How will Vedanta demerger impact shareholders?

Anil Agarwal’s company Vedanta is being spun off into six companies. There are several reasons for the demerger such as simplifying the corporate structure, improving shareholder value, wealth creation, and efficiency.  But , a decade ago during when the companies were merged, similar reasons were given. So, what has changed in Vedanta over the last decade that has led to the decision of demerger, and what will be the benefit or loss for the company’s shareholders?… Let’s find out
On September 29th, Vedanta’s board announced the demerger of its 5 operating businesses, including Aluminum, Oil & Gas, Base Metals (mainly copper and zinc international), Ferrous (steel and iron ore mining), and Power. In metal business Copper and Zinc International are included while in Ferrous, it includes Steel and Iron ore mining business.

It’s worth noting that on the same day as the demerger announcement, the global rating agency S&P downgraded the rating of Vedanta’s parent company, Vedanta Resources Ltd (VRL). This downgrade occurred because VRL is required to make payments for approximately $3.2 billion in bonds over the next 18 months, with amount close to $1 billion due in January 2024. VRL had requested easing the payment schedule, but the investors declined to provide relief.

It seems Vedanta has decided to demerge in order to repay the debt that is owed by the parent company. The thing to understand here is what impact this demerger process will have on Vedanta’s shares and why Vedanta did not choose the option of giving dividends to VRL, as the company used to do before?

The brokerage house Nuvama believes that the announcement of the demerger will not improve Vedanta’s credit profile or debt situation. Likewise, the financial position of VRL will remain the same for refinancing or debt repayment. This is because Vedanta’s cash flows are not in a condition to support VRL through dividend payments. If Vedanta announces dividends, it will add to the company’s debt.

Analysts believe that while the company may benefit from the demerger in the long term, there is a limited possibility of a significant increase in Vedanta’s share price in the short term, and in the medium term, there might also be weakness in the share price. This is why most brokers are recommending selling the shares. Even those with a positive rating,  have a target price of not more than 249 rupees, which is just about 8% higher than Monday’s closing price.
Now let us see whether shareholder will gain or lose from it.

Long-term investors are concerned about potential losses from this demerger, especially those who bought shares at higher levels. Just about four months ago, the share price was trading above 300 rupees, but it slipped to 208 rupees in the last week due to concerns about debt repayment. However, those who entered at lower levels during the recent decline might be seeing some profits and could potentially see further gains.

Now, the big question is what to do with Vedanta’s shares after this demerger? Market expert Ambareesh Baliga believes that when a company announces a demerger, it can be beneficial for shareholders for the initial period. There is a possibility that the share price may reach 245-250 in the next few days, so trading positions can be considered. However, it will take about 15 days to receive more details about the demerger. Once more information becomes available and is thoroughly understood, investors can consider buying shares before the record date to sell them after the demerger.

While Vedanta announced the demerger as a way to manage its parent company’s debt, it remains to be seen how the company will allocate its debt among these five entities. Analysts may not be recommending long-term investment based on this announcement, but there is potential for short-term gains through trading.