Vedanta’s Decision To Restructure Business Fails To Excite Investors

Vedanta Limited saw its shares tumble 8 per cent during Thursday’s (18 November) trading session. On Wednesday (17 November), the company had announced that the company’s board was evaluating various alternatives to unlock shareholder value. The company intends to house Aluminium, Steel, and Oil and Gas businesses in different standalone entities.

Subsequently, Vedanta’s board of directors has formed a committee to look into the idea. It appears that the company is taking a cue from the demerger of large conglomerates such as General Electric, Toshiba, and others.

Possibly, the company feels that its subsidiaries are not being valued at a fair value due to a holding company discount. Its subsidiary, Hindustan Zinc is valued much higher than the parent company as it is listed as a separate entity. Vedanta probably expects its other verticals to similarly command higher valuations after a restructuring.

Another major downward push for the stock price came from the Supreme Court’s decision to launch a court-monitored Central Bureau of Investigation (CBI) investigation in Hindustan Zinc’s divestment in 2002. The National Democratic Alliance in 2002 had begun divesting government assets, and Hindustan Zinc was sold off to Vedanta.

Initially, Vedanta received a 26 per cent stake through the first tranche of the sale in 2002. During the second tranche of the deal, Vedanta won another 19 per cent through the stake sale. The government continue to hold a 30 per cent stake in the company. But the Supreme Court order has now allowed it to sell its stake in the public markets.

Since the past few years, the Indian government has been quite focused on divesting its stakes in various public sector companies. The SC decision has both a positive and a negative impact on Vedanta.

Analysts have pointed to the fact that the move goes against its previous actions, such as proposing a delisting in the previous year, but the proposal failed to materialise. Further, the company has so far focused on integrating its subsidiaries and associate companies through mergers.

In 2012, the company merged with the listed Sesa Goa and Sterlite Industries. Later, it merged with Sesa Sterlite and Cairn India. Therefore, the demerger move comes as a surprise.

In addition, analysts from Kotak Institutional Equities pointed out that a major concern for investors has been the high debt at the promoter level. Vedanta’s parent company, Vedanta Resources, has raised $8.5 billion in debt.

In the past, it has depended on inter-corporate deposits and loans from its listed subsidiaries apart from the dividend income. These transactions have cast a shadow on the stock. Hence, apart from a restructuring, sorting these issues could help create value. According to reports, Vedanta has loaned out around $956 million to its parent to meet the promoter level debt obligations.

Given the cyclical nature of the businesses, some analysts are sceptical about the value accretion from the restructuring. In the last one year, Vedanta’s stock has given 176 per cent return, outperforming the indices as the commodity sector boomed.

However, once commodity prices revert back, it is possible that valuations would decrease regardless of the restructuring.