Vedanta Ltd’s plan to demerge its businesses could overshoot its timeline of 12-15 months given the likely lender scrutiny, experts said, pointing to the complexities associated with the proposed value-unlocking plan that involves listing the resources conglomerate’s each revenue stream separately.
The company’s distribution of debt across these new entities, in particular, will be in focus given that the split is expected to reduce the fungibility of cash flows across businesses.
“We…caution of execution risk for the demerger: we have heard that lenders are reportedly looking to scrutinize the demerger rationale, structural implications, long-term business goals post demerger, and financial management/funding for each unit,” CreditSights said on Monday.
Vedanta will also need approvals from the National Company Law Tribunal (NCLT) and the Government of India, and the latter could be hard to come by given the impending federal elections next year, the financial research and credit analysis firm said in a note to its clients.
Kotak Institutional Equities also expects the approvals to be tedious as the split could make earnings more volatile.
“This could make lenders’ approval challenging, given the elevated debt levels, with net debt/EBITDA at +4X over FY2024-26E for VEDL (ex-HZL),” it said in a report earlier this month.
In 2022-23 (Apr-Mar), Vedanta had used a substantial portion of cash flows generated across businesses, including that from Hindustan Zinc, for dividends, leading to a payout of nearly ₹38,000 crore as dividend. The move was largely aimed at helping parent Vedanta Resources with cash.
Vedanta Resources still has debt obligations of more than $3 billion in 2024-25, and more than $1 billion in the next six months. This debt overhang at the parent level is continuously weighing on Vedanta.
“This is becoming increasingly difficult, considering that cash flows from subsidiaries have contracted due to the weak commodity environment, HZL’s cash balance is fully exhausted, and interest rates have increased amid downgrades by credit-rating agencies,” PhillipCapital said.
