 "Vedanta")
Mining conglomerate Vedanta Ltd (VEDL) has clarified the details of its complicated corporate reorganisation. The management shared its vision at a recent investor meeting. The group has also outlined its plans to deleverage debt even as it goes ahead with capital expenditure (capex) plans.
Parent Vedanta Resources (VRL) has managed to carry out a debt restructuring, raising bonds in January 2024. As a result, VRL’s net debt should reduce to $6.2 billion by the end of the current financial year (FY24) and according to management, debt should reduce to $3 billion by FY27. The restructure has pushed the average maturity at VRL to 2.5 years from the earlier 1 year. This has resulted in a more balanced risk structure but the cost of financing is higher. This residual debt would be serviced via brand fees and dividends from subsidiaries. The VRL cost of borrowing would be a key monitorable in the future.
VRL’s debt obligations are about $1.6–1.8 billion in FY25 and FY26. Listed Indian subsidiary VEDL may pay a dividend per share of Rs 40 in FY25 and FY26, to help meet VRL’s debt obligations. VEDL will need to monetise the steel and iron ore assets and this process, which is estimated to raise $2 billion, could start in Q1FY25. In addition, the promoters can offload up to 11.9 per cent stake, retaining 50.1 per cent stake in VEDL.
VEDL is undergoing major capex. Capex in the aluminium and zinc businesses are scheduled to be completed in FY25. Overall, VEDL is undertaking a $6 billion capex investment to increase capacities across aluminium, zinc, iron ore, oil and gas, steel, and ferrochrome. The group expects to have a payback on the total capex in about three years with an Ebitda potential of $2.5-3 billion per annum and incremental revenues of $6 billion per annum.
Capex in aluminium and zinc should result in an incremental cash flow of $1 billion-plus per annum once the plants ramp up fully, which could be in H2FY26. The guidance is for aluminium Ebitda per tonne of $1,000 from end-FY26 assuming an LME aluminium price of $2,350 per tonne. Overall, VEDL’s FY25 Ebitda is targeted to hit $5.6–5.7 billion, though conservative analysts may assume lower estimates.
The existing company will be split into Vedanta Aluminium, Vedanta Oil and Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and VEDL to be retained. The split into six listed vertical entities will be done by the end-FY25 assuming Sebi clearance. It’s a proposed simple split, with investors receiving a single share of each of the five new entities for every share held in VEDL.
This reorganisation could unlock a lot of value. In particular, it could enhance the power subsidiary’s valuations. Investors can focus on pure-play verticals and divest the businesses they are not interested in.
The aluminium business will include the Lanjigarh refinery, Jharsuguda smelter and a 51 per cent stake in Balco. The power business includes 190mw Talwandi Sabo Power, 600mw Jharsuguda IPP, 1,000mw Meenakshi Energy and 1,200mw Athena. The Oil and Gas business is the erstwhile Cairn Oil & Gas. The Steel & ferrous business includes Sesa Iron Ore, Sesa Coke, Liberia (iron ore) and ESL Steel. The Base Metals vertical will hold Zinc International, Tuticorin Smelter, KCM and Fujairah Gold. VEDL will continue to hold its 64.92 per cent stake in listed Hindustan Zinc (HZL).
The Aluminium business, HZL, and Cairn contribute around 67-70 per cent of VEDL’s current revenue. As steel capacity doubles, ESL’s revenue contribution should rise to 7 per cent by FY26 (5 per cent in FY23). The debt restructure, corporate reorganisation and capex plans all look positive but the debt overhang remains a cause for concern.
According to Bloomberg, 5 of the 10 analysts polled this week are bullish on the stock, 3 have a 'reduce/sell' rating, and one each is 'neutral' and 'not rated'. Their average one-year target price is Rs 299.44, indicating a potential upside of about 14 per cent from current levels of Rs 262.80.
