Aluminium giant Vedanta is trading at Rs.228, a 2.50% gain from Friday’s close. The stock seems to be reacting positively to the demerger plan.
Vedanta (VEDL) recently unveiled plans to restructure its existing operations by dividing them into six publicly traded entities. Each VEDL shareholder will receive one share in each of the five newly listed companies for every one share of VEDL they hold. Experts see this demerger as a positive development, providing investors with opportunities to invest in individual businesses, offering a pure-play approach. However, it’s important to note that this demerger does not address the debt concerns of Vedanta Resources (VRL), the parent company, which still needs to repay a substantial debt of $4.2 billion by FY25E.
As per the plan, Volcan Investments, the parent company of Vedanta Resources and Vedanta Ltd. will now be renamed as Vedanta Inc. Sterlite Tech to demerge its Global Services business into a separate listed entity. Lastly, Sterlite Power Trans. to separate Infra Business and Investment as a new listed entity.
The demerger process requires approval from two-thirds of minority shareholders, along with obtaining necessary approvals from lenders and relevant statutory authorities. The management expects this comprehensive process to conclude within 12 to 15 months, likely by the end of CY24.
It’s important to highlight that this demerger process does not address the debt issue of the parent company, VRL. VRL has an outstanding debt obligation of $4.2 billion, with $1.3 billion due in H2FY24 and $2.9 billion in FY25. As the demerger does not improve VEDL’s credit profile, the situation remains unchanged for VRL, which must seek refinancing options to manage its debt. VEDL’s cash flows are not sufficient to distribute dividends to VRL unless VRL assumes debt on its own books.