Market unimpressed with Vedanta's value unlocking plan as group debt weighs

Investors may be waiting for details and how SC allowing govt to fully divest stake in Hind Zinc plays out

There was extreme turmoil in the share price of commodity conglomerate, Vedanta as the market responded to two news events. Promoter Anil Agarwal said the company is considering a demerger and separate listing of the aluminium, iron & steel, and oil & gas businesses as three standalone entities.

Vedanta has appointed a committee of directors to study the pros and cons and consider the best way to go through this process. Agarwal said current shareholders should eventually end up holding shares in four different companies – the parent (which is a subsidiary of the London parent) and three newly listed verticals.

At the same time, a Supreme Court order will allow the government to completely divest Hindustan Zinc, an erstwhile PSU where the GoI holds residual 29.5 per cent stake while Vedanta holds 64.9 per cent. The court wants a transparent process of divestment and asked for a CBI enquiry into the 2002 stake sale. Apart from possible legal complications, investors will wonder if there’s a possibility of merger of Hindustan Zinc with Vedanta Resources subsidiary, Zinc International. This would give the merged entity access to mineral resources controlled by Zinc International.

Vedanta’s decision to spin off verticals with separate listings is inconsistent, reversing the prior strategy of attempting to delist, after acquiring and merging entities like Cairn India, Sesa Goa, etc. However it failed to meet delisting norms, and may now be trying to improve valuations by listing verticals separately.

Holding companies with many subsidiaries often trade at a discount to the sum-of-the-parts valuations. This is partly because investors find it difficult to judge separate pieces. The discount is also because it is assumed the promoter will never sell stake. Value can therefore often be unlocked if there is a spin-off listing separate business segments. Such under-valuations can be quite high. For example, Hindustan Zinc has higher market capitalisation than Vedanta, despite the fact that Vedanta owns a large stake in Hind Zinc.

So why has the market responded negatively with the Vedanta share sold down by over 8 per cent, while Hindustan Zinc was sold down over 3 per cent? One key concern is group debt. The parent Vedanta Resources has standalone debt of $8.5 billion as of the first half of FY22, with annual interest liability of $7 million and over $3 billion of debt estimated to mature in FY2022-23. Dividends from Vedanta can support interest liability but principal repayments may depend on inter-corporate loans. Vedanta made a loan of $956 million to Vedanta Resources in 2020-21 and similar loans may be necessary again. The details of separation and relisting will obviously be important, and some investors may be waiting for that.

Another factor is the commodity cycle. Every business segment is a commodity, and hence, highly cyclical. Right now, there’s a global bull run in most commodities but if the cycle reverses, the businesses would be vulnerable, separately listed or not. Apart from copper, every business segment is expected to yield strong operating profits this fiscal but it’s also estimated the cycle is close to peaking and the next fiscal could see drops in EBITDA across most divisions. This could be a concern.

Technically, this has been a sharp downtrend on high volumes and it could continue. Further news-flow will be crucial to moves in the share prices of Vedanta and Hindustan Zinc as well.