Explainer: How Vedanta's Demerger Will Impact Its Shareholders?

Almost a decade after merging all its entities into Vedanta Ltd., the billionaire Anil Agarwal-led conglomerate announced a complete revamp of its Indian metal, mining, and energy businesses, including the demerger of its businesses into six independent companies, with a plan to list five of them by fiscal 2025.

“By demerging our business units, we believe that will unlock value and potential for faster growth in each vertical. While they all come under the larger umbrella of natural resources, each has its own market, demand and supply trends, and potential to deploy technology to raise productivity,” Anil Agarwal, Chairman of Vedanta, said in a statement after the board meeting.

The company plans to file for the mandatory SEBI approval in October. It also renamed Agarwal’s main promoter group entity, Volcan Investments Ltd., Vedanta Inc.

Vedanta plans to separate six listed entities, namely:

1. Vedanta Aluminium will house the aluminium business and the 51 per cent stake it owns in BALCO.

2. Vedanta Ltd would hold the 64.92 per cent stake it has in Hindustan Zinc, along with the upcoming semiconductor and display business and the stainless steel business. The significant share of Vedanta’s operating profit in the financial year 2023 came from Hindustan Zinc and the oil & gas business.

3. Vedanta Base Metals will house the copper and zinc international business.

4. Vedanta Oil & Gas will own Cairn India.

5. Vedanta Steel and Ferrous Materials will include the domestic iron ore business, Liberia assets, and ESL Steel Ltd.

6. Vedanta Power will house the power assets.

According to the management, the demerger will simplify the company’s corporate structure, giving investors the option to invest in the commodity of their choice. It will also offer a platform for individual units to pursue their strategic agenda.

Notably, the same reason was given when the group merged the entities a decade ago. In 2012, Agarwal merged the group’s commodity business into Sesa Sterlite, which was later renamed Vedanta.

"Sesa Sterlite will be one of the largest global diversified natural resources majors supporting the country's industrial growth. This transaction is a natural evolution, leading to a simplification of the group's structure," the company said in a statement back then.

In May 2020, Agarwal announced plans to de-list and buy out public shareholders at a sharp discount to book value. The promoters owned a 50.14 per cent stake in Vedanta and announced plans to buy out the remaining 48.94 per cent at a floor price of Rs 87.50, a 9.99 per cent premium to the closing price of Rs 79.6 on 11 May 2020. However, Vedanta offered a sharp discount to its book value of Rs 177.

How The Demerger Will Impact Vedanta’s Shareholders?

In the regulatory filing, the company said there would be a simple vertical split for every share of Vedanta. The shareholders would additionally receive one share from each of the five newly listed entities. The demerger and listing of separate companies is expected to take another 12–15 months, subject to approval from the board, stock exchanges, and the NCLT.

According to analysts, the newly listed demerged entities are expected to unlock stakeholder value, attract strategic investment, and improve competencies.

Vikash Singh, Research Analyst at Phillip Capital, said, “This move will have a positive long-term impact, as it will give the group flexibility, unlock value for investors (give them the choice of commodity they want to invest in), and give the parent company the option to liquidate fully or partially particular assets to manage its debt repayments”.

Debt Concerns

The Vedanta demerger does not resolve the concerns around the massive debt of the company. The company has pending payments of around $4 billion from now until the financial year 2025. The promoter company has cash-generating sources including dividends from Hindustan Zinc and Vedanta Ltd, potential stake sales in Vedanta Ltd, and brand fees from Vedanta Ltd and its subsidiaries.

However, Hindustan Zinc’s cash balance is exhausted, and a series of downgrades by credit rating agencies have led to higher interest rates.

Kotak Institutional Equities suggested a “SELL” on the stock with an unchanged fair value of Rs 200, considering the unfavourable risk reward. According to the brokerage, the demerger reverses Vedanta’s previous efforts, during 2012–17, to consolidate different businesses and contradicts the rationale of past corporate actions. “VRL’s (parent) high leverage and funding gap for upcoming bond maturities is a key overhang for Vedanta, and we believe the divestment of non-core businesses is the need of the hour. The demerger, by itself, is unlikely to unlock any value, in our view," it said.