Why Vedanta is trading way above the delisting price?

Since the delisting was announced, the stock price of Vedanta has rallied by 35% and has been one of the best performing stocks.

Jun 17, 2020 12:06 IST India Infoline News Service

In mid-May 2020, Vedanta announced its intent to delist the stock from the Indian bourses by buying back publicly held shares at a price of Rs87.50. At that point of time, the market price was lower than the proposed delisting price but it has moved up since. The chart below captures the stock price movement over last one year with the delisting announcement marked in red.

Data Source: NSE

Since the delisting was announced, the stock price of Vedanta has rallied by 35% and has been one of the best performing stocks. That does sound intriguing considering that the delisting price is Rs87.50. What could explain this rally above the delisting price? Clearly, the investors are expecting that the company would be willing to pay a much higher price than Rs87.50. There are several reasons for this expectation.

Delisting at the bottom of the commodities cycle

This argument is quite valid if you look at the metals cycle across the globe. The metal stocks have been in the midst of a secular down cycle for a number of years. Despite the intermittent bounces, stocks like Vedanta are quoting at less than 20% of the price they had scaled in the year 2010 when the commodity cycle had peaked. Delisting at this price is clearly seen as unfair to the minority shareholders as it does not consider the future potential of the stock and the demand pick-up from China. Markets sense that Vedanta is delisting at the bottom of the commodities and at the top of the COVID-19 cycle.

Vedanta PLC was delisted at a steep premium

It may be recollected that back in 2018, Vedanta Resources had been delisted from the London Stock Exchange. At that point, the delisting had happened at 32.5% premium to the price on the day of the announcement. By that benchmark, the delisting of Vedanta should command a price of well above Rs.100 for the Indian delisting. In the Indian context, we will have to also factor that Vedanta has traditionally been a stock with a high dividend yield ratio and shareholders have to be compensated for that.

Corporate governance pressures

This is not the first time, but corporate governance pressures are surely building up for Vedanta. Most of the proxy firms have protested that the price was outright unfair to shareholders. Fitch has raised larger corporate governance concerns with respect to the delisting. Fitch is of the view that the delisting would lead to greater control exercised by the promoter group in an extremely valuable asset portfolio and as a result transparency and disclosure practices could be a casualty. It is anticipated that corporate governance pressures would force a better delisting price for Vedanta.

Influential shareholders will not allow under-pricing

While Vedanta Resources holds a majority stake in the Indian unit, there are influential shareholders that will insist on a higher delisting price.

Shareholder in Vedanta Ltd. Shareholding Percentage (%)
Promoters and promoter groups 50.14%
Foreign Institutional Investors 15.18%
ICICI Prudential Mutual Fund 5.03%
HDFC Mutual Fund 2.47%
SBI Mutual Fund 1.12%
Life Insurance Corporation (LIC) 6.37%
Other Institutional holdings 3.80%
Individuals / ESOPs / others 15.89%
Data Source: Company Filings

Individuals and small shareholders account for less than 8% of holdings. Traditionally, foreign portfolio investors (FPIs) have not been very enthusiastic about expressing their opinion on such resolutions. They have normally gone with the judgement of proxy firms. The influential shareholders would be domestic institutions like LIC, ICICI Prudential MF, HDFC MF and SBI MF. The domestic institutions will not accept the price of Rs87.50. Unless the minority shareholder approval comes through, Vedanta cannot proceed with the delisting. They may hold the key to the delisting price.

Vedanta is a cash cow and that must reflect in the price

The delisting price ignores that once public shares are bought back by promoters, they get full access to the cash of its rich subsidiary, Hindustan Zinc. Being a high dividend yield stock, the promoters also save on the dividend payout to shareholders.

Vedanta Ltd and its massive cash pile
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
Hindustan Zinc 22,535 2,990
Zinc International 395 428
BALCO 11 4,173
Talwandi Sabo 181 6,289
Vedanta Star 30 3,381
Miscellaneous 1,345 1,602
Consolidated (Vedanta) 35,205 58,589
Data Source: Company Filings

Vedanta is clearly getting access to a lot of cash once the company is full delisted; almost equal to its current market cap and that makes a case for a better price. Markets are quite clear that the promoters need to pay a hefty premium considering the cash rich nature of the business and the stage of the metals cycle. That is, perhaps, what the prices are reflecting.

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