Analysts assert that Vedanta Group’s plan to demerge India-listed Vedanta Limited into six listed entities will not resolve the debt problem of its promoter entity, Vedanta Resources (VRL).
They suggest that additional asset sales or stake sales by promoters will be necessary to repay the debt.
Vedanta is already considering the divestment of its iron-steel division and its copper plant.
However, given the scale and earnings profile of these divisions, it is unlikely that they will completely address VRL’s funding gap.
Analysts from Kotak Institutional Equities observe, “The company’s consideration of separate listings for different businesses is unlikely to unlock significant value.
"The divestment of other businesses or further stake sales remains a last resort for Vedanta and VRL to address the 2024-25 (FY25) funding gap.”
VRL faces debt repayments of $3.6 billion due in FY25, including $2.2 billion in bonds, creating a significant funding gap of $3.1 billion.
Refinancing these bonds, given the challenging economic conditions, could force VRL to explore less desirable alternatives such as asset divestments or stake sales by promoters, according to the report.
In 2022-23 (FY23), substantial dividends from Vedanta and Hindustan Zinc (HZL) have shifted VRL’s debt to Vedanta Limited, resulting in a net debt/earnings before interest, tax, depreciation, and amortisation ratio of 4.7x in 2023-24 (FY24).
High leverage and negative free cash flow due to growth capital expenditures (capex) suggest that large dividends at Vedanta Limited may no longer be sustainable.
Currently, Vedanta’s key capacity expansion projects involve increasing Bharat Aluminium Company’s (Balco’s) aluminum smelting capacity to 1 million tonnes per annum (mtpa) from 0.57 mtpa and expanding steel capacity to 3 mtpa from 1.5 mtpa, set to be completed by the first quarter of FY25 and end-FY24, respectively.
However, analysts express concerns about potential delays in project completion, with almost 91 per cent of Balco and 75 per cent of steel project capex remaining unspent.
CreditSights analysts suggest that VRL can utilise various funding levers to bridge the gap.
This includes $1.7 billion in short-term investments in various bank deposits, quoted bonds, and mutual funds as of March 2023, which can be liquidated as needed.
Vedanta Limited can pledge a residual promoter stake in HZL for up to a 3.9 per cent stake, estimated at $250 million.
Funds can also be raised at the intermediate holding company level by selling or pledging its stake in Vedanta Limited.
CreditSights analysts mention that VRL’s history of timely debt repayments demonstrates its willingness to pay and could support lending sentiment from existing relationship banks and private debt lenders, albeit with security.
Despite anticipated lacklustre commodity prices through FY24, they believe that lowered FY24 production cash costs and higher FY24 production guidance compared to FY23 will help mitigate the impact.
Analysts anticipate that the value unlocking process will take at least one more year.
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