Vedanta Joins The League Of Troubled Indian Companies; However, This Time Its The Centre To Blame, Shares Plunge Over 7% In Intraday Trade.

Vedanta Resources has seen better days, but the sun is not shining brightly enough for businesses with huge debts on their balance sheets. 

Shares of Vedanta Limited have been under strain for eight consecutive sessions and took a sharp fall today. On Tuesday, in early trade, Vedanta’s stock declined as much as 9 per cent but recovered slightly to trade 7.17 per cent lower at Rs 267.55 a piece.

Vedanta’s stock price has declined more than 12 per cent in the past five sessions, falling nearly 20 per cent in a month.

Vedanta’s share price decline comes weeks before its scheduled $2-billion fundraising drive. However, Anil Agarwal’s most recent attempt to trim the load has upset the Centre. The company’s shares have fallen after the Centre opposed London-based Vedanta Resources Limited’s bid to sell international zinc assets to Hindustan Zinc.

The same has also affected the prices of Vedanta Resources’ dollar bonds. The bond yield has declined over 30 per cent, thus putting Vedanta bonds in the junk category and putting the company in a dangerous position since it could face a debt repayment crisis due to the fall in its bond yield in the global markets.

Anil Agarwal’s woes began when the Centre was displeased with Vedanta’s proposal as the move could interfere with and distort its plan to sell its 29.54 per cent residual stake in Hindustan Zinc. 

Hindustan Zinc, too could not get away from the heat as it also fell over 4 per cent in early trade.

Why Has The Centre Opposed The Deal

The Centre, last week, had opposed Vedanta’s proposal to sell its international zinc assets to its subsidiary Hindustan Zinc due to valuation concerns. Vedanta held a 65.92 per cent stake in Hindustan Zinc as of December 31, 2022.

The Centre is a minority shareholder in Hindustan Zinc and has warned of legal action and urged the company to explore other cashless methods to acquire assets.

The sale of assets to Hindustan Zinc is essential for parent company Vedanta, which aims to reduce its net debt. Vedanta has to pay $1.2 billion due by the second half of 2022-23, $4.1 billion by FY24, $3.9 billion by FY25 and $4.7 billion by FY26.

Further Struggle

Meanwhile, rating agency S&P Global stated in a report that if Vedanta Resources Limited cannot advance either the $2 billion fundraising exercise or the sale of its international zinc assets to Hindustan Zinc Ltd shortly, the company’s credit rating will be negatively impacted.

Another worry for the company stems from the amount of pledged shares. It is worth noting that 99.99 per cent of the promoter holding was pledged as of December 31, 2022. 

What Is Happening To Indian Business Tycoons

While Gautam Adani’s $236 billion infrastructure empire has withered by more than three-fifths in a month, no one saw yet another Indian company to be so close to a fall. 

Agarwal was entertaining the idea of merging debt-laden Vedanta Resources with its cash-rich, Mumbai-listed unit, Vedanta Ltd, just around the same time last year; however, the plan did not materialize. 

Although Vedanta Resources ultimately managed to shed its net-debt burden from almost $10 billion in March last year to a little under $8 billion, and the listed unit also declared a dividend last month, its parent and majority shareholder is “highly likely” to meet its obligations until September 2023, according to S&P Global Inc. 

However, things took a downturn when Agarwal tried to secure the finances for $1.5 billion in loan and bond repayments between September this year and January 2024.

So what happened here, two decades ago, in a privatization deal Hindustan Zinc Ltd, which Agarwal had started buying from the Indian government, has a cash pile, although much smaller than before, of $2 billion. So in January, Vedanta Ltd., which now owns 65% of the firm, decided to offload THL Zinc Ltd. Mauritius to Hindustan Zinc. 

That cash deal, defining mining interests in South Africa and Namibia, was valued at roughly $3 billion in phases over 18 months, and because Vedanta Ltd. is 70% owned by Vedanta Resources, it would have handled the latter’s liquidity needs.

However, the Centre thought otherwise since it still owns about 30% of Hindustan Zinc and stalled the transaction. “We would urge the company to explore other cashless methods for acquisition of these assets,” the Indian government said in a February 17 letter, threatening to explore legal avenues if Hindustan Zinc still decided to go ahead with the purchase.

The mining magnate faces two problems – First, the post-pandemic era commodity profits could be very well over unless China’s economic revival turns things around.

Hence, in the case that Agarwal can’t take Hindustan Zinc’s cash up to his privately held Vedanta Resources, his ability to pay down debt may become strained, forcing him to borrow more. But with the Fed not indicating that it’s done raising rates and existing Vedanta Resources bonds dropping in value, Agarwal might stumble to raise fresh money at a reasonable cost.

The second challenge is political. Suppose Agarwal tries to force the asset sale and incurs the government’s displeasure; in that case, it is possible that his plan to partner with Taiwan’s Foxconn Technology Group for a $19 billion semiconductor factory might not happen.

The project is already being monitored closely by opposition politicians in neighbouring Maharashtra, who have criticized its last-minute relocation to PM’s home state.

Conclusion: Things are already on the boil with the Adani Group having been accused of stock-price manipulation and accounting fraud. The opposition has already caught on to the point and has made it its central theme as elections come in next year.

The timing could not have been worse as the Adani scandal has already put the Modi administration under magnified scrutiny, and for Agarwal to get into any legal battle with the government in the current will only put him further out in the dock.