Dividend King Stock Vedanta Soared 5% This Week On Demerger Plans; More Steam Ahead?

Anil Agarwal-backed Vedanta was in the spotlight during the trading week between October 4th to 6th, as investors digested the company's plan to demerge its businesses into six independent pure-play companies. Investors bought Vedanta shares on optimism that the metal and mining giant will unlock value and attract big-ticket investments. That being said, Vedanta shares gained by nearly 10% on BSE during the week. However, there is a catch.

On BSE, Vedanta shares ended at Rs 222.70 apiece, up by 0.34% with a market cap of Rs 82,781.97 crore on October 6th. During the first trading week of October, which was holiday-shortened due to Mahatma Gandhi Jayanti On October 2nd, Vedanta shares gained by 4.70%.

Despite Vedanta's demerger plan driving its shares, Crisil Rating this week placed its rating on the long-term bank facilities and debt instruments of Vedanta on 'Rating Watch with Negative Implications' and has reaffirmed its 'CRISIL A1+' rating on the short-term debt instruments of the company.

Crisil's rating watch factors the recent demerger announcement by Vedanta.

Vedanta has a unique portfolio of assets among Indian and global companies with metals and minerals - zinc, silver, lead, aluminium, chromium, copper, nickel; oil and gas; a traditional ferrous vertical including iron ore and steel; and power, including coal and renewable energy; and is now foraying into manufacturing of semiconductors and display glass.

Vedanta's board approved a pure-play, asset-owner business model that will ultimately result in six separate listed companies, such as Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals, and Vedanta Limited.

According to Crisil's rating note, the deal will need requisite approvals, including from shareholders and lenders, and could take 3-4 quarters for completion. Also, clarity on the allocation of assets and liabilities across entities under the proposed structure, along with the group/parent support philosophy for each entity, is yet to emerge. This will be critical for evaluating the credit profiles of the entities, including Vedanta, under the proposed structure and for the resolution of the rating watch.

CRISIL Ratings will continue to monitor developments on the proposed divestment and pending clarity on the said critical aspects, it said.

Billionaire Anil Agarwal in an interview revealed that he expects the demerger plan to be completed by FY25-end.

Also, Crisil's note said the rating action also factors in the impending debt refinancing at the parent company, Vedanta Resources Ltd (VRL; rated 'CCC/Credit Watch Negative' by S&P Global Ratings), amid moderating operating profitability of Vedanta and the possibility of higher-than-expected financial leverage.

It added, "Any further delay in the refinancing or correction in the financial leverage to below the rating threshold can lead to a rating downgrade."

Should you buy Vedanta shares?

In its research note, Centrum said, "We believe, it is a positive step as it will provide investors the opportunity to have options to invest in pure-play businesses. Each business will have greater freedom and independent management to drive niche strategies for growth. We believe, holding company VRL which is under debt repayment stress with payment due of more than USD2bn in CY24 won't receive help from the demerger. We maintain BUY rating with TP of Rs273/sh on SOTP valuation."

Meanwhile, Phillip Capital in its note said, "We believe this move will have a positive long-term impact, as it will give the group flexibility, unlock value for investors (give them the choice of commodity they want to invest in) and the parent company would have the option to liquidate fully/partly particular assets to manage its debt repayments."

Keeping its target price intact, however, Phillip Capital upgraded its recommendation to Buy on Vedanta. It said, " Vedanta's stock price has fallen 20% since our 1QFY24 result update. Though 2Q average base metal prices are set to fall 1-5% sequentially, lower CoP should the help the company to keep its margins intact. At the same time, commodity prices have recovered a bit and are now slightly higher than 1Q average levels, which we expect will help the company to post better operating performance in 2HFY24."

Further, Phillip Capital added, "We believe that VRL will be able to part pay/refinance its debt (at higher cost) and will avoid a default. Simultaneously, the demerger will provide flexibility to VRL in terms of part or full sale of any particular asset, which will help it to manage its FY25 repayments. We do not expect any meaningful downsides in the stock from current levels, so we have kept our STOPbased target unchanged at Rs 290, which is now 30% higher than CMP; we upgrade the stock to Buy."

Vedanta is the largest stock on exchanges when it comes to rewarding its shareholders with dividend benefits. In FY23, the company paid a total dividend of 10,150% amounting to Rs 101.5 per share. On the current price level, Vedanta has a dividend yield of 45.58%.

Disclaimer:

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