Vedanta May Look to Demerge its Commodity Businesses

At a time when metal companies have been having the time of their life, one of India’s largest commodity players, Vedanta, has not really outperformed. For Vedanta, it looks like the answer may be to restructure the business in order to deliver extra value to shareholders.

While the broad focus is on restructuring its business, Vedanta may be specifically looking to demerge 3 of its key businesses into separate listed entities.

Vedanta chairman, Anil Agarwal, believes that the Vedanta group has a Hindalco, JSW Steel and an Exxon hidden within his group. The need of the hour is just to demerge these businesses and let each business discover its own value as an independent units.

The concept of SOTP (sum of total parts) is nothing new. This is the reverse situation where the parts are estimated to be worth a lot more than the whole.

Getting to specifics, it is reported that Vedanta may look to hive off its aluminium business, oil & gas business and the Iron & steel business into 3 separate entities. Of course, the core Vedanta may still retain some of the business like the stake in Balco, Hindustan Zinc and the chrome business.

The plan is that the existing shareholders of Vedanta will be issued shares in each of the separate entities against their current holdings in Vedanta.

Historically, Vedanta has always grown by inorganic acquisitions. Over the last 2 decades, Vedanta has acquired a majority stake in a host of companies in India including Balco, Hindustan Zinc, Sesa Goa, Cairn India, Electrosteel, Madras Aluminium etc.

Having integrated most of these entities into Vedanta, it is now looking to separate these companies into separate entities to deliver better shareholder value.

The emerging thought process is that separating these companies based on their core activity would enable sharper business focus, better allocation of capital and more flexibility to drive long term growth.

This will allow the group to separate the capital intensive businesses from the capital light businesses so that ROI can be properly demarcated.

The company has been keen to generate value to shareholders. In the last few years, the group had taken a hit on account of corporate governance issues at the UK based holding company.

Subsequently, Anil Agarwal had tried to delist Vedanta from the stock exchanges at the bottom of the commodity cycle by buying out the shareholders. That had got stuck after LIC had rejected the price. This is one more attempt at value creation.

Also Read:- Vedanta to make a $20 billion capex bet on commodities