On Friday, post market hours, Vedanta announced Board approval for demerger plan of Vedanta Ltd into five entities in a 1:1 vertical split. Investors can expect to get five shares in Vedanta Aluminium, Oil & Gas, Power, Steel & Ferrous Materials, and Base Metals for each share held in Vedanta. Post demerger, the shareholding pattern of each company will mirror that of Vedanta Ltd. The process should take 12-15 months to materialise.
The Vedanta management cited two main factors for the demerger — to unlock value in each of the business units, which can now pursue an independent growth strategy. To enhance strategic focus and allow an agile framework to respond to markets.
As regards the first, a cursory examination shows that significant value unlocking can be realised across the various assets. Hindustan Zinc (65 per cent stake held by Vedanta) has a market cap of around ₹1.3 lakh crore, which implies Vedanta’s stake in it is worth around ₹85,000 crore. This is more than Vedanta’s current market cap of ₹82,000 crore, whose business also houses aluminium, power, base metals and other businesses. This potential for value unlocking applies even after considering debt overhang or other issues facing respective commodity sectors now.
Vedanta Resources Ltd, the unlisted parent group company based in London having a 68 per cent stake in Vedanta, had a credit downgrade from S&P and Moody’s last week. The ratings mentioned issues with bond repayments due in January 2024 to the tune of $1 billion. The total dues amount to $3 billion. The view to allow strategic focus on each unit in Vedanta, the Indian entity, gives scope for finding strategic investors to each unit. This may allow stake sales which may come into play to address the debt concerns at the parent level in London.
In recent times, the financial health of parent-held Vedanta Ltd was being utilised for the cash flow needs of Vedanta Resources; FY23 was a record year for dividends as close to $3.4 billion in dividends were paid to Vedanta shareholders, which is an 83 per cent YoY increase. Although minority/non-promoter shareholders of Vedanta Ltd also got the dividends, this may have conflicted with strategic requirements for capital of individual businesses in the company. This demerger may put an end to this, and hence can be viewed positively in terms of corporate governance as well.
Sum of the parts
One of the reasons mentioned by the company for the demerger was to account for the India-centric themes, which are more pronounced now in the global sphere.
As is described in the table, at the Enterprise value level, the sum of the parts (adjusted for the 65 per cent Hindustan Zinc holding) indicates a 25-50 per cent higher value of sum of parts than the most recent EV of Vedanta. Shareholders can look for value creation as each unit lists in the market when the demerger process is completed successfully (subject to getting all requisite approvals). The final market value (EV minus net debt, minority interest and other liabilities) for each entity is dependent on the net debt ascribed to that unit. The consolidated net debt currently stands at ₹59,000 crore.
Vedanta Aluminium will undertake the Aluminium production business with Jharsuguda facility which recently upgraded its capacity to 1.8 MTPA and along with BALCO (51 per cent owned by Vedanta) the capacity stands at 2.4 MTPA. The company is expanding capacity to 3 MTPA along with production efficiency.
Vedanta Oil & Gas will house the crude exploration and production unit with average operated production of 143 kboepd. The unit expects to supply close to 50 per cent domestic oil and gas production.
Vedanta Power, including the recently acquired units and anchor plant at Talwandi, should account for 5 GW of power capacity.
Vedanta Steel and Ferrous Materials operates iron ores at Goa, Karnataka and Liberia with plans to increase capacity from 6.5 MTPA to 13 MTPA by 2025. Essar Steel unit (95 per cent owned), with operations in Bokaro, is operating the 1.5 MTPA steel plant with expansion planned to 3 MTPA.
Vedanta Base metals will operate Zinc and Copper business operating in South Africa. The residual company Vedanta Ltd will be the Holdco of 65 per cent stake in Hindustan Zinc (HZL) and also undertake the incubation of semiconductor and display technology companies.