Vedanta group in Trouble?

 The metal king of India

The stock has given stellar returns for over a decade. The Promoter has rewarded the shareholders consistently. Record dividends have been paid year after year. In fact, the dividend payout ratio is the best in the industry. The group never faced a resource crunch in its entire life. Thanks to the liberal interest rate scenario till recently, one phone call would bring global investors to its door. A series of acquisitions had put the  Vedanta group on the global map. The man heading the show—Mr. Anil Agarwal-- is named: ‘the metal Kind of India’. 

The man in a hurry

Undoubtedly, the Vedanta group was always investor-friendly. It was able to get the Authorities, the regulators, the Bankers & the Fund Managers on its side effortlessly whenever it made a big move. Many a time, the local and central governments had gone out of their way to clear the hurdles faced by the group. Easy funding, friendly governments, and flexible rules and regulations have compelled the Company to acquire all kinds of mineral resources left and right. People hailed the ‘golden touch’ of the Promoter and glorifying research reports greeted the investors almost every quarter. In the interim, the global metal cycle also turned positive, yielding astronomical returns.  Not surprisingly, the stock enjoyed a dream run for many, many years

The roadblocks

The Adani group fiasco suddenly shifted the attention of investors towards Companies that fuelled the growth engine through debt (the group borrowed $10 billion to fund the acquisitions) On close examination, the Vedanta group became the first victim of this newfound enthusiasm of Bears who made a killing by shorting Adani stocks during February 2023. As a result, the mining giant has grabbed the news headlines for all the wrong reasons. Everyone is putting a question mark over the Group’s ability to clear the huge pile of debt, including $ 500 million to be paid on 31st December 2023 and a $ 1 billion bond payment maturing in January 2024. Once the bear hammering began, investors have conveniently forgotten the $ 2 billion debt cleared by the Group in a span of 11 months. Still the outstanding debt to the tune of $7.7 billion, they say is humongous, and in a rising interest rate scenario, the Group will not be able to raise resources to the tune of $2 billion due to be cleared before the end of 2023—to be precise, $500 million between July and September and the balance before the end of the year. The Bears have already planted doubts in the minds of worried investors successfully – questioning the ability of the company to clear $3.9 billion debt during 2024-25 and $4.7 billion debt in 2025-26.  With a mere $500 million in its kitty, the parent company Vedanta resources will not be able to meet its obligations, unless there is a big fundraising exercise. Like the Adani group, the Vedanta group also will not be able to raise funds and once the doubts began to crop up, the stocks witnessed a free fall. 

The reversal of fortunes

In a smart move, Mr. Anil Agarwal who owns 64.92 percent of Hindustan Zinc Ltd (HZL) (29.54 held by the Government of India) tried to offload the mining resources of Vedanta Ltd in South Africa and Namibia for $3 billion The Centre’s opposition to the Company’s proposal to sell its zinc assets to HZL came like a bolt from the blue. The regulator, SEBI, has been approached to stop the deal from happening soon. The concerns aired by the Centre, though not convincing at this stage, had put a spanner on the plans of Vedanta resources to come out of the crisis quickly. After the Centre’s announcement, HZL stock has been mercilessly hammered down by the Bears.  

An opportunity or a trap?

The foreign currency bonds in the interim have been beaten out of shape, quoting at a mouth-watering discount of over 30 percent. When questioned by a journalist recently, Mr. Agarwal was unable to answer why the Government is opposing the move to transfer Vedanta’s zinc assets to HZL. After having paid stellar dividends year after year running to over $6 billion –nearly 10 times the acquisition price paid to the GOI—why the deal has not been cleared and is opposed vehemently, the promoter himself is not very sure. He has no clue as to why the company is not getting a free hand to do what it wants to do in the best interests of all the shareholders.   Against this backdrop, let us try to assess the situation in a balanced, rational, and unemotional manner through a series of questions:

1.    Has the promoter failed to deliver what has been promised any time before?

2.    Is the Group a wealth creator or destroyer?

3.    Has the shareholders suffered serious losses due to manipulation in share prices any time before?

4.    Is the promoter involved in any scandal before?

5.    Is there any question mark over the accounting practices of the Group?

6.    Are the banks, financial institutions or financiers failed to receive payments from the Company any time before for any reason whatsoever?

7.    If the zinc assets of Vedanta are transferred to HZL, is there any inherent loss to the existing shareholders of both companies?

8.    Will it be possible for the parent company to raise resources and repay loans as per schedule?

9.    Having faced headwinds several times before, is the company (Vedanta Ltd) not fully equipped to handle the downward cycle in metal prices going forward?

10. With a cash cow in its kitty (HZL) is the Group as a whole really in trouble—either in raising resources from Indian/Foreign Banks or making payments to bondholders going forward?

The 25 to 35 percent fall in the prices of HZL and Vedanta Ltd looks unwarranted as of now. The Bears in the market basically love hazy, foggy situations like this where there is a lot of noise created by analysts, technical experts, journalists, and armchair pundits—giving outlandish reasons of all kinds. For the discerning investor, of course, there is always money to be made from such panic situations.