Vedanta stock tanks 8% as Viceroy Research shorts parent's debt

The US-based research firm Viceroy Research has turned short on Vedanta Resources, as it found the group's financial structure unsustainable and operationally compromised.

Shares of Vedanta tanked up to 8 per cent in Wednesday’s intra-day trade on the BSE amid heavy volumes, as US-based Viceroy Research turned short on its parent firm's debt as it found the group's financial structure unsustainable and operationally compromised.

 

At the bourses, Vedanta stock plunged 8 per cent to Rs 421 on Wednesday before recovering partially to trade at Rs 439 levels. In comparison, the BSE Sensex was up 0.06 per cent at 83,761 around 1PM.

 

"The entire group structure is financially unsustainable, operationally compromised, and poses a severe, under-appreciated risk to creditors. The core of our investment thesis rests on a simple but critical dynamic: VRL is a "parasite" holding company with no significant operations of its own, propped up entirely by cash extracted from its dying "host": VEDL," Viceroy Research said in a note.

 

To service its own debt burden, Viceroy Research said, VRL is systematically draining Vedanta, forcing the operating company to take on ever-increasing leverage and deplete its cash reserves. This looting erodes the fundamental value of Vedanta, which constitutes the primary collateral for VRL's own creditors, the report suggests.

 

The Vedanta Group, Viceroy Research said, is a house of cards built on a foundation of unsustainable debt, looted assets, and accounting fiction.

 

“VRL financial zombie being kept alive by transfusions of cash from its subsidiary Vedanta. The proposed demerger will merely spread the group's insolvency across multiple, weaker entities, each burdened with a legacy of impaired assets and unserviceable debt. The structure is fundamentally broken and headed for a disorderly collapse, added the report,” the report said. 

Their investigation, the US-based research firm said, has uncovered material quantitative and qualitative discrepancies in Vedanta group’s, many of which we believe are tantamount to fraud.   Findings as per the Viceroy Research note:

 

?-? Bait and Switch Funding Model – Vedanta Limited promotes ludicrous capital-intensive projects that it cannot afford in order to raise fresh capital. This capital is then paid out to the PropCo to service its debt.

 

?-? Irreconcilable Interest Expenses - Vedanta’s interest expenses vastly exceed its reported note rates, and continues to increase despite paydowns and restructuring.

 

?-? Inflated Asset Values – We evidence inflated asset values across VEDL’s large list of non-performing operating subsidiaries. The debt across these assets vastly exceeds their true value and is cross collateralized among the Group.

 

?-? CAPEX Fraud - Expenses across operating subsidiaries are systematically capitalized, artificially inflating profits and asset values. This is a material misrepresentation. 

 

?-? Off-Balance Sheet Items – Billions of dollars of disputed expenses are kept off-balance sheet and undisclosed in financial reports.

 

?-? Governance Failure – Vedanta presents systematic governance failures across management and auditors, including inappropriate auditor choices.  Vedanta Group statement 

Meanwhile, Vedanta Group said that the Report is a malicious combination of selective misinformation and baseless allegations to discredit the Group. It has been issued without making any attempt to contact us with the sole objective creating false propaganda. It only contains compilation of various information - which is already in the public domain, but the authors have tried to sensationalise the context to profiteer from market reaction.

  

The timing of the Report is suspect and could be to undermine the forthcoming corporate initiatives. Our stakeholders are discerning enough to understand such tactics. In fact, to avoid any responsibility – authors of the report have added various disclaimers that the Report has been prepared for educational purposes only and expresses their opinions and are not statements of fact (page 7).  "We remain focused on the business and growth, and request everyone to avoid speculation and unsubstantiated allegations", Vedanta Group said.