Vedanta Industries, Six path to prosperity?
06 December 2023
Once upon a time in the world of business, Vedanta Group Resources stood as a diversified conglomerate with a vast portfolio spanning natural resources, metals, and energy. But as in all great stories, change became the harbinger of evolution. Vedanta has embarked on an extraordinary journey, one that's poised to transform the landscape of its operations. The plotline? A demerger, where Vedanta is breaking up its conglomerate structure into six distinct entities. Each entity will chart its course, seizing opportunities, and overcoming challenges in its unique sector. It's a narrative of transformation, growth, and strategic focus.
Before we take a look at how this demerger is expected to pan out along with its objectives, let us take a look at a few pointers to understand the background story:
Whopping Debt: Vedanta Resources has outstanding payments of approximately $7.8 Bn in FY23 with maturities coming up as soon as 2024. It is expected to have $4 Bn worth of debt until the fiscal year 2025.
Vague Management’s focus: All these units slated for demerger operated independently. However, in 2012, Anil Agarwal initiated their consolidation, assuring this move would unlock synergies to the maximum advantage of shareholders.
Following the COVID-19 pandemic, he surprisingly initiated a delisting effort by repurchasing all company shares at just Rs 87.5, despite the book value being more than double that amount!
Cash flow irregularity: The company's operational funding and debt repayment heavily rely on dividends from its subsidiaries, with a particular emphasis on Hindustan Zinc. Yet, the effectiveness of this financial pathway raises concerns. Over the past three years, he steadily drained the listed entities Vedanta Ltd and Hindustan Zinc, by raising more and more of debt and distributing it to shareholders in the form of dividends. Most of it went to the London parent for debt repayments, while ruining the finances of Indian entities. Was that in the interest of shareholders?
Government regulations: The inability to either sell the international zinc business to HZL or acquire the government's stake in HZL underscores the presence of significant regulatory risks.
𝐒𝐮𝐦𝐦𝐚𝐫𝐲: From an investor's perspective, Vedanta Resources appears to be in a tricky financial and regulatory position, facing whooping debt levels, an inefficient capital structure, dependency on the subsidiaries for cash, and near-term debt maturities. The company also deals with regulatory issues and a Moody's rating downgrade.
Let’s take a look at how this latest move by Vedanta is expected to help the company unlock its true potential and whether this move would be enough to solve all the issues the business faces.