Corporate Governance, Dividend Concerns Cloud Vedanta’s Ebitda Surprise

Even as Vedanta Ltd.’s operating profit rose to its highest in 10 quarters, inter-company loans, impairment on oil & gas assets and uncertainty around dividend policy continues to be a cause of worry for minority shareholders and analysts.

The company, in its conference call with analysts, remained silent on open offer or revisiting delisting plans after its earlier effort failed, saying that it will be unable to comment on market related activities since they will be speculative in nature.

Key Highlights From Concall

Increase In Inter-Company Loans

While billionaire Anil Agarwal’s Vedanta Resources, the holding company of the group, failed to garner the required number of shares to delist Indian subsidiary Vedanta, it borrowed an additional loan from subsidiary Cairn India Holdings.

As a part of the company’s cash management activities, Cairn India Holdings has extended loans worth $956 million, carrying interest rate of 7%, to Vedanta Resources & subsidiaries. That's an increase from $307 million in the first quarter.

This loan was unsecured and in line with the regulatory approval taken by Cairn India Holdings and didn’t warrant shareholder approval, the management said.

While giving out the re-payment schedule, Vedanta said it wouldn’t invest further amount in Vedanta Resources via any of its subsidiaries. The company, the management said, would consider options including asset sales, if required, and remains confident on debt refinacing at Vedanta Resources.

Ritesh Shah, analyst at Investec, said Vedanta faces a dilemma on parent’s debt maturity to be serviced either via inter-corporate deposits or payouts, which could have corporate governance repercussions. While the management tried to assure investors on no incremental ICDs, the brokerage doesn’t find any comfort given lack of details on the parent’s cash flows.

On Oct. 20, Moody's Investors Service placed Vedanta Resources’ B1 corporate family rating under review for downgrade. That followed an increase in refinancing risk and significant funding needs at the holding company level, following Vedanta Resources' failure to acquire the balance shareholding in key subsidiary Vedanta that would have improved access to group cash, the rating agency said.

Going Slow On Capex: The company said its focus will remain on preserving capital and that capex of $0.7 billion is the lowest in five years along with the option of investing additional capital of around $1.1 billion in alumina refinery, the company said in its disclosures on capital allocation policy.

This drew some concern from analysts. Pinakin Parekh of JPMorgan questioned if the company was preserving capital instead of passing it on to shareholders, and then allocating more to its subsidiaries.

Uncertainty Around Dividend Policy

Vedanta triggered concerns for not fully passing on Hindustan Zinc Ltd.’s dividend to shareholders.

The company announced a payout of Rs 9.5 a share on Oct 25. Compared with Rs28 a share payout by Hindustan Zinc. The remaining among is owed to minority shareholders based on Vedanta’s dividend policy, that allows exceptions only in case of special situations and certain clauses.

The street was looking for clarity. The management reiterated the dividend policy framed and approved in 2015 and cited exceptions:

The board may not approve a dividend in situations when:

• The company does not have any profits.
• There are prolonged strikes or lockouts, natural calamities, regulatory actions, major accidents or other events significantly impacting production volumes.
• Prices of the company’s products have fallen suddenly, impacting future profits in substantial manner.
• The company’s liquidity is jeopardised for any reason, impairing its ability to pay the dividend.

As Covid-19 led to a prolonged shutdown and a sudden fall in commodity prices, the management said company’s board may or may not give dividend. That discretion of taking that decision rested with the board of directors, it said.

Impairment On Oil & Gas Division

Vedanta reported a consolidated net loss of Rs 6,664 crore in fiscal year 2020 as against a net profit of Rs 7,065 crore in the previous financial year. That stemmed for an exceptional loss worth Rs 17,386 crore due to impairment of oil & gas assets as crude plunged after the pandemic struck.

But despite higher production and realisations from the oil & gas division, the management said it won’t reverse the impairment charges till crude is estimated to rise above $52-54 a barrel, Vedanta’s forecast for FY21 and FY22.

The management, however, didn’t rule out the chances of a write-back, linking it to the company’s reserves and pricing scenario.

Analyst Estimates
11 out of 15 analysts covering the stock recommend a ‘buy’, three suggest ‘hold’ and one has a ‘sell’ rating. The average of 12-month target price estimates compiled by Bloomberg suggests an upside of 43%.

Vedanta Q2FY21 ( Consolidated, YoY)

• Revenue down 3.8% at Rs 21,107 crore against the Bloomberg consensus estimate of Rs 21,958 crore, according to its exchange filing.
• Ebitda up 47.6% at Rs 6,531crore--the estimate was Rs 6,010 crore.
• Net profit fell 61.8% at Rs 824 crore against the estimated Rs 2136.3 crore.
• Deferred tax reversal of Rs 1,891 crore had aided the bottom line in the base quarter.
• Margin at 30.9% versus 20.1%.

Revenue fell on account of lower volumes at oil & gas business and lower commodity prices. Revenue decline was partially offset by higher volumes at Indian zinc business, and rupee depreciation.

The operating profit rose on higher volumes at zinc unit, subdued input commodity prices, lower cost of production at aluminium, steel and zinc businesses and rupee depreciation.