With the restructuring, Agarwal aims to create independent “pure play” companies to unlock value by drawing substantial investments for the expansion and growth of these businesses. Vedanta Ltd said it plans to file for the mandatory Sebi approval in October. The group also renamed Agarwal’s main promoter group entity, Volcan Investments Ltd, Vedanta Inc.

Rising interest costs globally, coupled with approximately $2 billion in the group’s bonds maturing next year, have intensified the urgency to simplify its complex corporate structure and unlock value to repay debt.

“It appears the demerger decision is driven by the debt concerns at the hold-co level,” said Amit Tandon, founder and managing director of proxy advisory firm IiAS.

Buoyed by the announcement, shares of Vedanta Ltd ended 6.82% higher at ₹222.55 on NSE, while its subsidiary Hindustan Zinc gained 3.59% to ₹308.65.

“By demerging our business units, we believe that we will unlock value and potential for faster growth in each vertical,” said Anil Agarwal, chairman of Vedanta.

In an interview on Friday, Ajay Agarwal, president of finance at Vedanta Ltd, said, “The demerger can provide both Indian and international investors an opportunity to invest and create value from ‘commodity-specific’ build-play entities.”

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The demerger is planned to be a simple vertical split; for every share of Vedanta Ltd, shareholders will receive a share of each of the five newly listed companies—Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials and Vedanta Base Metals.

“We believe this will allow the full value to be realized and increase shareholders’ value in each of the businesses because the shareholders for each of the businesses might be very different,” said Ajay Agarwal.

Hindustan Zinc Ltd, of which Vedanta Ltd owns 64.92%, will also create different legal entities for its zinc, lead, silver, and recycling businesses.

“The board has selected a panel of directors to evaluate the options and will appoint external advisers,” Hindustan Zinc said in a release.

Vedanta Ltd, whose promoter group entities are nearing a multibillion-dollar debt-repayment schedule, believes that by separating businesses, the group will be able to cater to a much larger pool of investors. “Being listed, it will individually allow each to have their own specific pool of capital…provide their own growth trajectory and attract a different set of financing perspective,” Agarwal said.

The announcement followed a rating downgrade of Vedanta’s London-based parent, Vedanta Resources Ltd (VRL), by S&P Global.

“The proximity of VRL’s large bond maturity in January 2024 has increased the likelihood of the company undertaking a liability management exercise. VRL has initiated talks with bondholders to help address the company’s bond maturities of about $3 billion, including $1 billion, in January 2024,” it said.

VRL’s limited alternative funding sources add to “downside risks, even though payment of the January bond is highly likely,” said S&P, following a similar downgrade by Moody’s Investors Service on 26 September.

“The downgrade reflects the elevated risk of debt restructuring over the next few months because VRL has not made any meaningful progress on refinancing its upcoming debt maturities,” said Kaustubh Chaubal, a Moody’s senior vice president and lead analyst on VRL.

Moody’s said VRL’s credit quality is constrained by its weak liquidity because of large refinancing needs and interest expenses amid tightening financing conditions.

VRL’s consolidated leverage (debt/EBITDA) was 3.7 times as of March 2023.

“Each of them (businesses) has become quite sizable, with a potential to stand on its own foot. Therefore, the time has come to run their own growth story,” Agarwal said.

“Does it create value for all shareholders? Absolutely, yes. Does it require a majority of minority approval? The answer is no. We will continue to work with all the stakeholders,” said Agarwal.

Vedanta promoters hold a 68.11% stake in the company as of 30 June, with the entire promoter holding pledged.

Vedanta’s key public shareholders include LIC (9.02%) and PTC Cables Pvt Ltd (2.34%).

At the parent level, Vedanta Resources Finance II PLC’s $1 billion dollar bonds are maturing on 21 January 2024, while VRL’s $951 million dollar bonds are maturing on 9 August 2024. Further, Vedanta Resources Finance II PLC’s $1.2 billion bonds will mature on 11 March 2025.

However, Agarwal said the latest business restructuring has no direct links to debt repayment concerns, though it enables group firms to get into better financial shape.

“This entire restructuring is for Vedanta India and has nothing to do with the promoters’ holding. Their holding will be treated as any other shareholder. So, they will also get 64% shares across each other businesses like all other minority shareholders, and it does not necessarily address the debt of Vedanta, but it creates an opportunity to unlock value in Vedanta Ltd and therefore, the portfolio increase will see an uptick,” Agarwal said.

While announcing the demerger, in a statement, Vedanta said it paid dividends of at least $11 billion and made a total capex investment of at least $14 billion over the last 10 years.

To be sure, a large part of the debt repayment at the parent level (VRL) has been done from the dividends doled out by Vedanta over the past several years.

“Vedanta Ltd will remain as an exciting incubator for new businesses, including Vedanta’s technology verticals buttressed by the strong financial earnings of the tier-one Hindustan Zinc assets,” the group said on Friday.

The company said it will provide investors the opportunity to invest in technology and globally significant businesses, including Vedanta’s interests in semiconductors and display (offering exposure to India’s fast-growing $140 billion electronics market) and stainless steel (Ferrochrome and Nickel).

“For display manufacturing, Vedanta has finalized a technology partnership with Taiwanese firm Innolux and is also close to finalizing a partnership for semiconductor manufacturing,” Vedanta said.

HZL owns the world’s largest underground zinc-lead mine at Rampura Agucha, India and is the fifth largest silver producer in the world, while Zinc India has 460 million tonnes of reserves.

“The new firms will remain committed to achieving net-zero carbon emissions by 2050 and net water positivity by 2030 with the aim to spend $5 billion over the next 10 years to accelerate this transition,” added Vedanta.

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Updated: 30 Sep 2023, 05:04 AM IST