Despite sweetened deal, full tendering of shares may be difficult; near-term volatility is possible; ‘Hold’ retained
All in all, we retain ‘HOLD/SP’ on Vedanta with a TP of Rs 186, implying 3x Q1FY23e Ebitda. Our recommendation also factors in a dividend yield of 9%.
Vedanta Resources Limited and persons acting in concert with it (promoter group) have increased the offer size and price for the voluntary open offer for Vedanta Limited. While the revised offer represents a 4% premium to the current market price, the fragmented nature of shareholding might be an impediment to full tendering.
Going ahead, we see leverage concerns at parent level exacerbating in the wake of the upward revision of the open offer price. That said, we do not rule out near-term volatility in the stock price. All in all, we retain ‘HOLD/SP’ on Vedanta with a TP of Rs 186, implying 3x Q1FY23e Ebitda. Our recommendation also factors in a dividend yield of 9%.
An offer one cannot refuse? The promoter group has decided to raise the number of equity shares of Vedanta to be acquired in the open offer to 651mn (earlier 371.75mn), representing 17.5% (earlier 10%) of equity shares, at a revised price of Rs 235 (earlier Rs 160). The revised offer represents a premium of 4% to the CMP, a better deal for investors than the earlier offer price that implied a discount of 13% to the CMP then. That said, the fragmented nature of shareholding may affect tendering of shares nevertheless. The last date for upward revision of offer price was March 19.
Leverage concerns exacerbate at parent level The total consideration assuming the full tendering of shares in the open offer would be `153 bn. We understand that promoter group has tied up an additional debt facility of $1.2 bn (8.95% due 2025). The proceeds might be partially utilised for funding the acquisition of shares in the open offer. Hence, we expect total debt at Vedanta Resources (standalone) to increase to $8.2 bn. While the increased shareholding in Vedanta would fetch them additional cash distributed through dividend, we believe that debt servicing concerns still persist.
Outlook: Stock price volatility ahead Vedanta’s revised offer price is a better deal for minority shareholders. That said, we believe that full tendering of 17.5% of equity shares might be challenging given the fragmented shareholding. The revised timelines indicated the upward revision in the open offer price deadline as March 19.
Over the medium term, we expect leverage at the parent’s end to rise. While higher shareholding would result in a higher share of dividend from Vedanta, we still believe that debt servicing would be onerous. On balance, we maintain ‘HOLD/SN’ with a TP of Rs186. Our recommendation also factors in a potentially sustainable dividend yield of 9%.