Vedanta Resources Limited just announced a demerger of its rather diversified business into six distinct units basis core business & operating segments. Of late, there has been quite a storm brewing for the group as it suffers the immense burden of sizeable debt. The suffering only exacerbated with the recent downgrade in its CFR ratings from Caa1 to Caa2 by Moody’s as the rating agency expressed elevated risks on the near-term outlook pertaining to the group’s debt restructuring plans. The agency maintained its negative outlook. Among other sensitivities the group remains highly vulnerable to adverse developments on the fundraising front as it seeks to deleverage its balance sheet holding ~$6bn worth of debt and almost two-thirds of such debt due for maturity by next year. The current, elevated interest rate environment offers no respite either.
While adverse developments have pushed most investors to the edge of their seats, the group’s decision to demerge businesses comes as a reason to renew hope. The turn in sentiment was also captured on the bourses, albeit with an underlying sense of caution. While the plans seem highly aspirational and are operationally heavy-duty, the group appears confident to be able to implement this plan through the next financial year.
The demerger, if successful, is expected to arrest the downward spiral and pivot into a series of positive developments, kicking off with positive investor sentiments, enhanced fundraising capabilities and overall improvement in financial health.
The demerger is primarily expected to be value accretive through unlocking of potential value previously locked into the group. Once split, distinct businesses can be expected to hold on their own. This entails healthier units continuing to build strength without reeling under pressure exerted by the unhealthy weight. These units can be expected to be led through a distinct strategy while building independent fundraising capabilities and benefiting from valuations minus the conglomerate discount overhang that would currently have a bearing on most models. At the same time, challenged units can now be resurrected with dedicated focus and distinct strategies without worrying about repercussions across other operations. Most such units can be expected to focus on rebuilding business models, revisiting capital allocation strategies and intensifying focus on operating efficiency.
If done right, this could turn out to be a landmark episode in the history of conglomerate revivals. Borrowing a metaphor from the world of horology, a damaged timepiece must be taken apart with great care, followed by careful evaluation and fixing of every piece before assembling it all with equal finesse.