Vedanta’s $13 Billion Debt Woes

IN MAY 2023, investors breathed a sigh of relief when Anil Agarwal-led Vedanta Resources Ltd. (VRL), the holding company of Vedanta Group firms, repaid loans worth $800 million to Standard Chartered Bank and released the encumbrances (largely the locked-in shares of promoters used as guarantee) created on the shares of its flagship firm Vedanta Ltd. (VDL). The move was in line with chairman Agarwal’s statement in the previous month that the group had the cash flow to service all its debt repayment obligations.

But hopes were short-lived. A couple of weeks later, VRL had to add a loan worth $850 million from Oaktree and J.P. Morgan. Around the same time, promoter entities pledged their 3.3% stake in Hindustan Zinc Ltd. (HZL), a subsidiary of (VDL), in favour of Axis Trustee Services Ltd. Soon after, promoters pledged 4.4% equity in VDL to borrow $250 million from Glencore.

Meanwhile, Agarwal’s other attempt to utilise cash reserves in HZL (around ₹16,500 crore at that time) through the sale of certain zinc assets parked in other group companies (in a $2.98 billion deal) to HZL failed to draw shareholders’ approval.

Since the pandemic, almost the entire promoter stake in VDL has been pledged — including the 50.1% stake of the Agarwal family classified as non-disposal undertaking (NDU) to confirm to lenders that promoters won’t exit the business. The promoter holding in HZL has also been pledged almost fully (99.37%) as on March 2024. It also included the 50.1% NDU, clubbed with pledged shares in the stock exchange filing format, says a source in the know.

The culmination of the refinancing and the pledging saga was the sale of 1.76% stake in Vedanta Ltd., held by promoter arm Finsider International Co., for ₹1,737 crore in February.

A Bumpy Ride

Obstacles toughened scrap trader-turned-metal baron Agarwal to weather uncertainties. In his 50 years in business, Agarwal raised capital to acquire sick assets, struggled to repay loans and attempted multiple restructuring of businesses to cross-utilise cash reserves. He faced the wrath of investors, environmentalists and politicians, but continued on the journey.

The déjà vu is that Agarwal’s Vedanta Group is in a tight spot because of its debt — estimated around $13 billion (₹1.08 lakh crore net debt) by end March. Though the company source claims it has been reduced to $12.4 billion, the narrative has stayed the same for the last 10-15 years — imbalance of cost, debt and lower cash flows.

Agarwal’s major achievement was the acquisition of low-cost assets, including HZL and Bharat Aluminium Co. (BALCO) from the government two decades back and their turnaround as lucrative assets. He also took over costly oil and gas E&P assets, Cairn India, at $9.6 billion in 2011. Cairn continued its growth momentum with the new investments.

However, the group struggled to weather the dips in the commodity cycle in the areas it operates — aluminium, copper, zinc and iron ore. Vedanta Ltd.’s consolidated net profit fell to ₹4,239 crore in FY24, against ₹10,574 crore in FY23, according to Capitaline Research. Net sales fell marginally to ₹1.41 lakh crore from ₹1.47 lakh crore. Profit before interest, depreciation and tax (PBIDT) (excluding other income) increased 5.2% to ₹35,198 crore, due to lower prices of commodities produced. Lower prices of aluminium and zinc in the last fiscal affected the company’s topline. Finance cost, meanwhile, rose 52% to ₹9,465 crore, due to a rise in borrowing costs.

Agarwal also faced a number of challenges at factory locations. Outside the Lanjigarh aluminium refinery, near Niyamgiri hills in Odisha, villagers opposed the group’s bauxite mining project in 2008. Two people (a protester and a policeman) died during the clashes in 2019. Group company Sterlite faced similar protests in Thoothukudi, Tamil Nadu, for its sulphur dioxide emission. In 2018, at least 13 protesters died in police firing.

Promoters Locked-in

Holding company VRL, which delisted from the London Stock Exchange (LSE) in 2018 amidst increasing investor scrutiny on its mining and metal making operations and liquidity management, had a tough time in January 2024 securing bondholders consent to restructure four series of bonds — including two of $1 billion each that were due for maturity in 2024, one $1.2 billion bond in 2025, and another $600 million in 2026. The company made an upfront payment of $779 million in cash on February 7 to redeem a portion of the bonds and extend their maturities. It also paid a consent fee of $68 million.

The parent firm had, in December, secured a $1.25 billion loan from private credit lenders to refinance/repay part of the $3.2 billion debt maturing in 2024 and 2025. VRL has a pending $1.1 billion loan maturing in FY25. India-listed VDL, which includes on-ground operations of mining and metal making in iron ore, aluminium, copper and zinc through its subsidiary HZL and oil and gas exploration and production under Cairn India, has debt maturities of around $1.5 billion.

The truth is that liabilities have crept into promoter holdings, leading to pledge/NDU of almost their entire stake in VDL and HZL to meet repayment obligations of VRL. The flagship business, VDL, is valued at around ₹1.15 lakh crore. HZL, in which the Central government holds 29.54% stake, is valued at ₹1.43 lakh crore.

The management says it intends to reduce debt by $3 billion at parent firm VRL by FY27. The group projects $6.5 billion EBITDA in FY25, respectively. In addition, the management is in talks with bankers to monetise iron ore and steel assets. But the process is delayed.

Agarwal believes a new beginning is the most valuable gift one can give himself. The $18 billion group is now eyeing one more organisational overhaul to unlock what it believes is a 50% value upside. According to the plan, mainstay VDL will be demerged into six entities, with a plan to list all demerged entities by March 2025.

The Survival Plan

In the first week of April, the board of VDL approved raising nearly `2,500 crore through debt securities. The fundraising will take place through issue of non-convertible debentures on a private placement basis. The company raised funds via non-convertible debentures thrice in FY24, the latest being in December, for ₹3,400 crore.

The capital is essential to meet the company’s $6 billion worth of ongoing projects in aluminium, zinc, iron ore, oil and gas and power generation. Capital expenditure on expansion stood at ₹11,675 crore in FY24. According to the executive quoted above, the investment will be around $1.9 billion (₹15,844 crore) this year.

The company wants to foray into new businesses, including manufacture of semiconductor and integrated display glass and panels for TV, computers and cellphones. It wants to ramp up renewable, silver and nickel businesses. It needs to refinance some of the loans to buy time till cash flow strengthens. Also, the locked-in shares of promoters need to be released as well.

On the expansion front, VDL completed the ramp-up of the Jharsuguda aluminium capacity to 1.8 MTPA. Lanjigarh refinery expansion from 2 MTPA to 5MTPA is in the works. Expansion activities are also in full swing at BALCO to increase the smelter capacity close to 1 MTPA by September. HZL plans to raise its zinc production capacity from 1 MTPA to 1.5 MTPA through brownfield expansion.

For ramping up its oil and gas business, Cairn India, which has interests in 62 blocks, targets to increase its share of India’s oil & gas production to 50%. The cash-rich onshore exploration and production company had to be merged with VDL in 2017 to access its cash reserves of nearly ₹16,900 crore. VDL had a debt of ₹37,600 crore at that time (in 2015 when the merger was announced). Though the group wants to sell ESL Steel Ltd., formerly Electrosteel Steels Ltd., it is focused on doubling the capacity to 3 MTPA.

Recently, VDL paid out a substantial portion of cash flows from businesses, including HZL, in the form of dividends. The move was aimed at funding VRL for repaying debts.

Holding company VRL has an estimated standalone net debt of $6.2 billion as on March 31, 2024, the company said during a recent investor presentation. VRL has de-leveraged its balance sheet by $3.5 billion in the last two years. It also claims that the company has re-profiled near-term bond maturities of $4 billion through a liability management exercise. With this, the repayment for FY25 has fallen to $1.1 billion against the earlier requirement of $4.1 billion. According to the new repayment structure, the company will have to pay a total of $918 million, and $1.8 billion in the next two fiscals.

Research agency CLSA says the company is well-placed to benefit from the commodity upcycle due to its diversified exposure. The efforts of group companies to raise capacity and profitability across segments augur well, it adds. “While debt at parent has now declined meaningfully, leverage has increased. Its leverage trajectory and corporate structure will be in focus.”

VDL’s consolidated net debt rose to ₹68,444 crore in March 2024, from ₹57,374 crore a year ago, thanks to reducing profits, higher capital expenditure and financing costs, and dividend payouts. The company spent almost ₹11,000 crore on dividends in two tranches in FY24. It paid a total dividend of ₹37,572 crore in FY23.

Of the total dividend paid, ₹25,717 crore and ₹6,815 crore went to promoters in FY23 and FY24 for their 68.11% and 61.95% stake, respectively.

VDL said after its Q4 result that gross debt stood at around ₹71,759 crore and cash and cash equivalent at ₹15,421 crore as on March 2023. Net debt to EBITDA improved to 1.5x in March, compared with 1.7x three months before.

VDL will have to pay the $1.5 billion debt maturing this fiscal, which is expected to increase to $2 billion next fiscal (FY26). It is also likely to generate cash flow of $3.5-4 billion for FY25, which may be sufficient to meet secured debt maturities of $1.5 billion with refinancing as an additional option, the company said in the investor presentation.

Downgrading Reputation

It was in April 2023 that Agarwal went public with his plan to make Vedanta Group a zero net debt company in two-three years. The group has ample cash flow to meet its debt repayment obligations, Agarwal announced. “We have the lowest debt in the world for a group of our size.” He also added that the debt was a result of investing billions of dollars across businesses, and group companies never defaulted on their payments.

However, the first year of Agarwal’s plan period doesn’t give the impression that the firm would be able to generate $17 billion ($13 billion for existing net debt and $2 billion each for capex cost for two financial years) free cash flow to become net debt neutral.

In January, Moody’s Investors Service downgraded VRL’s corporate family rating and senior unsecured bonds, citing concerns over the company’s ability to address cash needs. Shortly after, the debt-laden firm was downgraded to selective default by S&P Global Ratings despite the miner concluding a deal with creditors to extend the maturities of its three dollar bonds worth $3.2 billion.

Restructuring To Stay Afloat

Unbundling assets is another strategy to tame debt. The group announced separation of VDL into six entities — Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and ferrous Materials, Vedanta Base Metals and Vedanta Ltd. in September 2023. For every share of Vedanta Ltd., shareholders will additionally receive one share of each of the five newly listed firms.

But the real advantage of unbundling is debt bifurcation. According to company sources, debt will be divided among new, demerged entities in the ratio of assets allocated to them. Debt allocated to a company would be in direct proportion to the book value of its assets. The move will force individual businesses to meet repayment commitments. Respective managements will be accountable for increasing cash flows to meet repayment obligations.

Vedanta officials had earlier said the demerger will ensure appropriate debt allocation to each demerged entity and adequate capitalisation. “The demerger does not specifically change Vedanta’s near-term ability to repay debt (although the group is working on many other initiatives in this regard), but they greatly improve our prospects beyond that,” a group spokesperson had said in an earlier response.

According to Yes Securities, the demerger will help in unlocking value. “Firstly, it makes the complex business structure simpler with sector-focused operations. Secondly, it makes it easier for investors to value businesses individually and invest in more value-accretive sectors that would be compounders of wealth,” the brokerage firm says. Majority of the capex is being put in minerals-based sectors — zinc, aluminium, and copper, it adds.

VRL management believes new investments will help in balance sheet re-capitalisation. “Each vertical, under their own management team and independent board of directors, will have the freedom to pursue their own tailored strategy, which should help boost growth and generate more cash,” says the spokesperson quoted earlier.

The group believes the move will create standalone, pure-play businesses that will attract investments for future expansion. “Whilst we have not publicly shared our internal and third-party valuation analysis, we are confident this can unlock at least 50% upside,” the spokesperson said.

According to officials, as the group looks to capitalise on the India growth story, the demerger into focused verticals will generate increased interest from global investors to invest in Vedanta’s assets directly. The management expects the demerger process to be completed by early 2025.

Agarwal’s latest plan is another attempt to restructure businesses to fetch better valuation. In November 2021, VDL announced a restructuring that included demerger and listing of aluminium, iron and steel, and oil and gas businesses as standalone entities. However, the plan was dropped as share prices of listed companies started moving upwards. A year before that the group tried to delist Vedanta Ltd. to accelerate simplification of the corporate structure. That attempt failed to garner the required number of shares to delist the Indian entity.

The restructuring of Vedanta Group has been attempted multiple times since 2008. VRL announced a simplification of corporate structure into three commodity focused verticals — copper, zinc and lead; aluminium and energy; and iron ore in the same year. But the company dropped the plan due to pressure from shareholders of Sterlite Industries.

But Agarwal was not ready to bow down. In February 2012, it presented another plan to merge its Indian subsidiaries into a single unit, Sesa Sterlite, to cut costs and improve cash flows. It was contrary to the earlier idea of separating businesses. It merged non-ferrous metals producer Sterlite Industries into iron ore miner Sesa Goa, followed by the mergers of Vedanta Aluminium and Madras Aluminium Co. The joint entity was named Sesa Sterlite, which was renamed Vedanta Ltd in 2015. The group’s stake in Cairn India was also transferred to the entity. Before the failed delisting attempt of Vedanta Ltd., Agarwal successfully delisted the holding firm from the LSE in 2018.

The group’s latest attempt at demerger comes in the run-up to a substantial amount of repayments in the next couple of years. Analysts stress the complexities in the proposed value-unlocking plan. Proportionate debt distribution across new entities will be a major challenge.

“We have heard lenders are reportedly looking to scrutinise the demerger rationale, structural implications, long-term business goals, and financial management/funding for each unit,” says Credit Sights, a Fitch Group firm, in an earlier report. Kotak Institutional Equities also expects the approvals to be tedious as the split could make earnings more volatile. “This could make lenders’ approval challenging, given the elevated debt levels,” it adds.