Vedanta: Demerger targeted to ease monetization

3 Oct 2023 , 10:42 AM

Recommendation: Add; Target Price: Rs 301

 

Vedanta Ltd has announced its BoD approval for the demerger of existing businesses to create six listed (with mirrored shareholding) pure play entities. The stated aim is to unlock value vs the existing consolidated entity as it aligns management, strategies and capital structure to meet the specific needs of each business. This also opens up the opportunity to monetise individual businesses, in order to lower the elevated debt burden amid a not-so-strong commodity cycle. Immediate gains would be limited, given a 12-month timeline set for the completion of the demerger/listing process; refinancing of upcoming debt maturity of US$4.2bn over the next 18 months, remains in focus. Post the 20% fall, analysts of IIFL Capital Services upgrade to ADD. 

Announces demerger of underlying businesses to create independent listed entities: 

The Board of Directors of Vedanta Ltd have approved the demerger of various underlying businesses into independent entities, resulting in six listed pure play companies for aluminium, O&G, base metals, steel & ferrous materials and power. The currently listed VDL will own a stake in HZL and house new businesses in semiconductors, display and stainless (Facor + Nicomet). The existing shareholding of VDL will be mirrored at the new entities as well. The process is expected to get completed by Sep’24. HZL has also initiated a review process to separate the Zn & Pb, silver and recycling businesses into separate entities with the outcome targeted in two months. 

Targeted to unlock value through possible fundraise at individual company level: 

VDL management highlighted the intent of restructuring as: (i) offering investors (including strategic) independent pure play investment opportunities to unlock value (ii) focused independent boards and management for each business (iii) better aligned strategies linked to individual market cycles and possibility to streamline the capital structure. 

Near-term focus remains on debt refinancing: 

The restructuring of businesses into separate listed entities opens up the possibility of monetising assets for raising funds, so as to meet the elevated consolidated debt (including that for VRL). However, near-term focus will remain on the progress of refinancing the upcoming debt maturity of US$1.3bn in 2HFY24 and US$2.9bn in FY25.