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What GQG Partners, the firm that fishes in troubled waters, sees in Vedanta

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The man who made a contrarian bet on Adani could be riding in as a saviour for another company in trouble. Following reports that US-based GQG Partners, founded by Rajiv Jain, is in talks to buy a stake in Vedanta, a big block deal was reported on Thursday in which more than 2% equity changed hands worth over Rs 2,600 crore.

GQG Partners, an investment boutique which manages global and emerging market equities for institutions, advisors, and individuals worldwide, had hit the headlines last year when it invested over Rs 15,000 crore in Adani stocks in early March amid devastation triggered by a report by American short-seller Hindenburg Research accusing the group of various wrong-doings. Jain’s bet paid off when by the end of last year Adani stocks had rebounded in expectation of the group emerging unscathed out of a probe by Sebi.

Details of today’s block deal would be known only in the evening when exchanges report data, but if the reports of Jain’s GQG Partners buying a stake in Vedanta are true it would be another contra bet, though not as daring as the one on Adani. Vedanta has been struggling with repayment of huge debt for a while.

Vedanta’s debt troubles

Early last year, strong debt concerns had started to swirl around the business of Anil Agarwal-led resources conglomerate. “We are very, very comfortable,” the 69-year-old billionaire had told ET at that time, 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.

However, in September, Moody’s Investors Services downgraded Vedanta Resources, the London-based parent of Vedanta, to take cognizance of the increased risk around the company’s upcoming debt repayments, while maintaining its negative outlook. The company had limited headroom to raise money given that its entire shareholding in Vedanta Ltd was already pledged. The rating agency also warned of a further downgrade if the company was unable to make progress on funding arrangements.

Moody’s again downgraded the credit rating of Vedanta Resources last month when the company restructured its bonds to delay immediate debt repayments. Moody’s said it viewed the debt restructuring as default avoidance and assessed that the creditors have incurred an economic loss with respect to the original promise. It considered the transaction to be a distressed exchange under its criteria. Moody’s said Vedanta Resources is likely to face material liquidity issues over the coming 24 months and the risk of default risk remains high. The natural resources major had a gross debt of ?75,227 crore – or more than $9 billion – as of December-end. Net debt was Rs 62,493 crore – just shy of $8 billion. Last year, Vedanta had also announced it was looking to sell its steel business. Chief financial officer Ajay Goel told ET last month that the process for the asset sale is underway, and that Vedanta will have a “firm proposal” by the end of the current quarter, and the deal is likely to be finalised by April-May. The company acquired Electrosteel Steel through the insolvency process.Vedanta will seek to cut debt by up to $2 billion in the next fiscal as it focuses on generating free cash flow by managing costs and enhancing volumes, CFO Goel had told ET.

The reported plans of stake sale to GQG Partners is part of Vedanta’s efforts to raise capital to repay debt. The billion-dollar worth of share sale reportedly in the works will cut down the parent-level debt by a third and give a message to the market that the promoters of Vedanta are very serious and are open to selling some family silver to manage their debt, ET Now reported a few days ago.

What GQG Partners sees in Vedanta

If Jain of GQG Partners, who is invested in several Indian companies besides Adani, is indeed buying a billion-dollar stake in Vedanta, what did he see in it? Vedanta is now expected to emerge out of its troubles. After downgrading it in December, S&P Global Ratings upgraded the long-term credit rating for Vedanta Resources in January, post the extension for three of its bond maturities. It gave a ‘stable’ outlook for the company, a sign that the company could meet its debt obligations within the next 15 months.

“Its plan to monetize assets at Vedanta Ltd. could be an important driver of further deleveraging, and improved funding access,” S&P said. Vedanta had announced in September last year the plans to demerge its Indian business units into independent pure-play companies to unlock value and get investments. It said 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 would also mean that the debt of the company will be distributed among the six listed companies based on their assets and capabilities.

Vedanta aims at targeted operating profit of $7 – $7.5 billion in 2024-25 (April-March) which will be underpinned by its various debottlenecking projects, along with higher volumes and a reduction in costs. The company has factored in volumes growing by 7-8% next year, an uptick of around 5% in prices next year.

Another important consideration for GQG Partners could be the Supreme Court proposing on Wednesday a panel of domain experts to inspect Vedanta’s closed Sterlite copper unit in Tamil Nadu’s Tuticorin and suggesting further compliances and way forward, saying shutting down a plant of “national importance” will not serve anybody’s purpose.

Sterlite copper plant was closed in 2018 after violent protests over pollution allegedly caused by the copper smelting unit. India became a net importer of copper for the first time in 18 years in 2018-19 as the closure of the plant wiped out more than 46% of the country’s production of the base metal. Sterlite accounted for a huge 40% of the country’s total copper smelting capacity. Restarting of the plant would be a big positive for Vedanta.

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