Vedanta demerger positive but debt concerns stay; share price target Rs 249, says Nuvama

Vedanta Ltd announcing the demerger of its existing businesses into six listed entities is a positive development, said Nuvama Institutional Equities, even as the move does not solve the debt concern of parent Vedanta Resources that must repay $4.2 billion by FY25. Expecting a limited downside ahead for the stock, Nuvama suggested an unchanged share price target of Rs 249 on the India-listed Anil Agarwal firm, based on FY25 earnings estimates.

"We view this demerger (to be concluded in 12–15 months) as positive since it would provide opportunities to invest in standalone businesses (pure-play).The stock has corrected 21 per cent since our downgrade. Given limited downside hereon; we are upgrading Vedanta to ‘HOLD’," Nuvama said.

Vedanta, Nuvama said, is transitioning from a globally diversified natural resources producer to a pure-play asset owner business model. The six separate listed entities will individually house separate commodities, thereby giving investors an opportunity to invest in a commodity of their choice—which helps in unlocking value, it added.

"One positive is that new ventures (such as semiconductors and glass) will be clubbed under one company, Vedanta Ltd, which removes ambiguity of owning other commodity companies. The process requires two—thirds approval of minority shareholders, as well as approvals from lenders and other statutory authorities. Management expects this process to be completed in 12–15 months (i.e. by CY24-end)," Nuvama said.

That said, the demerger process does not address parent Vedanta Resources debt issue. As this demerger does not improve Vedanta's credit profile, the situation remains the same for Vedanta Resources to refinance the debt. Vedanta's cash flows are not sufficient to upstream the dividend to Vedanta Resources unless it assumes debt on its books, Nuvama said.

To recall, days after Moody’s Investors Service reduced its credit rating on Vedanta Resources, S&P Global Ratings also cut its long-term issuer credit rating and the rating on outstanding debt on the parent firm to CCC from B-, placing it under CreditWatch, with “negative implications.”

"We are cognisant that value unlocking will take at least a year. We thus believe Vedanta Resources would be able to refinance its debt (helping to increase duration), which will allay fears of a default," it said.

Nuvama said Vedanta needs two years to set its house in order. "With growth expected to come from its aluminium business from FY25 (post commissioning of its alumina, aluminium and coal mines), it will have cash flows, which can help in servicing debt. Moreover, the company will have an opportunity to either sell part of one of its businesses or raise money by diluting its equity," Nuvama said.

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