Will Vedanta's Demerger Unlock Value? Here's What Analysts Say

Analysts are divided on whether the demerger of Vedanta Ltd.'s diversified businesses would unlock value. They, however, agree that parent Vedanta Resources Ltd.'s debt-refinancing attempt will be a key trigger for the stock.

The company plans to spin off its aluminium, oil and gas, power, steel and metal businesses into separate listed entities, according to an exchange filing. Vedanta will continue to operate Hindustan Zinc as well as its display and semiconductor manufacturing units.

Vedanta Resources has $2.1 billion of debt outstanding in the current financial year, the funding for which is largely sorted, according to Kotak Institutional Equities. For the next fiscal, Kotak estimates a funding gap of $3.1 billion in cash flows for an outstanding debt of $3.8 billion.

Here's what brokerages say on Vedanta's demerger:

• Maintains 'sell' rating with an unchanged target price of Rs 200, implying a 10.1% downside.

• The demerger, by itself, is unlikely to unlock any value.

• The demerger will reduce the fungibility of cash flows across businesses and increase earnings volatility, which could be a concern for lenders.

• The attempt to reverse Vedanta's past efforts to consolidate stakes in different businesses contradicts the rationale of past corporate actions.

• VRL's high leverage and funding gap for upcoming bond maturities are key overhang.

• VRL can deleverage only through the divestment of stakes in Vedanta or individual businesses.

• Demerger could make partial divestment in different businesses easier.

• Upgrades to 'buy' with an unchanged target of Rs 290, implying a 30.2% upside

• Brokerage doesn't expect any meaningful downsides in the stock from current levels.

• Vedanta's businesses' valuation discount may reduce after demerger, unlocking value for individual entities.

• Demerger is positive in the long term, giving the group flexibility for the partial or full sale of any particular asset to manage its repayments in the next fiscal.

• VRL will be able to pay or refinance its debt at a higher cost, avoiding default.

• Maintains a 'neutral' rating with a 10.7% reduction in price target to Rs 250.

• The demerger is expected to simplify the corporate structure, enhance the risk mitigation framework, ensure autonomy, and improve transparency.

• The debt positions at both Vedanta and VRL remain unchanged, and both continue to face refinancing and repayment risks.

• The developments concerning the company's debt will be a key monitorable.

• Margin expected to be under pressure in the current financial year as metal prices remain range bound.

• Margin to improve from the next fiscal as metal demand increases and new facilities come on stream.

• After the demerger, Vedanta will act as an incubator for the Vedanta Group.

• Upgrades stock to 'hold' with an unchanged target of Rs 249, implying an upside of 11.8%.

• Upgrade follows 21% correction in stock price since brokerage's last downgrade and an expectation of limited downside.

• Demerger is a positive since it would provide opportunities to invest in standalone businesses.

• However, it doesn't solve the debt concern of VRL, which must repay $4.2 billion in debt by the next fiscal and doesn't improve the credit profile of the company.

• Vedanta's cash flows are not sufficient to upstream dividends to parent unless it assumes debt on its books.

• With value unlocking taking at least a year, VRL will be able to refinance its debt and allay fears of default.

• Growth is expected to come from its aluminium business in the next fiscal and the company will have cash flows, helping in servicing debt.

• Maintains 'buy' with an unchanged target price of Rs 326, implying a 46.4% upside.

• Demerger could be impacted by the delay in receipt of all requisite sanctions and acceptances.

• Independent capital structures, debt serviceability, capital-allocation policies, and dividend distribution policies will have to be in place for each entity after formation.

• Re-rating multiples could impact some businesses, like oil and gas.

• Typically, oil and gas upstream businesses are valued at a lower multiple of three–four times EV/Ebitda as opposed to the five times it is currently valued at.

• Antique's target multiples for aluminium and base metals are 5.5–6.5 times in line with other non-ferrous companies.