Billionaire Anil Agarwal backed metal giant, Vedanta's stock price and its subsidiary Hindustan Zinc's stock will be in focus on July 18 after the latter received the NCLT Jaipur bench's approval on the scheme of arrangement that will allow Hindustan Zinc to transfer its general reserves to retained earnings. While Vedanta is currently in focus for its Rs 8,500 crore QIP, which is in line with Vedanta's plan of deleveraging as it plans to split its own business in the ratio of 1:6. Amidst this, is it the right time to buy Vedanta stock?
Vedanta Hindustan Zinc Scheme:
As per the regulatory filing on July 17, Hindustan Zinc announced that the Hon'ble National Company Law Tribunal ('Hon'ble NCLT'), Jaipur Bench, having jurisdiction over the Company, pronounced the order approving and sanctioning the aforesaid Scheme of Arrangement ('Order'). Same filing was updated by Vedanta as well.
The scheme of arrangement of Hindustan Zinc that has been approved involves reorganization of the capital of the company. The scheme includes transfer of amounts standing to the credit of the General Reserves to the Retained Earnings. This scheme is in the interest of all stakeholders of the company.
In its rationale for the scheme, HZL had said that over the years, the Company has built up significant reserves through transfer of profits to the reserves in accordance with provisions of the erstwhile Companies Act, 1956 and erstwhile rules notified thereunder, namely, the Companies (Transfer of Profits to Reserves) Rules, 1975.
HZL added, steady growth in sales volume, balanced capital expenditure for continuing operations has helped the company achieve a strong track record of generating cash flows. With healthy business practices in place, the Company expects that it will continue its growth trajectory and its business operations will keep generating incremental cash flow over the coming years.
Since general reserves is in excess of the company's anticipated operational and business needs, thus, HZL believes that these excess funds can be utilized to create further shareholders' value, in such manner.
Upon completion of the scheme, the amount of Rs 10383, 15,26, 729 standing to the credit of the General Reserves, as appearing in the books of accounts of the company as on the Appointed Date, shall be reclassified, transferred to, and shall form part of the Retained Earnings of the Company for the previous financial years.
Whether this will impact dividends since usually companies payout dividend rewards via their general reserves.
In this regard, HZL said, "It's neither any payment nor any commitment to pay, rather it is enabling. As per the Companies Act, 2013, there is no requirement now to transfer certain percentage of profits to reserves prior to distribution of dividend. Given the company's growth trajectory, the management is of the view that funds lying in GR are in excess of company's anticipated operational and business needs in the foreseeable future. Thus, these excess funds can be utilized to create further shareholders' value as per the capital allocation policy and subject to the Board's approval."
Apart from this, the demerger between Vedanta and HZL is still on the hoop, and eyes government approval. The initial scheme included a demerger of three entities by Hindustan Zinc. These separate entities were zinc and lead, secondly silver, and lastly an entity for the recycling business. However, the scheme has faced hardships as the government was not keen on approving it due to major concerns related to the impact of this demerger on investors' confidence.
Another concern was that Hindustan Zinc operated a single profitable unit, and there was no guarantee that post-demerger it would continue the same momentum.
Earlier, it was reported that Hindustan Zinc had revised its demerger plan.
Vedanta Rs 7,000 Crore QIP:
The metal behemoth opened its Rs 8,500 crore QIP on July 15. For the same, the company fixed a floor price of Rs 461.26 per Equity Share. The QIP is in line with Vedanta's plan of reducing its debt by $3 billion in the next three years.
Vedanta Demerger In 1:6 Ratio:
Vedanta's demerger is of a 1:6 ratio, where the company will be split up into six listed entities to unlock value. The demerger plan has been in full swing.
Earlier, in a note, Agarwal said that FY25 is going to be a transformative year for the company on many fronts as it prioritizes disciplined growth, operational excellence and exploring opportunities along the value chain. He further revealed that Vedanta's demerger is going to be completed by December 2024-end. Further, he reiterated Vedant's goal of achieving Group EBITDA of $7.5 billion within two years and deleveraging its parent Vedanta Resources by $3 billion in the next 3 years.
Last year, in September, Vedanta announced the creation of a demerger of metals, power, aluminium, and oil and gas businesses to unlock potential value. After the exercise, six independent verticals - Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta Limited - will be created.
Under the demerger, for every share of Vedanta, shareholders will receive one share of each of the five newly listed companies. After the demerger, the businesses of Hindustan Zinc as well as the electronics business will remain with Vedanta Limited.
Vedanta Share Price:
Vedanta's stock price stood at Rs 455.70 apiece, with a market cap of Rs 1,69,392.65 crore. The stock is a couple of rupees away from its 52-week high of Rs 506.85 apiece, while more than doubling from the 52-week low of Rs 207.85 apiece.
YTD, Vedanta stock zoomed by over 18% on BSE.
There is potential for a double-digit surge in Vedanta stock ahead.
BUY Vedanta Stock:
In its latest note, Phillip Capital said, "We continue to maintain a positive stance on the company. The recent upsurge in LME and improving integration in the aluminium business will augur well for Vedanta as aluminium is poised to take the top spot in EBITDA contribution while HZL will continue to provide steady cash flows."
Phillip added that with debt-related issues largely settled in the medium term, the company continues to focus on growth and guiding for US$ 7.5-10bn of EBITDA in future (we have taken a conservative stance at US$ 6bn). Out of all the businesses, aluminium has the most potential for EBITDA improvement due to improving backward integration into coal and bauxite mining.
Given parent Company VRL promised to retire US$ 3bn debt in the next three years, Phillip Capital's note added, "We expect divided yield to remain supportive. We maintain buy with our SOTP target price at Rs 552."
Disclaimer: The write-up is just for information purposes, and is not a recommendation to buy, sell or hold. We have not done fundamental or technical analysis and have no opinion on the stock mentioned. Neither, the author nor Greynium Information Technologies should be held liable for any losses. Please consult a professional advisor.
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