Hello, I am Gunjan Grover.
Today we will talk about a company that is moving on Adani's trend.
Conditions such as a rising interest rate and slowing economic growth can prove dangerous for any highly leveraged company.
And if until recently there was a hypothesis that even large companies are insulated from these factors – it is not so at all.
Billionaire Anil Agarwal has been in Vedanta News for the last few days, and that too for all the wrong reasons.
Indian commodity mining giant Vedanta is in a debt crisis, and it is not a small debt, it is a debt of $ 11.8 billion, ie more than Rs.90,000 crores.
And in Vedanta's case also "foreign" rating agencies have played a critical role in these issues.
This story sounds a bit similar, doesn't it? Yes
After Adani's meltdown, now another Indian business group i.e. Vedanta crisis has raised tension in India's investing community.
Big companies are now reeling under the pressure of debt.
And the spotlight has now shifted to India's largest mining company - Vedanta.
Vedanta shares' losing streak of eight trading sessions was briefly broken on Wednesday.
Because Vedanta's parent company - Vedanta Resources Ltd said in its statement that it has prepaid all loans maturing by March 2023.
Along with this, it has also assured that it will be able to meet all its debt servicing requirements till June 2023 as well.
This means according to them everything is fine.
But on the other hand, the Government of India is also angry with Hindustan Zinc Limited owned by Vedanta.
Matters seem to be turning a bit serious for the Vedanta Group.
Now you will ask what is the relation between this two news? And how did it suddenly come to this? Don't worry.
In today's video, we will tell you in detail how much debt the Vedanta Group has.
What is the deadline to repay this loan? Why is Hindustan Zinc finds itself at the center stage in the story? What are the challenges ahead for Anil Agarwal?
So let's start.
Vedanta Ltd is a diversified natural resources group
It is engaged in the exploration, extraction, and processing of minerals such as zinc, lead, silver, copper, aluminum, iron ore, and oil and gas.
It can be said that it is the leading producer in all these segments, due to which it commands a strong position in the Indian markets.
Vedanta Ltd has a presence across India, but Vedanta is also present in countries like South Africa, Namibia, Ireland, Liberia, and UAE.
Vedanta recently acquired Goa-based company Nicomet, after which it has also become India's sole nickel and cobalt producer.
The company's business is highly diversified due to operations in different commodity segments,
and this diversification also shields them to some extent from anyone commodity-specific cyclicality and risk.
A specialty of Vedanta has also been that their zinc, silver, and lead businesses are supported by the low cost of production.
Now if we look at the financials of the company, their operating profit has been very strong, especially if we look at FY22.
In the current FY, the impact of a fall in commodity prices is due to the Russia-Ukraine war and China's 0-covid policy on Vedanta's operating margin.
Leveraged companies have to make regular interest payments to their creditors.
If a highly indebted company doesn't generate enough operating profit to cover its interest payments, it may struggle to meet its debt obligations
There's a chance that it will either have to service the debt. To do this, take a new loan or default on your commitment.
And both of these situations can create problems for the company.
So, in a company's operating profit, earnings before interest payments and taxes are essential, especially if the company is highly leveraged.
Like Vedanta!
You must be thinking that Vedanta's operating profits are healthy, so how is Vedanta's liquidity position?
Well, according to the December 2022 report of Credit Rating Agency - Crisil, Vedanta Ltd.'s liquidity is strong.
As on September 2022, it has Rs. 26,453 crores in cash balance and if required can get an unutilized credit limit of 12,000 crores.
Then where is the problem? It is said - “Devil is in the details!”?
Have you heard the name Vedanta Resources Limited before this video? what is that? Hardly anyone would know
Vedanta Resources Limited is the holding company under which Vedanta Limited operates.
Recently we made a video on holding companies.
In case you missed it, check out to know concepts from holding companies!
Vedanta Resources ltd holds a 69.7% stake in Vedanta Ltd as on 31 March 2022.
It is also important to understand the importance of these operating relationships because as we told you at the beginning of the video -
many question marks are being raised on the debt servicing of Vedanta Resources ltd, due to which they had to come out with their statement.
Due to these developments, the stock of Vedanta Limited has crashed by 17.5% in the last 1 month.
Vedanta Ltd. is forced to pay higher dividends to support the debt of its parent company, Vedanta Resources Ltd., becoming a significant cash outflow.
From above Vedanta Ltd. has undertaken significant annual capex in FY21 and FY22 which is putting pressure on their financials.
Also, in the first half of FY23, the company posted Rs. 8500 crores, which is expected to grow further by FY24.
Hence the declining operating profitability of Vedanta Ltd. is also a point.
Especially in challenging global economic conditions!
In fact, after adjusting the cash component of $3.5 billion, Vedanta Group currently has an all-in debt of $11.8 billion.
And that too after parent company Vedanta Resources Ltd reduced its debt burden from $10 billion to $7.7 billion last year.
The trouble now is that several large debt papers of Vedanta Resources Limited are maturing in the coming months.
If we look at the maturity schedule of these securities, they have to make loan repayments of $840 million from October 2022 to March 2023,
bond payments totaling some $900 million in April and May of the first year,
and the first quarter of FY24, they also have to repay external and internal loans totaling $860 million.
Now if we look even beyond June 2023, we come to know that Vedanta Resources Ltd's debt maturity schedule is quite rigid.
By the end of Q3 FY24, Vedanta Resources Ltd has debt servicing obligations of $670 million,
bond payments of about $1 billion due in January 2024, and an annual interest bill of $600 million.
US-based credit rating agency - Moody's believes that Vedanta Resources Ltd will be unable to service-re-refinance this loan on time.
And for this reason, they downgraded the credit rating of the company in October 2022!
However, Vedanta Resources Ltd in its response termed Moody's comments as "extremely pessimistic"
Said the credit rating agency ignored the company's track record of raising funds from multiple sources, including international and domestic.
Angered by the rating action, the company terminated Moody's services in November last year.
He argued that, even in challenging times, in the first half of FY23, Vedanta Resources Ltd has raised close to $1 billion in funds
from India's public sector banks such as the SBI and Canara Bank.
Being a holding company with a 69.7% stake, Vedanta Resources Ltd has also received dividend payments of approx $1.6 bn from Vedanta Ltd. in FY23.
However, even these funds are not sufficient to service Vedanta Resources Limited's large debt maturities.
And another rating agency, S&P Global Ratings, again questioned Vedanta Group's fundraising capabilities in February this year.
He said that Vedanta Resources Limited will be able to meet all its debt obligations by September 2023,
but to maintain adequate liquidity after September, the group will either have to raise capital again from external sources,
With this high interest, the rate environment and unfavorable credit rating would make it costlier.
Yes, then they have to sell some of their assets!
Now Vedanta group thought that instead of selling property to others, it is better not to sell it to anyone in its own house.
To get out of this debt trap, Anil Agarwal-led Vedanta Group has proposed that
Vedanta Ltd will sell its Africa-based international zinc business to its subsidiary Hindustan Zinc for about $3 billion.
And the government has felt bad because of this.
Now how are Vedanta and the Government of India involved in the same company?
The matter is such that Hindustan Zinc Limited was a CPSE i.e. Central Public Sector Enterprise.
CPSE means a company in which the government's stake is 51% or more.
This company used to come under the Ministry of Mines. But in 2002 the government privatized it.
The government sold its 26 percent stake and control to Sterlite Opportunities and Ventures Limited.
After some time again the government sold an 18.92% stake to Sterlite.
And this is the Sterlite Group you know today as Vedanta! But even today the Government of India holds a 29.54% stake in Hindustan Zinc.
Now Vedanta Resources Limited is the holding company of Vedanta Limited.
And the same Vedanta Limited owns a 64.9% stake in the listed entity Hindustan Zinc and also holds a 100% stake in Zinc International.
And Vedanta Ltd. wants to sell its 100% subsidiary Africa-based Zinc International to Hindustan Zinc to get relief from its debt problems.
By selling Zinc International, Vedanta will get its money and Hindustan Zinc will also get access to Zinc International's mines and resources.
Post the proposed sale, Hindustan Zinc will have total zinc reserves and resources of 35 million tonnes.
It is believed that mining activities are going to increase rapidly, due to which Hindustan Zinc will become the world's largest zinc mining company.
It is believed that due to the scale of operations, there can be a significant impact on their cost of production as well.
One minute. Now you will ask what is the last problem. Everything is correct. All is not well with the deal.
As per Systematics Research, Hindustan Zinc is trading today at around $633/tonne based on R&R/T - i.e. Resources and Reserves/MT.
Now, going by the deal's valuation at the same time, Vedanta's Zinc International assets are being valued at $851/t.
This means a premium of 35%!
Now you like the last one more or you see that it can be of great benefit in the coming time, so why would you not prefer to pay the premium?
But it is not just about one life that is being discussed here.
Here we are talking about all those shareholders who may find this 35% premium very expensive in a way.
And perhaps this was also seen.
When the announcement was made around January 2023, the company's stock fell by about 10% due to the unfavorable valuation of the deal.
Apart from this, mines are not window shopping.
Its acquisition would cost the company about $3 billion, but the company currently has up to $2 billion in line.
This means the company will have to borrow the rest of the money from the market.
And with this, in just a blink of an eye, a cash-rich company will be in debt.
But now you must have a question what is the problem with the government the most?
After all, when did the government give away its key stakes with control rights?
So the point is that the government has been selling its hatched stake in Hindustan Zinc for a long time to achieve its disinvestment target.
And if the government had sold its stake before the news of this deal came, it would have gotten about Rs 40,000 crore.
But after the news of this news, the stock price of Hindustan Zinc went up, due to which the government now has a higher stake than before.
Will get less money on selling. Today it is believed that the government may take legal action because of this deal.
Last month, the Mines Ministry said that the entire deal was a "related party transaction" and the government cannot give its consent to the deal.
Related party transactions in a way become a very important thing for small shareholders.
Due to this, the promoter or any other entity related to the company is not misappropriating money or any other property from somewhere!
So, if the proposed sale does not go ahead, it will be difficult for Vedanta Resources Ltd to raise funds in a truly sustainable way.
If seen, Anil Agarwal must convince the government in any way.
So then, what will happen next?
Regarding the sale of Hindustan Zinc, the Government of India has strengthened its position and informed SEBI that it is against the deal.
It seems that this matter is not going to be resolved easily.
Coming to the debt burden, Vedanta Group has said that it is fully confident that it will be able to service its debt maturities
and it is at an advanced stage of raising fresh funding of $1 billion from banks.
Vedanta Ltd. is also raising about $1 billion through its subsidiaries,
It will eventually be forwarded to Vedanta Resources Ltd. in the form of an inter-company loan.
Investors fear that while doing so Vedanta Resources Ltd has already pre-paid the loan maturing this month.
Having grown its balance sheet by approx $2 billion over the past 11 months,
Vedanta Group is confident that it is well-positioned to meet its liquidity and debt requirements.
It is only after these statements that the stock price of Vedanta Limited made a strong comeback, reversing its downward momentum.
Shares of the company were up about 4.5% in trading hours on Friday, March 3.
And this indicates that investors are buying the assurance of the company meeting its debt repayment commitments on time.
But, the world does not run on confidence alone.
Andy Mukherjee of Bloomberg writes in his column that Vedanta Ltd., one of India's largest mining companies, is currently facing 2 big problems.
First- If the economic revival in China does not play out as per the expectations,
then the days of post-pandemic super-normal operating profit in the commodities segment are all likely to be over.
And if this happens, there could be a negative impact on the liquidity position of Vedanta Limited.
Because to pay off the old debt, the company is taking on new debt at high-interest rates which, as we now understand, is a very bad idea.
At last, the whole country is on the cusp of economic recession due to this. Yes. We are talking about Pakistan.
If you haven't seen this video, be sure to check it out!
Another big problem before Anil Agarwal is that if he tries to force the sale of Hindustan Zinc Ltd, he will anger the government in the process.
And the government's displeasure may jeopardize Vedanta's ambitious $19 billion semiconductor plans.
So what do you think? Is Vedanta Group the next target for the bears? Have their chances of default been exaggerated?
Do let us know in the comment section.
Let us remind you that this video is for educational purposes only, and is not a buy or sell recommendation of any kind.
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On that note, here's me Gunjan Grover, signing off. Bye bye, Take care. Keep calm and Invest on.