All you need to know about Vedanta’s Demerger

Vedanta’s share price has surged following significant developments in its demerger plan. With the State Bank of India’s approval and growing momentum among lenders, the mining company’s stock has risen over 3.50%. 

Let’s look at the impact of recent updates on Vedanta’s demerger, shedding light on the factors driving this notable increase in shareholder value.

Overview of Vedanta Ltd. demerger

Vedanta Ltd., India’s largest diversified natural resources company, announced plans to demerge its core business units into six independent listed companies on 29th September 2023. This strategic move aims to unlock value, attract investment, and enable each business to grow independently.

Planned demerged entities:

1. Vedanta Aluminium
2. Vedanta Oil & Gas
3. Vedanta Power
4. Vedanta Steel and Ferrous Materials
5. Vedanta Base Metals
6. Vedanta Ltd. (retaining Hindustan Zinc, semiconductor, display businesses, and other incubated businesses)

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Rationale for demerger

1. Simplification of corporate structure: The demerger will create sector-focused independent businesses, making it easier for investors to evaluate and invest in specific sectors.
2. Value unlocking: Independent management and strategic agendas will help each entity realise its full potential and value.
3. Investor attraction: Global investors, including sovereign wealth funds and strategic investors, can directly invest in preferred verticals.
4. Growth and investment: The demerged units will have greater freedom to manoeuvre market cycles, finance growth, and invest independently.
5. ESG commitments: The new entities will maintain Vedanta’s strong focus on ESG practices, including net-zero carbon emissions by 2050 and net water positivity by 2030.

Vedanta Ltd. Financial analysis

Vedanta Consolidated Quarterly Results

Vedanta Ltd. Shareholding pattern

Vedanta Ltd. financial and operational highlights

• Vedanta Aluminium: The largest single-location aluminium smelting facility outside China, with significant growth in green aluminium production.
• Vedanta Oil & Gas: India’s largest private oil, gas, and sweet crude exploration and production company.
• Vedanta Power: Houses large independent power plants, becoming one of India’s largest private independent power players.
• Vedanta Steel and Ferrous Materials: Includes iron ore and steel production, aiming to double annual iron ore production.
• Vedanta Base Metals: Strong international base metal production assets with significant zinc and copper production growth.

Vedanta Ltd. approval and compliance

• State Bank of India (SBI) has granted its consent to the demerger, seen as the last major compliance requirement.
• Lender consortium: Includes state-owned and private banks like SBI, Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, and others. The majority have given the go-ahead, with remaining approvals expected soon.
• Securities and Exchange Board of India (SEBI): Approval required post-lenders’ no-objection certificate.
• National Company Law Tribunal (NCLT): Final approval to be sought following SEBI clearance.

Vedanta Ltd. Debt allocation and management

• Debt distribution: Vedanta’s existing debt (₹56,338 crore as of March 2024) will be allocated among the demerged entities in the asset allocation ratio.
• Credit rating: Vedanta has received stronger credit ratings post-demerger announcement, reflecting improved financial health.
• Deleveraging efforts: The company reduced net debt by ₹6,155 crore in the March 2024 quarter, showing progress in deleveraging.

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Vedanta Ltd. Challenges and concerns

• Debt reduction: The demerger does not immediately resolve Vedanta’s significant debt burden (~$4 billion pending payments until FY2025). However, it provides potential for future deleveraging through improved operational performance and strategic investments.
• Market uncertainty: Despite the strategic rationale, the market remains cautious due to past restructuring and current financial pressures.

What’s in it for retail investors?

1. Direct investment opportunities: Retail investors can invest directly in specific sectors, aligning portfolios with preferences and market outlooks.
2. Unlocking value: Demerger brings transparency, clearer valuation metrics, potentially re-rating stocks, and enhancing market value.
3. Independent management: Each entity’s focused management can drive growth and efficiency, benefiting shareholders.
4. Better market cycles: Independent companies navigate market cycles, reducing risk for stable returns.
5. Improved capital allocation: Strategic priorities dictate capital use, enhancing financial health and shareholder returns.
6. Higher dividends potential: Enhanced operational efficiency may lead to higher dividend payouts.
7. Increased liquidity: Six distinct entities increase overall stock liquidity, improving attractiveness for investors.
8. Exposure to growth sectors: Access to high-growth sectors like semiconductors and display glass manufacturing.
9. Risk diversification: Holding shares in multiple entities spreads risk, reducing the impact of sector-specific downturns.

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Bottomline

The proposed demerger of Vedanta Ltd. into six independent entities is a strategic move aimed at unlocking value, simplifying the corporate structure, and attracting investments. 

While the approval process is underway, and a majority of lenders have consented, the focus remains on effectively managing and reducing the significant debt burden. If successful, the demerger could position Vedanta’s businesses for sustained growth and increased shareholder value, aligning with India’s economic growth trajectory and rising demand for natural resources.