Hit by the negative commodity cycle
To understand the way the negative commodity cycle has hit Vedanta, the chart below best exemplifies the extent of value destruction.
Clearly, the stock has lost more than 80% from its peak valuations in late 2017. In fact, between late 2017 and May 2020, the Vedanta stock has lost more than 80% value. Effectively, the market capitalization of Vedanta Ltd has shrunk from Rs170,000cr to just Rs33,000cr. That kind of value destruction diminishes the gains of listing the company as it takes away the value of equity as currency. But the bigger concern is on the China front.
China currently accounts for over 50% of the global demand for industrial commodities including aluminium, steel, copper and zinc. That makes the fortunes of global commodity companies extremely dependent on the Chinese economy. From late 2017 when the Sino-US trade war commenced and Chinese economy began to slow down, the stock price of Vedanta has corrected over 80%. That is the kind of volatility that does not add much value to Vedanta. The irony is that Vedanta currently sits on a cash balance of Rs35,000cr but has a market cap of just Rs33,000cr.
How exactly is the delisting being restructured?
There are 5 things that shareholders of Vedanta need to know about the delisting offer.
- The delisting will be done on the stock exchanges via the process of reverse book building, which will enable eventual price discovery.
- Vedanta Resources has agreed to buy back the public shareholding of Vedanta Ltd at a price of Rs87.50 per share; a small discount to the current market price.
- Inclusive of ADR shares, public shareholding in Vedanta Ltd is 185.3 crore shares which translates into 49.86% public shareholding.
- At the price of Rs87.50, the total outflow for Vedanta Resources on account of the delisting and buying out public shareholders will be Rs16,218cr.
- Investors have a choice to either participate or not to participate. If company receives more than 90% in reverse book building, it can force delisting of the company.
There are two things to remember here. Delisting is part of the group’s long term strategy to simplify the structure. In 2018, even Vedanta Resources PLC was delisted from the London Stock Exchange. Secondly, the price of Rs87.50 is not the final and sacrosanct price. In the past, the promoters have been willing to raise the price offered in most cases and shareholders should take their time before taking a view. In March this year, Vedanta was back at its 2016 levels. If shareholders are able to get a much better price in sync with market realities, it does make a lot of sense for the shareholders of Vedanta to accept the delisting offer and move out.
How exactly will Vedanta Resources benefit from this delisting?
As explained earlier, delisting the stock de-couples valuation of the business from the vagaries of the global commodity cycle. But there is a bigger logic to the delisting proposal and for that one needs to understand the cash in the books of Vedanta Ltd.
|Vedanta Consolidated Balance Sheet (Cash Stash)|
|Group Company||Total Cash (Rs. in crore)||Total Debt (Rs. in crore)|
|Vedanta Ltd – Standalone||3,808||36,569|
|Cairn India Holdings||6,900||3,157|
If you look at the balance sheet of Vedanta, leverage should not be a real worry. Against total debt of Rs58,589cr, Vedanta has a cash stash of Rs35,205cr. That means; cash is sufficient to cover 60% of its total debt. But the problem is with the Rs22,535cr cash stash of Hindustan Zinc. Hindustan Zinc has not yet been allowed by the Indian government to merge with Vedanta and hence Vedanta does not have access to the cash reserves of Hindustan Zinc. The delisting will give more financial flexibility to Vedanta. Now Vedanta does not have to share the dividends from Hindustan Zinc with minority shareholders. The delisting will entail an outflow Rs16,218cr but will give full access to the cash flows of the group. It could be the perfect situation when the commodity cycle turns positive.