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Vedanta in search of nirvana: A look into the six-way split of the conglomerate


Anil Agarwal, the feisty entrepreneur who founded Vedanta in the 1970s as a scrap trading business and built it into a mines-and-minerals conglomerate by buying sick companies and turning them around, told ET in April that he wants to leave behind a legacy rivalling that of the Tatas, with a sprawling conglomerate run by professionals.

“As far as my credibility is concerned, 99% people think I am the best,” he said. “But the 1% people who matter, take a little time (to trust my credibility),” he said. “I dream that in the time to come, this company will be like another Tata Sons – several companies will run, grow and more professional people will run the company. Everybody should have a win-win situation.”

That was the time when strong debt concerns had started to swirl around Agarwal’s business. “We are very, very comfortable,” the 69-year-old billionaire had told ET, drawing attention to the company’s track record. “In the last 25 years, we have not defaulted even once. There has been disproportionate talk about our debt,” he said.

Four months later, and a few days ago, Moody’s Investors Services downgraded Vedanta Resources to take cognizance of the increased risk around the company’s upcoming debt repayments, while maintaining its negative outlook. The rating agency also warned of a further downgrade if the company is unable to make progress on funding arrangements.

Vedanta debt quagmire

Concerns over bonds worth $3.2 billion maturing in 2024 and 2025 are at the centre of Vedanta’s crisis as it has been struggling to raise funds. Debt obligations at Vedanta Resources include a $1 billion bond due in January, $950 million bonds due in August, and $1.2 billion maturing in March 2025, apart from other loan repayments. The holding company’s credit quality is constrained by its weak liquidity because of large refinancing needs and interest expense amid tightening financing conditions in global capital markets, Moody’s had said. The company also has a limited headroom to raise money given that its entire shareholding in Vedanta Ltd is already pledged. Vedanta Ltd’s entire stake in Hindustan Zinc, too, is pledged. Vedanta Resources will also be hindered as a softening commodity price environment will limit the ability of its operating subsidiaries to generate cash flows.Data from Vedanta’s annual report had signalled mounting challenges over the company’s debt. Though the London-based holding company’s gross debt stood at $6.4 billion at the end of May, compared to $9.7 billion at the end of March 2022, its ability to service debt as on March 31, 2023 had been severely dented due to lower operating profit generated during FY 23 and a rise in interest costs, ET had reported in June.

Its interest coverage ratio, the metric used to determine the ability of a company to pay the interest on its outstanding debt, more than halved to 8.2 times at end of FY23 from around 15.0 times a year ago. The interest coverage ratio for a company is derived from dividing the operating profit generated by the gross finance costs borne by it minus its investment revenue. Vedanta’s earnings before interest, tax, depreciation and amortisation fell 22% on year to ₹35,241 crore in FY23 on lower prices of aluminum, lead and silver and a rise in raw material costs though the company managed to better its operational performance. Net debt more-than-doubled to ₹45,260 crore because of cash outflow towards paying dividends and capital expenditure.

Agarwal sought to trim the group’s debt by getting Hindustan Zinc, a unit of Vedanta Ltd, to buy some of the parent group’s zinc assets in a $2.98 billion deal. However, the Indian government, which owns nearly 30% stake in Hindustan Zinc, opposed the move.

Splitting the conglomerate

Months after Agarwal had spoken of his dream to turn his conglomerate into another Tata Sons with several independent entities, the company announced yesterday that it would demerge into six listed companies to undergird the valuations of its revenue streams as diverse as mining, energy, and non-ferrous metals. This will also mean that the debt of the company will be distributed among the six listed companies based on their assets and capabilities.

Mumbai-listed Vedanta, which produces copper, aluminium, iron ore and crude oil, and is a subsidiary of the London-based Vedanta Resources, said the exercise was aimed at building a simplified corporate structure that would appeal to focused investors. Separate listed companies for each vertical should boost the valuations of revenue streams that typically have slightly different business cycles and competitive dynamics despite sharing the broader industry classification of commodities and natural resources.

Resolving a complex corporate structure has long been a priority for Agarwal’s indebted group, but a global increase in borrowing costs has raised the stakes. By listing more of its businesses separately, Vedanta can hope to reduce a deep conglomerate discount, meaning it is currently worth less than the sum of its parts, Bloomberg reported. The move paves the way for additional capital to be raised with share sales and would make divesting unprofitable businesses — something that Agarwal has long avoided — simpler.

The company believes valuations have failed to reflect the true potential of each business stream as holding companies often trade at discounts. Splitting and then listing different businesses separately will help Agarwal gain more value for his business so that the conglomerate is not worth less than the sum of its parts. “None of our businesses other than HZL are correctly valued. If you consider our current market capitalisation of $10 billion, our 65% stake in HZL only is worth that much,” Ajay Agarwal, President, Finance, Vedanta, told ET on Friday.

Last month, Agarwal’s Twin Star Holdings, the majority shareholder among Vedanta’s promoters, sold a partial stake in the company through bulk deals, offloading 154 million shares, or a 4.14% stake, at a weighted average price of Rs 258 per share. The stake sale, according to sources, was part of the group’s fundraising efforts to repay a part of the debt maturing early next year. Promoters currently own 68.11% stake in Vedanta. Higher valuations would allow the promoters to realise better value for similar stake sales in the future.

Will Vedanta be able to get the nirvana from its debt problems with the restructuring? Analysts remain cautious about the implications while pointing to Vedanta’s precarious debt situation. “Demergers like these generally add value for shareholders, but we would wait for more details,” said Ambareesh Baliga, an independent analyst.


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