This, if it happens, would reverse the last few years of simplification structure in terms of merging group companies into Vedanta, said analysts, who believe promoter leverage stays as a key overhang for the stock and will remain so unless addressed.
By 10.20 am, the stock was trading at Rs 314.40, down 7 per cent.
If the company chooses to list aluminium, iron & steel and oil & gas businesses, there would effectively be four listed companies, with the fourth one being the residual entity owning copper smelting, power and Zinc International assets.
“If Vedanta were to choose this option, the most likely way could be via de-merger with mirror shareholding via of the existing Vedanta as it would be easier to achieve compared to an IPO process,” said JPMorgan.
The foreign brokerage noted that nowhere in the press release was it mentioned that Zinc International assets would be sold to Vedanta’s arm Hindustan Zinc, which is thus a low probability event for now.
“A restructuring by itself is unlikely to unlock value as it would not address concerns of promoter leverage, a key overhang,” said Kotak Institutional Equities.
The stock has seen de-rating due to concerns on parent debt and maturities. Parent Vedanta Resources has a standalone debt of $8.5 billion as of the first half of FY22, annual interest liability of $7 million and over $3 billion of debt maturing in FY2022-23E. Kotak said dividends from Vedanta can support interest liability but principal repayments would likely depend on inter-corporate loans from Vedanta.
“In FY2021, Vedanta had extended a loan of $956 million to Vedanta Resources. We see high promoter leverage as the key overhang for Vedanta and needs to be addressed to unlock value,” Kotak said.
The domestic brokerage said it sees a potential of value lock in case Vedanta opts for a demerger of all businesses and investors (promoter and minority) get direct ownership of Hindustan Zinc, as it assigns a holding company discount of 25 per cent, or Rs 60 per share, to its Vedanta SOTP in the current structure.
Besides, the unlocking requires the divestment (part or full) of some businesses to help reduce parent leverage meaningfully.
In the recent earnings call, both the management of Vedanta and Hindustan Zinc shared that they see strategic benefits of merging Vedanta’s Zinc International (ZI) business with Hindustan Zinc.
“We believe this could help unlock the value of ZI’s huge mineral reserves. Management has not indicated any timeline for corporate restructuring and it is likely to be a long-drawn process involving approvals from various stakeholders. We have revised our fair value to Rs 335 per share from Rs 320) factoring current market value,” Kotak said.
Deepak Jasani of HDFC Securities noted that promoters of Vedanta failed to buy the non-promoter shareholding and delist the company in the past and has been looking at other ways of adding value.
“One option it is considering at this point of time is the demerger of its key business units into separate listed companies to give shareholders better value. Vedanta is a conglomerate of commodities and comprises iron ore, steel, oil, aluminum and copper. It is one of the most integrated commodity plays in India but that leadership position is not exactly reflected in its market capitalization. Separating these businesses into listed entities is expected to give more focus and add value,” he said.
“The obvious bet is that the commodity upcycle will last for some more time during which focused commodity franchises will have a profitable run. Of course, the shareholders of Vedanta would then get proportionate shares in all the split companies. Adani group had undertaken a similar exercise in 2015 to split ports, power, transmission, alternate energy and incubation initiatives into separate entities. Over the last 6 years, Adani has created billions in value. The only question for Vedanta is that as these businesses are all in commodities, how much value unlocking can happen overtime,” he said.