Neutral Vedanta Ltd For Target Rs.187 - Motilal Oswal
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Vedanta’s promoters propose an open offer for 10% equity
* Vedanta Resources (VRL) along with other promoter companies have announced an open offer for acquisition of 371.8m shares (10% of equity shares) from public shareholders.
* The offer price has been fixed at INR160/share (~12% discount to its CMP). At INR160/share, VRL would have to shell out INR59.5b (USD0.8b).
* Earlier in Dec’20, the promoter group bought 4.98% equity from the market at INR160/share by paying ~USD400m.
* VRL would come out with a detailed public statement and letter of offer within 15th Jan, 2021 containing details of offer.
Funding
* Promoter has group has informed that it has adequate funds available for financing the transaction.
* Earlier in Dec’20, the promoter group had raised USD1b at 13.86% by selling notes due in CY24 in the market.
* It has also raised USD0.4b by selling notes to Oaktree Capital in Dec’20.
* As on date, ~100% of promoters holding is pledged.
VRL’s debt position
* As on Sep'20, VRL (standalone entity) had a net debt of ~USD7.0b and has debt maturities of ~USD2.5b till Jun’22.
* In addition to this, VRL's holding company has a debt maturity of USD0.32b, which has to be met through cash flows.
Valuation and view
* We see Vedanta’s open offer to buy ~10% stake as a step towards another attempt at delisting. If the open offer goes through, promoter shareholding in the company would rise to ~65%.
* Capital Allocation would be a key factor to watch. Extension of loans of USD956m in 1HFY21 by Vedanta to promoter group highlights the stretched balance sheet of the promoter.
* VEDL's cost reduction in aluminum, higher volumes in zinc and oil and gas businesses, as well as higher commodity prices should drive earnings growth. Over FY20-22E, we estimate 24%/65% EBITDA/EPS CAGR.
* We value VEDL on a SoTP basis to arrive at a TP of INR187 per share (assigning a 10% holding company discount to its holding in HZ). However, an open offer at ~12% discount to CMP could adversely impact the stock price. Maintain Neutral.
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