Encouraging signs ahead for Vedanta investors post announcement of demerger of business units. Vedanta Limited’s demerger plans has received overwhelming response from the analysts with enthusiasm expressed through rating upgrades by CLSA, Nuvama Institutional Equities, and Phillip Capital. On 29 th September, Vedanta announced its demerger plans into six independent companies to create value for investors and attract investment from foreign institutions.
The demerger, due to be completed over a period of 12-15 months, will allow investors to pick specific businesses for focused investments and is seen to be beneficial in the long run. According to brokerages, the demerger will also create value for its shareholders and is designed to address the challenges on the debt, operational, and repayment fronts. In a note, Nuvama has said that the demerger plan is a step in the right direction for Vedanta while CLSA says that this move could help the parent bring in strategic investors and ease the debt situation.
CLSA has also upgraded Vedanta to ‘outperform’ and the simplified structure should also enable the natural resources conglomerate to pare its debt, as selling a stake in any operational entity would be easier. It would also streamline payment of brand fees to VRL. The investors are upbeat on Vedanta’s unique portfolio of assets among Indian and global companies with metals and minerals – zinc, silver, lead, aluminium, chromium, copper, nickel; oil and gas; a traditional ferrous vertical including iron
ore and steel; and power, including coal and renewable energy.
The company is now foraying into manufacturing of semiconductors and display glass. It will also give global and Indian investors potential to invest in their preferred vertical, thereby broadening the
investor base for Vedanta assets. According to Phillip Capital, which has given a BUY on Vedanta with a price target of Rs 290, Vedanta shareholders currently get a packaged deal where they buy Vedanta as a mining conglomerate.
After the spilt, they will get to choose businesses that are ‘pure plays’ on individual commodities, which is the biggest positive for minority shareholders. “At present, Vedanta’s businesses gets saddled with a huge holding discount and are sometimes significantly undervalued (for e.g., its current market capitalisation is less than the value of its shareholding in HZL, despite HZL contributing 45-50% EBITDA). This problem could resolve after the demerger and individual businesses could see better value propositions,” the note said.
The de-merger of Vedanta is planned to be a simple vertical split. For every 1 share of Vedanta Limited, the shareholders will additionally receive 1 share of each of the 5 newly listed companies. This will be the first step towards creating value for its shareholders. Despite debt challenges, most analysts are confident about the growth prospects of Vedanta’s businesses due to multiple reasons. With substantial investments in metals that are critical for economic development and energy transition, Vedanta is well positioned to capitalise on India’s growth potential.
Urbanisation, industrialisation and strong policy support for infrastructure and housing are expected to generate strong demand for natural resources. The demand for commodities in India is expected to grow faster than the world over the next few years. The demand for copper, aluminium and zinc in India is expected to grow at a CAGR of 9.5%, 4.1% and 5.9%, respectively, in 2022-30, much higher than the average global demand of 2.4%, 2% and 1.6%.
Higher offtake from infrastructure and automobile sectors will drive zinc, steel and lead demand. On the
other hand, demand from packaging and EV industries are driving aluminium usage. Thus, the demerger with boards for each of the six companies with varying opportunities and risk profiles will ensure that these businesses will pursue growth with independent decision making and capital allocation.
Vedanta Limited ranks 6th among 216 global metal and mining companies in the S&P Global Corporate Sustainability Assessment 2022. The Company aims to ensure that it remains sharply focusses on ESG transformation post the unbundling exercise. This will ensure that the new companies post demerger will remain committed to achieving net-zero carbon emissions by 2050 and net water positivity by 2030 with the aims to spend $5 billion over the next 10 years to accelerate this transition. In the process of transitioning to net zero, Vedanta has already secured 1.8 GW of renewable energy to power its diverse operations.
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