Anil Agarwals Vedanta's Demerger Plans: Here's all you need to know

Anil Agarwal, the mining billionaire behind the Vedanta Group, has announced plans to divide the single unit into six separate entities, a decade after they were merged into a single unit. This decision comes as part of an effort to "unlock shareholder value" and follows earlier contemplations of a similar split in November 2021. While Vedanta's stock price is still down 27% year-to-date.

The Proposed Entity Split

In the planned demerger, the current entity will be divided into Vedanta Aluminum, Vedanta Oil and Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals, and Vedanta Ltd. Shareholders who own Vedanta shares will get one extra share in each of the new companies that are being created. This process of splitting Vedanta into separate companies will take around 12-15 months, after all the necessary approvals.

1. Vedanta Ltd: This currently listed entity will retain its 64.92 percent stake in Hindustan Zinc, a pivotal contributor to Vedanta's operating profit in 2023. Additionally, it will house the upcoming semiconductor and display business, along with the stainless steel business.

2. Vedanta Aluminium: This entity will house the aluminum business and the 51% stake in BALCO.

3. Vedanta Oil & Gas: This segment will encompass Cairn India.

4. Vedanta Base Metals: It will include the copper and zinc international business.

5. Vedanta Steel & Ferrous Metals: This entity will manage the domestic iron ore business, Liberia assets, and ESL Steel Ltd.

6. Vedanta Power: All power assets will fall under this segment.

The Vedanta Group believes that the demerger will simplify its corporate structure, allowing investors to choose specific commodities to invest in and enabling individual units to pursue their strategic goals independently.

This strategic move provides the Vedanta Group with the flexibility to unlock value for investors in several ways. They can either sell a particular asset or bring a strategic investor on board, which can be beneficial for the group's overall financial health.

In the current corporate structure, there could be double taxation on the profit from the sale of an asset and on the dividend payout. However, post-demerger, the promoters will only be liable to pay long-term capital gains tax, potentially reducing the tax burden on the group and its shareholders.

Debt Concerns

Vedanta Resources Ltd, the parent company, is currently dealing with the challenging task of managing its upcoming debt. Over the next six months, it needs to repay a significant amount, ranging from $1.3 to $1.4 billion, which includes a substantial bond payment of $1 billion scheduled for January 2024. Additionally, there is approximately $3 billion in repayment expected in the fiscal year 2025.

Analyst Opinions

CLSA upgraded the stock to outperform but reduced the price target, emphasizing the need for operational improvements.

Nuvama upgraded the stock to Hold, expressing optimism about the demerger but leaving the price target unchanged.

Philip Capital has given Vedanta a buy rating, along with a price target of Rs 290. They believe that there isn't much more room for the stock to decrease significantly.

Vedanta Q1FY24 Result

Vedanta faced a 40% drop in its net consolidated profits compared to the same period last year. Profits fell from ₹5,592 crore to ₹3,308 crore. The company's overall revenue also decreased by 13%, going from ₹38,251 crore in Q1FY23 to ₹33,242 crore in Q1FY24.

However, EBITDA (which measures earnings before various expenses) was ₹6,975 crore, down from ₹10,741 crore in the same quarter of the previous fiscal year.