Stake Sale in Hindustan Zinc to Boost Funds with Vedanta for Debt Repayment, Capex

Vedanta Ltd's planned sale of its 3.31 per cent stake in subsidiary Hindustan Zinc Ltd (HZL) will boost funds available with the mining conglomerate for debt repayment and capital spending, CreditSights said on Thursday.

Vedanta Ltd board of directors on Tuesday approved the sale of up to 2.6 per cent (11 crore shares) in its zinc subsidiary, worth Rs 6,370 crore.

On Wednesday, it raised the quantum to 3.31 per cent, which at last trading price could fetch over Rs 8,000 crore.

The sale through the offer-for-sale route to retail and institutional investors will bring down Vedanta's stake in HZL from 64.92 per cent to 61.61 per cent.

"We view HZL's stake sale as credit positive for Vedanta Ltd and (its parent) Vedanta Resources Ltd's creditors and bondholders, given more funds will be available for debt repayment and/or capex spending; further debt reduction will lower VRL's already-elevated interest burden," CreditSights said in a note.

At the same time, the stake sale will reduce Vedanta's future dividends received from HZL, which has been the group's cash cow for many years.

"While we believe that the worst is over for Vedanta Resources Ltd (VRL) and its successful bond restructuring has meaningfully eased near-term debt refinancing risk, we expect VRL's debt funding access to remain constrained and its interest burden to remain elevated.

"We anticipate upside risks to capex guidance of USD 1.9 billion, even as we see an improving FY25 (April 2024 to March 2025 fiscal year) credit outlook for Vedanta Ltd/VRL on the back of rising commodity prices, higher volume guidance and lower production costs," it said.

CreditSights said its projected funding shortfall of $850 million for FY25 and a major portion of $1.4 billion shortfall for FY26, will be plugged with the recent 2.6 per cent promoter stake sale in Vedanta Ltd, Vedanta Ltd's proposed 3.31 per cent stake sale in HZL, and the $1 billion equity fundraising.

"Potential funding avenues that Vedanta could tap onto include dividend upstreaming and brand fees from Vedanta Ltd and its operating companies, asset and equity stake sales, bonds and/or loans. Progress in Vedanta Ltd's demerger could act as a modest credit positive for VRL bonds," it said.

Further debt reduction, either at Vedanta Ltd or VRL, will lower the conglomerate's already-elevated interest burden.

"As of end-F1Q25, Vedanta Ltd gross debt excluding leases stood at Rs 78,000 crore (USD 9.3 billion)," it said. "We believe the decision to sell stake in HZL was fueled by the meaningful rally in HZL's share price."

At the same time, it acknowledged the stake sale will reduce Vedanta Ltd's future dividends received from HZL. Historically, HZL has been a cash cow for Vedanta, where HZL's dividends form a meaningful chunk of dividends received.

"Considering Vedanta Ltd has always had a strong desire to lift its stake in the cash generative HZL by acquiring the 29.5 per cent stake from minority shareholders, the Government of India, and its intention to reduce cash leakage, the stake sale decision was mildly surprising to us.

"Overall, while the reduced dividends will weaken VRL's future debt servicing ability, we are more favorable over the potential for near-term debt repayment and reduced cash interest outflows," it said.

Separately, last week Vedanta decided to shelve the planned sale of its steel business.

The Electrosteel Steel unit was a key component of Vedanta's asset sale program to generate funds for deleveraging.

"With equity fundraisings bridging the funding gap, the company has grown reluctant to shed assets. The promoters historically have focused on the growth of their asset portfolio and refrained from asset sales," CreditSights said.