Why Vedanta board scrapped restructuring plan and why analysts welcome the move

Diversified natural resources conglomerate Vedanta Ltd’s plan to demerge and list three of its core businesses — oil and gas, aluminium, and steel verticals — has hit a dead end after the board rejected the plan proposed nearly three months ago.

In November last year, Vedanta promoters led by billionaire Anil Agarwal had proposed a restructuring exercise to simplify and unlock the group structure by carving out three different entities and separately listing them on the stock exchanges. This, in essence, was a complete about-turn from the plan in late 2020 to delist Vedanta’s shares.

On Tuesday, Vedanta informed the stock exchanges that its board had rejected the restructuring and the company will not undertake any corporate restructure including demerger or spin-off, and will continue with its existing structure.

Vedanta’s shares remained volatile on Wednesday, with the stock oscillating between positive and negative territories. In late morning trade, the stock was quoting at Rs 367.50 apiece on the BSE, down 0.57% after rising to an intraday high of Rs 376.30 in the first few minutes of opening followed by a fall to Rs 364.35.

Analysts remain bullish on the company. In fact, American securities and investment banking firm JP Morgan upgraded the stock to ‘overweight’ from ‘neutral’ and raised the target price to Rs 465 per share.

“We have increased target multiple to 4x FY23e EV/EBITDA against earlier multiple of 3.2x. We also like announcements of calling off restructuring and capital allocation policy. Operating environment is very strong. These measures should address concerns on cash flow usage,” JP Morgan told its clients in a note.

Here’s all what the board said:

Corporate Restructuring

The company has concluded this comprehensive review (of the corporate structure and evaluation of a full range of options and alternatives to unlock value and simplify the corporate structure) with inputs from various experts and advisors.

The board concluded that the current structure is optimal and is commensurate with the current scale and its diversified lines of businesses. Therefore, the company will not undertake any corporate restructure including demerger/spin off etc. and will continue with its existing structure.

Capital Allocation

The company aims to maintain optimal leverage ratio (Net Debt/EBITDA) at consolidated level. Vedanta’s consolidated leverage ratio for the quarter ended December 2021 stood at 0.7x, which is amongst the best compared to peer group. During normal business cycles, the company will maintain this ratio below 1.5x at consolidated level.

Capital Expenditure

Capital expenditure includes both growth and sustaining capex. A substantive amount of this outlay will be in existing lines of operations with focus on volume augmentation, cost reduction, ESG and moving to value-added products, which command higher margins.

Growth projects will follow guidelines of minimum internal rate of return of 18%, and sustaining capex will be tracked on a per-ton basis and managed through annual operating plan exercise, the board said.

Dividend policy

The company will disburse a minimum 30% of attributable profit after tax (before exceptional items) excluding profits of Hindustan Zinc Ltd as dividends. It also said that dividend from HZL will be passed through, within six months, subject to the board’s evaluation.

Inorganic Growth

Vedanta will selectively invest in acquisitions that are accretive to existing businesses or that have synergies with its core businesses. It will participate in the government’s divestment program which has strategic fit with the portfolio.

The bid for state-run refiner BPCL is at the stage of expressions of interest. The company reiterated it will establish a specific fund, with a strategic investor to fund the potential investment, without leveraging Vedanta’s balance sheet.

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