The Kotak Institutional Equities has maintained its ‘Sell’ rating on Vedanta after the company announced a demerger of its existing businesses into six listed entities. The share of Vedanta surged over 5% to Rs 233.75 during the intra-day trade on Tuesday. “The demerger reverses VEDL’s past efforts (during 2012-17) of consolidating stakes in different businesses and contradicts the rationale of past corporate actions. VRL’s (parent) high leverage and funding gap for upcoming bond maturities is a key overhang for VEDL,” said Kotak Institutional Equities in its report.
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The report further added that, “We believe the divestment of non-core businesses is the need of the hour. The demerger, by itself, is unlikely to unlock any value, in our view. Maintain SELL, with an unchanged FV of Rs 200, given the unfavorable risk-reward.”
The demerger of the business is a vertical one. For every share of Vedanta, shareholders will receive one share of each of the five newly listed companies. The demerged entities will be called Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta. The company said some of the ‘resulting companies’ are in the process of incorporation.
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Kotak’s report pointed out that the demerger would reverse VEDL’s past efforts of consolidation and also said that demerger by itself is unlikely to unlock any value. “We believe the hefty dividends by VEDL/HZ, similar to that in FY2022-23, are no longer sustainable. VRL can deleverage only through the divestment of the stake in VEDL or individual businesses. The demerger could make a partial divestment in different businesses easier, which would help VRL in deleveraging. However, the demerger by itself is unlikely to unlock any value, in our view. Maintain SELL,” said the report.
