03-Oct-2023
2 mins read
Vedanta’s recent demerger announcement, which involves splitting its diverse business into six separate listed companies, led to a 4% increase in its share price during early trading on Tuesday. This restructuring initiative aims to create value for shareholders within the Vedanta Group, led by billionaire Anil Agarwal. The company’s shares reached ₹233.80 each on the BSE, marking a 4.42% increase.
Vedanta is transitioning from a globally diversified natural resources producer to a pure-play asset owner business model. The six separate listed entities will house different commodities, providing investors with the opportunity to invest in their commodity of choice and potentially unlocking value.
The demerger process, expected to take 12-15 months, necessitates the approval of two-thirds of minority shareholders, as well as approvals from lenders and statutory authorities. While it simplifies ownership by consolidating new ventures under Vedanta Ltd, it does not directly improve Vedanta’s credit profile.
While the demerger generated some positive momentum for the stock, concerns about the company’s debt situation persist. Many brokerages have maintained their “sell” ratings on Vedanta following the announcement, with CLSA and Nuvama being the exceptions.
CLSA revised its rating upwards due to the recent stock correction but adjusted its target price downward due to uncertainties related to the company’s capital structure. Brokerages cited various concerns, including the lack of clarity regarding debt profiles, the reversal of past consolidation efforts, Vedanta’s funding gap, and a perceived lack of focus on core operations.
Nuvama Institutional Equities also viewed the demerger as a positive development, even though it doesn’t address the debt concerns of Vedanta Resources, which is required to repay $4.2 billion by FY25. Nuvama suggested an unchanged share price target of Rs. 249, based on FY25 earnings estimates, and upgraded Vedanta to a “HOLD” rating.
Despite the challenges, Nuvama believes Vedanta has a two-year window to address its debt situation, especially with anticipated growth in its aluminium business from FY25. Cash flows from these operations can potentially help service the debt. Additionally, Vedanta could explore options such as selling part of its businesses or raising capital through equity dilution.
The demerger primarily impacted Vedanta Ltd and didn’t directly address the debt concerns of Vedanta Resources, which remains a separate entity. Vedanta’s ability to upstream dividends to Vedanta Resources may still be limited due to its cash flow constraints unless it assumes additional debt. That’s the reason why demerger failed to excite the brokerage houses.