Burdened by debt, Anil Agarwal-led Vedanta Limited’s decision to split into six different entities has not been entirely unexpected. With repayments of around $1.4 billion due in the next six months, and another $3.5 billion—a combination of bank debt, inter corporate deposits and bonds—due in FY25, the move speaks of the depth of challenges at the conglomerate with a market capitalisation of around $10 billion.
The five new firms—Vedanta Aluminium, Vedanta Power, Vedanta Base Metals, Vedanta Oil & Gas and Vedanta Steel & Ferrous—are expected to be listed by FY25, while Vedanta Ltd already trades on the bourses. The decision has not gone down too well with those tracking the group. A report by Kotak Institutional Equities has termed the vertical split “six steps backward”, adding that the move would reduce the fungibility of cash flows across its businesses. “[It will] increase earnings volatility, which could be a concern for lenders,” the report adds.
Emphasising the parent firm Vedanta Resources’ high leverage and funding gap for upcoming bond maturities as a key overhang for Vedanta Ltd, the report suggests that the divestment of non-core businesses would have been a more suitable option for the group. “The demerger, by itself, is unlikely to unlock any value,” it states. Each Vedanta shareholder will receive one share in each of the six listed entities after the demerger.

The company’s management has said it would take about 12 to 15 months to complete the demerger and listing of each of the entities, with approvals required from shareholders, lenders, and regulators. The Kotak report also points out that getting the lenders’ approval would be challenging “given the elevated debt levels”. Vedanta had merged its listed entities such as Sesa Goa and Sterlite in 2012, followed by Sesa-Sterlite and Cairn India in 2017. In that backdrop, the report also questions this decision to unlock value as it flies in the face of past corporate actions. “Ideally, Vedanta should have always had a holding company and operating company structure. Putting all the businesses in one company was perhaps not a great idea,” says Deven R. Choksey, Chairman and MD of wealth management and investment advisory firm DRChoksey Finserv.
In terms of numbers, two key businesses—zinc and oil & gas—bring in around half of the group’s revenues, and contribute over 85 per cent of its Ebitda. Choksey says the acquisition of smaller businesses (it has acquired a number of steel and power businesses) have brought down the group’s Ebitda, and its returns on equity and capital employed. “Take the case of semiconductors; that requires huge capital, and even globally, generates Ebitda margins only in single digits,” he says. 
Experts suggest one possible rationale behind the move could be the management’s desire to attract funds from investors looking to put money in specific businesses. “Most of the businesses have good earning potential and generate good cash flows. Besides, the overall commodity cycle is still looking good,” says Mahesh Singhi, Founder & MD of corporate advisory Singhi Advisors. He also points out that the company has been through a number of difficult situations in the past. “There is no fundamental problem with any of its businesses. On the issue of debt, the banks will give the company [credit], and the option of divesting a part of the holding always exists,” he adds.
To be sure, the possibility of selling some businesses could be considered in the future. And opportunities along those lines could be created in the steel and power space, as it could attract the interest of strategic or private equity investors. The immediate priority, however, is to address the debt repayment schedule, and with the planned demerger, it will be interesting to see how the lenders take it, and the story unfolds.  
             
@krishnagopalan