Anil Agarwal-led Vedanta Ltd’s (VEDL’s) decision to demerge businesses into six different entities will add value to investors only if the group finds strategic investors for reducing debt by selling assets partially or fully.
Sumangal Nevatia, Research Analyst, Kotak Institutional Equities Research, said the demerger of business would reduce the fungibility of cash flows across businesses and increase earnings volatility, which could be a major concern for lenders.
“The demerger could make a partial divestment in different businesses easier. However, the demerger by itself is unlikely to unlock any value,” he added.
Shareholder approval
The demerger reverses VEDL’s past efforts of consolidating stakes in different businesses and contradicts the rationale of past corporate actions. Vedanta Resources’ high leverage and funding gap for upcoming bond maturities is a key overhang for Indian business holding company VEDL which is attempting to divest non-core businesses through the demerger.
Between 2012 and 2017, the group had undergone a tedious process of merging various listed entities leading to Sesa Goa merged with Sterlite and subsequently Sesa Sterlite and Cairn India.
Though the board of VEDL has approved to demerge aluminium, power, steel and iron ore, base metals (copper and zinc international) and oil and gas into separate listed entities by September FY25, it needs approval from 75 per cent of the shareholders by value (promoters already own 64 per cent) along with creditors.
Given the elevated debt levels, getting approval from lenders would be challenging as the net debt to EBITDA for VEDL (ex-Hindustan Zinc) would be over four times between FY2024 and 26E, said Nevatia.
Analysts’ views
Vikash Singh, Research Analyst, PhillipCapital, said though average base metal prices in September quarter have fallen 1-5 per cent sequentially, lower cost of production should help the company keep its margins intact.
“We believe Vedanta Resources will refinance its debt at higher cost to avoid a default and the demerger will provide an opportunity to sell any of the particular asset to manage its FY25 repayments,” he said.
Kunal Kothari, Research Analyst, Centrum Institutional Research, said Vedanta Resources has debt repayment of $3.2 billion in the next two years and the demerger will not help the parent company meet the debt obligation as it will take time to complete the process.
Ashish Kejriwal, Research Analyst, Nuvama Institutional Equities Research, said though the demerger will provide an opportunity to invest in standalone pure-play businesses, it does not solve the debt concern of the parent company Vedanta Resources.