Vedanta\'s Debt Problem is leading to the Turbulent Journey for the co... Vedanta\'s Debt Problem is leading to the Turbulent Journey for the company : A analysis of its problem they are facing Read more

VEDL

Summary

Vedanta, a conglomerate with interests in commodities, faces a crisis of confidence amid conflicting messages from its leadership. Chairman Anil Agarwal's ambition to transform Vedanta into a USD 100 billion entity hasn't convinced investors, leading to credit rating downgrades and plummeting share prices. The company grapples with debt repayment challenges, with substantial offshore bond maturities approaching. Some bondholders express a trust deficit. Vedanta's substantial dividend payouts to parent companies have impacted Vedanta Ltd's financials, increasing its net debt. A series of buybacks to privatize Vedanta has faced setbacks, including share sales to rivals to raise funds. Despite challenges, Vedanta's ownership of valuable national assets offers hope amidst a turbulent journey.

Conflicting Messages in Uncertain Times

Commodities, a business fraught with uncertainty, are at the mercy of political equations, supply-demand dynamics, and regulatory forces. Amid this volatile backdrop, Vedanta's leadership has introduced an element of ambiguity, leaving investors in a state of unease. The conglomerate now faces a severe crisis of confidence, intensified by its recent proposal to split into six distinct companies.

Vision Amidst Doubt

At the annual general meeting on August 10, 2022, Anil Agarwal, Vedanta's Chairman, unveiled an audacious vision: to transform Vedanta into a USD 100 billion behemoth. This vision, however, hasn't been uniformly embraced. It has set off alarm bells, prompting both Moody's and S&P to downgrade Vedanta's credit rating, placing the company under negative credit watch.

Investor Confidence Nosedives

With investor confidence reaching rock-bottom, Vedanta's shares plummeted to a 52-week low last month. Some research firms, like ICICI Securities and Yes Securities, even ceased coverage. Kotak Institutional Investors took a more aggressive stance, issuing a report advising investors to sell, criticizing Vedanta's proposed "Vertica Split."

Vedanta's Financial Conundrum

Debt Repayment Dilemma

The primary concern of rating agencies revolves around Vedanta's murky financial picture. A significant portion of Vedanta's offshore bonds, including USD 1 billion in 13.875% bonds due in January 2024, USD 1 billion in 6.125% bonds maturing in August 2024, and USD 1.2 billion in 8.95% bonds due in March 2025, are due soon. The uncertainty about how Vedanta plans to arrange funds for these repayments casts a shadow over its future.

Survival Amidst Doubt

Is Vedanta's mining-to-metal empire teetering on the brink of collapse? While retail investors and lenders hold their breath, Vedanta's strength lies in its ownership of significant national assets. Unlike some businesses that vanished without a trace, Vedanta's extensive ownership of national assets means that lenders have seen substantial recoveries from defaulters, such as Essar Steel and Bhushan Steel.

Vedanta's Diverse Portfolio

Vedanta is more than a metal and mining company. In addition to base metals, it's India's largest oil and gas producer. It's also the exclusive producer of nickel in India, the country's largest aluminum manufacturer outside China, and the owner of Hindustan Zinc, ranking as the fifth-largest silver producer and the second-largest zinc producer in 2022.

A Trust Deficit and Market Perception

Agarwal's Assurance

Anil Agarwal has consistently underlined Vedanta's impeccable track record of never defaulting. In an interview with the Financial Times in March, he boldly stated that "everyone wants to lend to us," casually dismissing USD 1 billion as insignificant.

Market Skepticism

Despite Agarwal's confidence, Vedanta's bonds are currently trading below par. Bonds due in January 2024 hover around the high 80s, while those maturing in August 2024 are trading at a distressing level in the early 60s. These bond valuations reflect a profound trust deficit that demands immediate attention.

Vedanta's Financial Entanglement

Debt Transfer Dilemma

There's a prevalent belief that Anil Agarwal may have utilized Vedanta Ltd's resources to service the debts of his privately-owned Vedanta Resources. In FY23, Vedanta Ltd disbursed INR 37,730 crore as dividends, with INR 25,698 crore funneled to parent companies. The parent company faced a USD 2.7 billion debt payment in FY23, as outlined in its annual report. This substantial dividend outflow weighed heavily on Vedanta Ltd's financial health.

Uncertain Dividends

Easy dividends have become a relic of the past. Vedanta Resources' primary income sources for servicing debt, brand fees, and dividends, face severe constraints due to plummeting commodity prices. The outlook for brand fees, calculated as a percentage of revenue, and dividends, now linked to depleting cash reserves, seems bleak.

Buybacks and Debt Challenges

The Buyback Fiasco

In 2020, Anil Agarwal initiated a series of buybacks to privatize Vedanta, granting him more autonomy over cash flows from Hindustan Zinc and Vedanta Ltd.

Borrowed Buybacks Backfire

This move, however, backfired, as he purchased shares using borrowed funds. To raise funds and avert potential defaults, Agarwal's Twin Star Holdings sold a 4.14% stake in Vedanta in August, at a 5% discount. In June, Vedanta sold shares to rivals Glencore International AG and Trafigura Group to raise funds, highlighting the challenges Agarwal faces in obtaining capital from traditional sources like banks and private equity.

The Quest to Stay Afloat

In a financial quandary, Anil Agarwal must now ensure Vedanta's survival amidst debts and doubts. The proposed "value-unlocking" plan aims to restore confidence among new lenders by demonstrating the repayment strategy for a USD 1 billion bridge loan, crucial for repaying bondholders and extending bond maturities.

As Vedanta grapples with these challenges, both shareholders and bondholders await answers, hoping that the company avoids debt-driven acquisitions. The path ahead remains uncertain, and all eyes are on how Vedanta will navigate these turbulent waters.

The key ratios signify it has a lot of problems to deal with 

Vedanta Balance Sheet - Burdeing with Debt