Promising better value for shareholders, billionaire Anil Agarwal founded Vedanta Limited announced demerger and corporate restructuring of its Indian businesses. After regulatory and legal approvals – 18 months as claimed - Vedanta’s all Indian businesses will be listed as six separate companies on Indian exchanges. However, the announcement and subsequent analyst meet failed to infuse confidence in the investor community for the debt ridden group. 

Vedanta Limited, which is listed in India, is owned through London-based Vedanta Resources Limited. The parent and its businesses in India must repay $2.2 billion by March 2025. The total debt on the group entities is more than $6 billion. A series of one-time measures to repay the debt are running out. Probably this is the toughest time (in terms of time and options to raise funds) for 70-year-old Agarwal, a small time scrap dealer in Mumbai turned largest metals producer in India. 

A decade back, he merged his iron ore business with aluminum promising better realization value for its shareholders. During the Hot Commodities (as described by investment advisor and author Jim Rogers) days he acquired crude oil, copper, zinc, and steel assets. 

By nature, commodities have a typical business cycle of booms and busts. However, Agrawal continued to service his debt obligations by taking away high dividends from his cash-rich Zinc business. One should also remember that he acquired 45% of Hindustan Zinc from the government of India in 2002. Today, the group is the world’s second-largest producer of Zinc. 

Debt servicing through Dividend Payouts

As per the group records and corporate filings, Vedanta has declared a dividend of over ₹85,000 crore in the last ten years. What is shocking here is that 64% or ₹54,454 crore of the same was paid in the last 18 months, immediately after the debt started maturing. Moreover, it paid ₹34,858 crore as dividends from only one entity Hindustan Zinc, in which promoters now own 64.92%. 

Higher dividend payments to service debt obligations have dented the financials of the group’s Zinc business which has been the cash cow for all these years. In March 2020, Hindustan Zinc had a reserve of ₹39,465 crore on its balance sheet, which is now less than one-third to ₹12,097 crore as of Mar 2023. 

Debt Obligations

As per company records, Vedanta Group has gross debt of ₹73,500 crore and cash and cash equivalents of ₹14,300 crore leaving with net debt of ₹59,200 crore. The situation is grim, argues Kotak Institutional Research desk. “The $2.2 billion maturity in 2024-25 is a taller hump. We note that large dividends are no longer possible and Vedanta Resources (the London-based Parent) might be forced to divest stake/assets in Vedanta Limited,” Kotak said in a research note. 

“For debt maturities in 2023-24, the group addressed the funding gap through front-ended dividend payouts, a divestment of a 6% stake in Vedanta and deferment of $450 million of intercompany loan. The debt repayment maturing in 2024-25 is about $3.6 billion, with cash and other alternatives there is a funding gap of 3.1 billion dollars,” the investment banker added in the same note. 

Credit Deterioration  

On the day, when Vedanta announced its restructuring exercise, credit rating agency S&P downgraded Vedanta Resources’ ratings to CCC from B- “We believe the likelihood has increased that Vedanta Resources will undertake a liability management exercise that we could consider distressed under our criteria,” S&P Global said in its release announcing the action. “The CreditWatch placement reflects the likelihood of further rating downside over the next three months, especially if we considered the liability management exercise to be distressed,” S&P Global said. 

Earlier on Sept 26, Moody’s also downgraded the corporate family rating (CFR) of Vedanta Resources to Caa2, citing elevated risk to debt restructuring over the next few months because the company has not made any meaningful progress on refinancing its upcoming debt maturities.

Costly Funds

Poor confidence in the management and credit downgrades has already started showing negative results for Vedanta. It raised ₹2,500 crore through a bond sale with a maturity of 18 months at sharply higher rates. The company had to offer a coupon of 12% payable every quarter to investors. In an earlier fundraise in December, Vedanta managed to get 800 crore at a coupon linked to a 91-day Treasury bill yield, which then worked out to around 8.79%. 

Investment advisors, Unimpressed

Even after the restructuring announcement, leading brokerage houses remained unimpressed. The lack of clarity on debt profiles, reversal of past consolidation efforts, Vedanta’s funding gap, and lack of focus on core operations are some of the concerns of these brokerages.

Citi has maintained its sell rating but changed the target price to ₹225 from ₹222. The brokerage reckons that Vedanta’s objective in pursuing these actions is to reduce the conglomerate discount and potentially facilitate a stake sale by the promoter. The management's lack of clarification on the debt breakdown has provided limited visibility into independent leverage ratios.

Kotak Institutional Equities has maintained its ‘Sell’ rating for Vedanta as it believes that the demerger alone might not bring about a significant unlocking of value. The brokerage highlights that this demerger represents a reversal of Vedanta’s previous efforts, between 2012 and 2017, to consolidate stakes in different businesses, and contradicts the rationale behind those earlier corporate actions.

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