Unlocking Value: Axis Securities Reveals How Vedanta's Demerger Will Transform Investment Potential

The ambitious demerger initiative of Vedanta, spearheaded by Anil Agarwal, has hit a snag as the National Company Law Tribunal (NCLT) has put the brakes on the plan. This setback arises from an undisclosed liability linked to Vedanta Base Metals, whose complete valuation remains uncertain. Nevertheless, Axis Securities maintains an optimistic outlook on the demerger, projecting its completion in the latter half of the upcoming financial year.

The Road Ahead for Vedanta’s Demerger

Axis Securities has expressed confidence in the potential value that could be unlocked following the demerger, particularly from the Aluminium segment. They anticipate that the company will pursue a second motion for NCLT approval, along with necessary statutory clearances, while simultaneously working on transferring mining leases and other assets to the newly formed entities. The full demerger process is expected to wrap up by the second half of FY26.

Understanding the Purpose Behind the Demerger

Vedanta’s demerger strategy is designed to streamline its corporate structure, offer fresh investment opportunities, align its strategic focus with market demands, and tap into the latent value of its diverse assets. In a significant move earlier this year, Vedanta’s board sanctioned a separation into six distinct publicly listed companies: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals, and Vedanta itself.

How the Demerger Will Unlock Value

In a detailed analysis by Axis Securities, they outlined their expectations for the allocation of debt among the separated entities:

70% of Vedanta Ltd’s standalone debt will be attributed to the Aluminium division.
10% will go to Oil & Gas.
3% will be assigned to Steel and Ferrous.
2% will be linked to Power.
The remaining 15% will be retained by the residual Vedanta Ltd.

For cash allocations, the breakdown is as follows:

20% for the Aluminium business
10% for Oil & Gas
3% for Steel and Ferrous
2% for Power
65% for the residual Vedanta Ltd

Tackling Debt and Financial Health

Both Vedanta Ltd and its parent company, Vedanta Resources, have prioritized reducing their debt burden. Over the last two and a half years, Vedanta Resources has successfully reduced its debt by over $4 billion, bringing the total down to $4.9 billion as of January 2025. Plans are in place to further cut debt by $3 billion over the next three years, compared to the FY24 debt figure of $5.8 billion. The group’s debt-to-EBITDA ratio currently stands at 2.3x, with a target to reduce it to 1x in the near future.

Vedanta Base Metals: Challenges and Opportunities

The management previously delayed the demerger of Vedanta Base Metals to maximize shareholder value. The NCLT’s rejection of the demerger scheme stemmed from legal complications concerning Talwandi Sabo Power (TSPL), which allegedly owes ₹1,251 crore to the Chinese firm SAPCO. However, Axis Securities believes this issue will not hinder the progress of the demerger for other segments. They anticipate a resolution involving TSPL, while Vedanta Base Metals will remain part of the legacy Vedanta Ltd.

Vedanta’s Strong Q3 Performance

In its recent quarterly report, Vedanta showcased impressive growth, with a 76% year-on-year increase in consolidated net profit, reaching ₹3,547 crore for Q3 FY25 compared to ₹2,013 crore in the same quarter last year. Revenue from operations also saw a 10% rise year-on-year, climbing to ₹38,526 crore from ₹34,968 crore the previous year.

Comparing Vedanta and Market Trends

Over the past five trading days, Vedanta’s stock has surged by 7%, delivering over 4% returns in the previous month and 3% over the last six months. Impressively, the stock has appreciated by 60% in the past year. In contrast, the benchmark Nifty 50 index has only risen 1% in the last five days while witnessing a decline of 2.7% over the past month and 10% over the last six months. Despite these fluctuations, the index still maintains some gains year-on-year.

By focusing on strategic demerger plans and enhancing financial health, Vedanta aims to position itself for future growth and success in a competitive market landscape.