Demerger unlikely to benefit Vedanta stock in near term

Mumbai: Shares of Vedanta are set to remain weak over the medium term, weighed down by concerns of debt liabilities at its parent company, which will outweigh the announced plan to split businesses to unlock value trapped in a holding structure.

The natural resources major, last week, announced that it will demerge its existing business into six listed companies, aiming to build a simplified corporate structure, while boosting the valuations of the diversified businesses.

While analysts see the move helping the company eventually, they remain sceptical about its impact over the next few months, especially as they also await details of how debt will be distributed among each of the businesses.

“While one could argue for a (theoretical) case of multiple expansion on peer-benchmarking, we cite risks of inter-group restructuring, carbon-heavy assets, cash flow burn in new ventures amongst others,” analysts at Investec Capital said in a note to their clients. The brokerage has retained its ‘sell’ rating for a target price of ₹180. Shares of Vedanta closed 7% higher at ₹222.55 on Friday. Markets were closed on Monday.

The stock is down by more than a fifth in the last three months.The shares hit their 52-week low last week as London-listed Vedanta Resources’ outstanding of over $3 billion over the next 18 months, without any refinancing in sight, resulted in rating downgrades.

“As this demerger does not improve Vedanta Ltd’s credit profile, the situation remains the same for Vedanta Resources – to refinance the debt. Vedanta Ltd’s cash flows are not sufficient to upstream the dividend to Vedanta Resources unless it assumes debt on its books,” Ashish Kejriwal of Nuvama Institutional Equities said.While the stock did see sharp gains on Friday which were backed by higher-than-usual volumes, analysts see further gains fizzling out. “There could be a small relief rally up to ₹232-243, but a major hurdle remains at around ₹261,” said Rajesh Palviya, head of technical and derivatives research at Axis Securities. A close below ₹208 could result in further weakness, dragging it towards ₹160, and any relief rally should be used as an exit opportunity, Palviya said.

“They were earlier consolidating everything, and are now demerging, so it kind of gives a mixed signal. Hindustan Zinc, which is a major value driver for the company, remains with Vedanta, so the demerger seems to be more from the perspective of getting a strategic investor,” said an analyst with a Mumbai-based brokerage, who did not wish to be named.