to approval from the board, stock exchanges and the NCLT, this process is likely to take another 12-15 months.
How Does This Help The Group?
With this move, the Vedanta Group gets the flexibility to unlock value for investors either by liquidating a particular asset or by bringing a strategic investor on board.
While in the current structure, there would be a double taxation on profit of sale of an asset and on the dividend payout, but the promoters will pay only long-term capital gains post the demerger.
The $4 Billion Elephant In The Room
Corporate structure simplification, value unlocking and such points are justified in their own way, but the demerger does not resolve the biggest issue surrounding the group which has left the street anxious currently - Reduction of debt.
Vedanta Resources has pending payments of around $4 billion from now until financial year 2025. The promoter entity has cash generating tools - Dividend from Hindustan Zinc and Vedanta Ltd., potential stake sales in Vedanta Ltd. and also brand fees from Vedanta Ltd. and its subsidiaries.
However, they are running out of options currently as Hindustan Zinc's cash balance is exhausted as we reported about it earlier this year and a slew of downgrades by credit rating agencies have led to higher interest rates.
After increasing its stake by nearly 20 percent in the listed entity, Vedanta Resources sold over 4 percent of that via block deals a couple of months earlier. That has made the street more nervous.
What Are The Analysts Saying?
Investec maintained a sell recommendation on Vedanta as they highlight the company has carbon-heavy assets and they also remain skeptical on the cash flow burn in the new ventures.
CLSA has upgraded the stock to outperform from its earlier rating of underperform. However, it has cut its price target to Rs 230 from Rs 250 as it believes the focus needs to shift to operational improvements for sustained re-rating.
Nuvama has upgraded the stock to Hold as it believes the demerger is a step in the right direction. However, it has left its price target unchanged.
Watch: Nigel Dsouza explains the mega demerger of Vedanta and what shareholders should expect from the same.
Philip Capital has a buy rating on Vedanta with a price target of Rs 290 as it does not see any further meaningful downside in the stock.
(Edited by : Hormaz Fatakia)
First Published: Oct 3, 2023 6:09 AM IST
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