Senior Credit Analyst, Lucror Analytics

Leonard Law, CFA

Senior Credit Analyst

High Yield Experts

Lucror Analytics

Lucror Analytics is a leading credit and ESG research specialist and a provider of technology solutions for differentiated fixed income strategies. Our roots are in bottom-up fundamental credit analysis with a specialization in high yield corporate credits from Europe, Asia and Latin America. We are one of few research specialists integrating ESG considerations with fundamental credit research through a dedicated ESG platform. Our ESG assessment covers five key criteria: Disclosure, E,S, & G Pillars, Controversies, ESG Impact on Credit and ESG Momentum.

Recognizing the importance and value-add of Factor Investing in fixed income, Lucror developed the Smart Quant Navigator (SQN), an intuitive platform that helps clients devise and implement factor-based strategies ranging from pure quant to active fundamental, with integrated ESG.

Our company has been at the forefront of developments in the fixed income markets, identifying opportunities and consistently delivering new products and value-adding solutions to clients. Lucror has close relationships with the largest and most reputable asset managers, family offices, hedge funds, investment and wealth managers globally.

Credit

<p><br/> The Asia HY Trade Book for the month of September includes a summary of our recommendations, as well as our high-conviction ideas. The report also features relative-value charts and lists of the bonds in the Lucror Asia HY index.<br/></p>

  The Asia HY Trade Book for the month of September includes a summary of our recommendations, as well as our high-conviction ideas. The report also features relative-value charts and lists of the bonds in the Lucror Asia HY index. 

Asia HY Trade Book - September 2020 - Lucror Analytics

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>On the evening of Thursday 17 September 2020, PTI (Press Trust of India) published an article which was then afforded wider take-up in the Economic Times (of the India Times) about the imminent <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> ("VEDL") delisting offer process.</p><p>The headline was "Vedanta moves Sebi to get nod to start reverse book building for delisting."</p><p>The <a href="https://economictimes.indiatimes.com/markets/stocks/news/vedanta-moves-sebi-to-get-nod-to-start-reverse-book-building-for-delisting/articleshow/78169390.cms" target="_blank" rel="noopener">article</a> starts by saying <em>"after mobilising USD 3.15 billion to fund the delisting of its Indian subsidiary"</em> it continues by saying that <em>"Sources said the firm is expecting to receive SEBI approvals by early next week, post which it will launch reverse book building".</em></p><p><strong>The "sources" here are a problem.</strong></p><p>I actually have no issue with the timing - indeed launch should be expected imminently - but the "sources" here read like <em>"someone paid by Anil Agarwal to say what Anil Agarwal wants them to say."</em></p><p>The source said Rs 125/share is "the best offer in the current scenario", that "the proposed transaction eliminates the potential impact of future balance sheet risks" because "the commodity cycle remains uncertain and hazy."  The article itself adds... </p><blockquote><p>On the other hand, delisting in the price band of Rs 125 to 128 per share offers a good opportunity for public shareholders to realise immediate and 100 per cent cash value amid volatile and uncertain markets. The price of Rs 125-128 per share is also at a hefty premium of the share's book value of Rs 89.38 as on March 31, 2020.</p></blockquote><p>Basically, the entire article seems like a plant from the Agarwal family. </p><p>The value of the Hindustan Zinc shares held by <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a><em> per Vedanta share</em> as of Friday was Rs. 157.52 (down from Rs 175.41 the previous Friday). This article suggests that the rest of Vedanta Limited probably has negative value (despite having a book value of Rs 89.38, and yes that is a more valid understanding of Vedanta's 'book value' than the article's). </p><p>VEDL has produced an average ex-Hindustan Zinc ("HZL") EBITDA of Rs 125.1bn per year over the last seven years since VEDL has existed in its current form. The <em>worst</em> three years in that period averaged INR 110.1bn.</p><p><strong>Split out the value of the HZL shares and the VEDL ex-HZL business and it is surprising. </strong></p><ul>
<li>At the closing price on Friday, the value per VEDL share of its holding in Hindustan Zinc was Rs. 157.5/share, or Rs. 126.0/share (5x last 3yr average EBITDA) at a 20% discount. </li>
<li>The rest of VEDL at an EV / EBITDA ratio using the worst 3 years of VEDL ex-HZL in its modern form is worth Rs. 68.9/share at 2.0x EBITDA. Push that to 5x EBITDA for VEDL ex-HZL and that is worth Rs. 157.8/share. Using a 7-year average and it is Rs. 170/share. </li>
</ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/160/204/original/Screenshot%202020-09-20%20at%209.25.08%20PM.png?1600608325" class="editor-image img-responsive" data-smartkarma-image-id="160204"></figure><div style="text-align: left;" class="content-caption">note: this spreadsheet is available to Smartkarma subscribers (DM for more details)</div><div class="content-highlight">
<p><em>"Future balance sheet risks" because "the commodity cycle remains uncertain and hazy?"</em></p>
<p>Sure. I see that. I'll give you a really good price.</p>
<p>Buy me out at 3.0x the worst 3yrs of ex-HZL EBITDA and then spin off the Hindustan Zinc shares to all VEDL shareholders. </p>
<p>At last trade using 30 Sep 2020 expected cash levels, that would be Rs. 115.0 per VEDL share plus Rs. 157.5 per VEDL share of Hindustan Zinc shares. </p>
<p><strong>That's Rs. 272.5/share based on a low multiple of depressed EBITDA</strong> despite stated plans to grow output on lower cash costs created by recent capex. </p>
</div><h2></h2><h2>But the Financing...</h2><p>The understanding in the article of the cash available at what time and for whom is also misleading. </p><p>A diagram of where we stand is below.</p><ul>
<li>The colors of financing (in gray and coral) are shown as to their solidity/certainty in the explanation at the bottom. Yes, Vedanta Resources has raised US$3.15bn to date (that we know of). Media reports suggest there is another US$600mm targeted. I would note that SEBI Regulations regarding Delisting Offers only require that Rs. 161bn (US$2.2bn) be placed in escrow as of the start of the Delisting Offer.  That is the Floor Price x Maximum Number of Shares to be purchased.</li>
<li>The blue arrows are cash - pre-existing or inflows to VEDL and HZL since March 2020 (the HZL cash is the end-June 2020 level). These are sources of getting cash from downstream back to Vedanta Resources so that it can repay its loans (Facility A and "Other Unknown" are expected to be very short-term loans contingent on re-payment within 3-6 months).</li>
</ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/160/192/original/Screenshot%202020-09-20%20at%206.19.14%20PM.png?1600597190" class="editor-image img-responsive" data-smartkarma-image-id="160192"></figure><p>Of course, when we look at it from the standpoint of what Vedanta Resources can afford once they have agreed to a Discovered Price and own 90+% (and can therefore squeeze out minorities at the same price), we look at what funds are available downstream that VEDL could lend to Vedanta Resources to allow VEDR to repay some obligations very early. </p><p>As of now, there is probably a <em>minimum</em> of US$2.2bn which could be repaid within weeks by VEDL to VEDR. That is sitting on VEDL. </p><p>As soon as HZL can pay out a large dividend, there is probably another US$1.6bn to come from that (post-tax).</p><p>This does not include recent value "uncovered" with the Supreme Court judgment in favor of Cairn India last week, the sale or collateralisation of another US$1.0bn in inventory at Cairn and VEDL ex-HZL, or the idea of selling silver and zinc royalties to someone at HZL. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/160/205/original/Screenshot%202020-09-20%20at%2010.12.25%20PM.png?1600611178" class="editor-image img-responsive" data-smartkarma-image-id="160205"></figure><p></p><div class="content-highlight">
<p>If US$2.2bn could be repaid quickly via loan from VEDL to VEDR, and another US$1.6bn could be repaid from a second loan from VEDL to VEDR after Hindustan Zinc paid out a massive Rs. 47/share dividend to all shareholders (delivering Rs. 117bn (US$1.6bn) to VEDL after tax), combined with the US$1.4bn borrowed elsewhere, that would be US$5.2bn. </p>
<p>US$5.2bn at USDINR 73.60 is Rs. 208/share. If VEDL scraped the bottom of the barrel, it could find another US$0.8-1.0bn through inventory, etc. That would be worth another Rs. 32/share. HZL could probably upsize its bond planned for this week to Rs 80bn. That would add another Rs. 12.7/share. If VEDL sold a 20% stake in Cairn India like it had planned, that would add another US$500-800mm I expect. That would add another Rs. 20-32/share of available money.</p>
<p>All told, Rs 180/share is "easy."</p>
<p>Rs. 200/share is somewhat "doable", and as the table above shows, cheap.</p>
<p>Rs. 240 is probably possible but is a stretch. Rs. 270-280 is doable only with considerably more balance sheet wrangling. </p>
</div><p>To be clear, this is not value.</p><p>This is maximum funding available in the pipe without going out and tapping some other emergency lines at VEDR or at the family level, or stretching at the HZL level. </p><p>Of course, if you were Mr. Agarwal, you'd want to stretch at the HZL level as much as you could. After setting a final hearing date for mid-September, the Supreme Court appears about to allow the sale of the Government of India's stake in HZL to go forward. If HZL pays out a massive dividend, it considerably lowers "Book Value" (defined the way VEDL's merchant bank has valued it), and gives a chunk of revenue to the GOI before the stake sale. That lowers the price at which minorities might buy an OFS (Offer for Sale) of the GOI's stake in HZL, and it lowers the price at which VEDL might take out HZL minorities in future, but it raises the PBR at which he could say that he is doing the deal, possibly earning a favourable reaction. And it may be the only way that the GOI would be willing to sell it (i.e. they might be unwilling to sell it in a delisting Offer because they would become the price-setter, and that would be unsavoury to some observers).</p><p>There is, as always, more below the fold for subscribers. </p><hr><div><p><em>Insights previously published in the timeline of the Vedanta Delisting Offer are listed below.</em></p></div><div><table class="table table-striped"><tbody>
<tr><td colspan="3" style="width: 724.8px;"><h3>Relevant Insights To Date</h3></td></tr>
<tr>
<td style="width: 72px;"><strong>Date</strong></td>
<td style="width: 134.4px;"><strong>Theme or Ticker</strong></td>
<td style="width: 476.8px;"><strong>Insight Title</strong></td>
</tr>
<tr>
<td style="width: 72px;">2019</td>
<td style="width: 134.4px;">Indian M&amp;A Guide</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/quiddity-india-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:30885" rel="noopener">Quiddity India M&amp;A Guide 2019</a> </td>
</tr>
<tr>
<td style="width: 72px;">24 May 2020</td>
<td style="width: 134.4px;">Delisting Offers</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/indian-delisting-exit-offers-know-your-process-and-the-games-played" target="_blank" data-smartkarma-citation="insights:39683" rel="noopener">Indian Delisting/Exit Offers - Know Your Process and The Games Played</a> </td>
</tr>
<tr>
<td style="width: 72px;">19 Jun 2020</td>
<td style="width: 134.4px;">Failed Exit Offers</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/failed-exit-offers-in-india-lessons-for-vedl-adani-and-hexw" target="_blank" data-smartkarma-citation="insights:40492" rel="noopener">Failed Exit Offers in India: Lessons for VEDL, ADANI, and HEXW?</a> </td>
</tr>
<tr>
<td style="width: 72px;">27 May 2020</td>
<td style="width: 134.4px;">
<a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> </td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-delisting-offer-how-it-goes-from-here" target="_blank" data-smartkarma-citation="insights:39761" rel="noopener">Vedanta Delisting Offer - How It Goes From Here</a> </td>
</tr>
<tr>
<td style="width: 72px;">22 Jun 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-delisting-offer-opportunities-and-timing" target="_blank" data-smartkarma-citation="insights:40528" rel="noopener">Vedanta Delisting Offer: Opportunities and Timing</a> </td>
</tr>
<tr>
<td style="width: 72px;">25 Jun 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-buyout-loan-huge-hindustan-zinc-div-but-may-change-vedanta-rbb-timing" target="_blank" data-smartkarma-citation="insights:40653" rel="noopener">Vedanta Buyout Loan = HUGE Hindustan Zinc Div But May Change Vedanta RBB Timing</a> </td>
</tr>
<tr>
<td style="width: 72px;">14 Jul 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/putting-sightlines-on-the-vedanta-discovered-price" target="_blank" data-smartkarma-citation="insights:41236" rel="noopener">Putting Sightlines on the Vedanta Discovered Price</a> </td>
</tr>
<tr>
<td style="width: 72px;">18 Aug 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/putting-sightlines-on-the-vedanta-delisting-offer-timing" target="_blank" data-smartkarma-citation="insights:42260" rel="noopener">Putting Sightlines on the Vedanta Delisting Offer TIMING</a> </td>
</tr>
<tr>
<td style="width: 72px;">7 Sep 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-reaching-the-end-game" target="_blank" data-smartkarma-citation="insights:42969" rel="noopener">Vedanta: Reaching The End Game</a> </td>
</tr>
<tr>
<td style="width: 72px;">17 Sep 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-more-fuel-for-the-fire" target="_blank" data-smartkarma-citation="insights:43316" rel="noopener">Vedanta : More Fuel For The Fire</a> </td>
</tr>
</tbody></table></div>

On the evening of Thursday 17 September 2020, PTI (Press Trust of India) published an article which was then afforded wider take-up in the Economic Times (of the India Times) about the imminent Vedanta Ltd (VEDL IN) ("VEDL") delisting offer process.The headline was "Vedanta moves Sebi to get nod to start reverse book building for delisting."The article starts by saying "after mobilising USD 3.15 billion to fund the delisting of its Indian subsidiary" it continues by saying that "Sources said the firm is expecting to receive SEBI approvals by early next week, post which it will launch reverse book building".The "sources" here are a problem.I actually have no issue with the timing - indeed launch should be expected imminently - but the "sources" here read like "someone paid by Anil Agarwal to say what Anil Agarwal wants them to say."The source said Rs 125/share is "the best offer in the current scenario", that "the proposed transaction eliminates the potential impact of future balance sheet risks" because "the commodity cycle remains uncertain and hazy."  The article itself adds... On the other hand, delisting in the price band of Rs 125 to 128 per share offers a good opportunity for public shareholders to realise immediate and 100 per cent cash value amid volatile and uncertain markets. The price of Rs 125-128 per share is also at a hefty premium of the share's book value of Rs 89.38 as on March 31, 2020.Basically, the entire article seems like a plant from the Agarwal family. The value of the Hindustan Zinc shares held by Vedanta Ltd (VEDL IN) per Vedanta share as of Friday was Rs. 157.52 (down from Rs 175.41 the previous Friday). This article suggests that the rest of Vedanta Limited probably has negative value (despite having a book value of Rs 89.38, and yes that is a more valid understanding of Vedanta's 'book value' than the article's). VEDL has produced an average ex-Hindustan Zinc ("HZL") EBITDA of Rs 125.1bn per year over the last seven years since VEDL has existed in its current form. The worst three years in that period averaged INR 110.1bn.Split out the value of the HZL shares and the VEDL ex-HZL business and it is surprising. 
At the closing price on Friday, the value per VEDL share of its holding in Hindustan Zinc was Rs. 157.5/share, or Rs. 126.0/share (5x last 3yr average EBITDA) at a 20% discount. 
The rest of VEDL at an EV / EBITDA ratio using the worst 3 years of VEDL ex-HZL in its modern form is worth Rs. 68.9/share at 2.0x EBITDA. Push that to 5x EBITDA for VEDL ex-HZL and that is worth Rs. 157.8/share. Using a 7-year average and it is Rs. 170/share. 
note: this spreadsheet is available to Smartkarma subscribers (DM for more details)
"Future balance sheet risks" because "the commodity cycle remains uncertain and hazy?"
Sure. I see that. I'll give you a really good price.
Buy me out at 3.0x the worst 3yrs of ex-HZL EBITDA and then spin off the Hindustan Zinc shares to all VEDL shareholders. 
At last trade using 30 Sep 2020 expected cash levels, that would be Rs. 115.0 per VEDL share plus Rs. 157.5 per VEDL share of Hindustan Zinc shares. 
That's Rs. 272.5/share based on a low multiple of depressed EBITDA despite stated plans to grow output on lower cash costs created by recent capex. 
But the Financing...The understanding in the article of the cash available at what time and for whom is also misleading. A diagram of where we stand is below.
The colors of financing (in gray and coral) are shown as to their solidity/certainty in the explanation at the bottom. Yes, Vedanta Resources has raised US$3.15bn to date (that we know of). Media reports suggest there is another US$600mm targeted. I would note that SEBI Regulations regarding Delisting Offers only require that Rs. 161bn (US$2.2bn) be placed in escrow as of the start of the Delisting Offer.  That is the Floor Price x Maximum Number of Shares to be purchased.
The blue arrows are cash - pre-existing or inflows to VEDL and HZL since March 2020 (the HZL cash is the end-June 2020 level). These are sources of getting cash from downstream back to Vedanta Resources so that it can repay its loans (Facility A and "Other Unknown" are expected to be very short-term loans contingent on re-payment within 3-6 months).
Of course, when we look at it from the standpoint of what Vedanta Resources can afford once they have agreed to a Discovered Price and own 90+% (and can therefore squeeze out minorities at the same price), we look at what funds are available downstream that VEDL could lend to Vedanta Resources to allow VEDR to repay some obligations very early. As of now, there is probably a minimum of US$2.2bn which could be repaid within weeks by VEDL to VEDR. That is sitting on VEDL. As soon as HZL can pay out a large dividend, there is probably another US$1.6bn to come from that (post-tax).This does not include recent value "uncovered" with the Supreme Court judgment in favor of Cairn India last week, the sale or collateralisation of another US$1.0bn in inventory at Cairn and VEDL ex-HZL, or the idea of selling silver and zinc royalties to someone at HZL. 
If US$2.2bn could be repaid quickly via loan from VEDL to VEDR, and another US$1.6bn could be repaid from a second loan from VEDL to VEDR after Hindustan Zinc paid out a massive Rs. 47/share dividend to all shareholders (delivering Rs. 117bn (US$1.6bn) to VEDL after tax), combined with the US$1.4bn borrowed elsewhere, that would be US$5.2bn. 
US$5.2bn at USDINR 73.60 is Rs. 208/share. If VEDL scraped the bottom of the barrel, it could find another US$0.8-1.0bn through inventory, etc. That would be worth another Rs. 32/share. HZL could probably upsize its bond planned for this week to Rs 80bn. That would add another Rs. 12.7/share. If VEDL sold a 20% stake in Cairn India like it had planned, that would add another US$500-800mm I expect. That would add another Rs. 20-32/share of available money.
All told, Rs 180/share is "easy."
Rs. 200/share is somewhat "doable", and as the table above shows, cheap.
Rs. 240 is probably possible but is a stretch. Rs. 270-280 is doable only with considerably more balance sheet wrangling. 
To be clear, this is not value.This is maximum funding available in the pipe without going out and tapping some other emergency lines at VEDR or at the family level, or stretching at the HZL level. Of course, if you were Mr. Agarwal, you'd want to stretch at the HZL level as much as you could. After setting a final hearing date for mid-September, the Supreme Court appears about to allow the sale of the Government of India's stake in HZL to go forward. If HZL pays out a massive dividend, it considerably lowers "Book Value" (defined the way VEDL's merchant bank has valued it), and gives a chunk of revenue to the GOI before the stake sale. That lowers the price at which minorities might buy an OFS (Offer for Sale) of the GOI's stake in HZL, and it lowers the price at which VEDL might take out HZL minorities in future, but it raises the PBR at which he could say that he is doing the deal, possibly earning a favourable reaction. And it may be the only way that the GOI would be willing to sell it (i.e. they might be unwilling to sell it in a delisting Offer because they would become the price-setter, and that would be unsavoury to some observers).There is, as always, more below the fold for subscribers. Insights previously published in the timeline of the Vedanta Delisting Offer are listed below.
Relevant Insights To Date

Date
Theme or Ticker
Insight Title


2019
Indian M&amp;A Guide

Quiddity India M&amp;A Guide 2019 


24 May 2020
Delisting Offers

Indian Delisting/Exit Offers - Know Your Process and The Games Played 


19 Jun 2020
Failed Exit Offers

Failed Exit Offers in India: Lessons for VEDL, ADANI, and HEXW? 


27 May 2020

Vedanta Ltd (VEDL IN) 

Vedanta Delisting Offer - How It Goes From Here 


22 Jun 2020
Vedanta Limited

Vedanta Delisting Offer: Opportunities and Timing 


25 Jun 2020
Vedanta Limited

Vedanta Buyout Loan = HUGE Hindustan Zinc Div But May Change Vedanta RBB Timing 


14 Jul 2020
Vedanta Limited

Putting Sightlines on the Vedanta Discovered Price 


18 Aug 2020
Vedanta Limited

Putting Sightlines on the Vedanta Delisting Offer TIMING 


7 Sep 2020
Vedanta Limited

Vedanta: Reaching The End Game 


17 Sep 2020
Vedanta Limited

Vedanta : More Fuel For The Fire 



Vedanta (VEDL): Cash Raised, Money Flow, and How It Affects Delisting Offer Discovered Price

<p><br/> The Europe HY Trade Book for September 2020 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry.<br/></p>

  The Europe HY Trade Book for September 2020 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry. 

Europe HY Trade Book - September 2020 - Lucror Analytics

<p>Several days ago it was noted in the media that <a href="https://www.smartkarma.com/entities/vedanta-resources-limited" target="_blank" data-smartkarma-citation="entities:22202:1" rel="noopener">Vedanta Resources (VED LN)</a> affiliates were looking to borrow an additional US$600 million in order to finance the take-private of <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a>. That sum would be added to the US$1.75bn of short-term loan facility set up in July, and the US$1.4bn borrowed in a bond issue in late August. </p>
<p>That brings the prima facie total to be raised to US$3.75bn or roughly INR 275bn. </p>
<p>Considering the public holding of 1.85358bn shares, that comes to INR 148 per Vedanta Ltd. share. </p>
<div class="content-highlight">
<p>That would be a low price for the Reverse Book Build. A very low price. </p>
<p>At last traded price (INR 219.25), <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a>'s shareholding in <a href="https://www.smartkarma.com/entities/hindustan-zinc-ltd" target="_blank" data-smartkarma-citation="entities:8688:1" rel="noopener">Hindustan Zinc (HZ IN)</a> was worth roughly INR 161.8 per Vedanta share. Getting the rest of Vedanta for negative value would be a serious win. </p>
<p>I had previously calculated that buying out the <em>non-Hindustan Zinc portion</em> of Vedanta Limited at 3x EV/EBITDA would be worth an additional INR 73/share. </p>
<p>Assuming one ascribes a 20% discount to buying VEDL minorities out of their Hindustan Zinc position and pays 3x EV/EBITDA for the rest would get you a price of INR 191.4/share, but that too ends up being quite generous. Take zero discount for the HZL and it is INR 231+.</p>
<p>As discussed in <a href="https://www.smartkarma.com/insights/vedanta-reaching-the-end-game" target="_blank" data-smartkarma-citation="insights:42969" rel="noopener">Vedanta: Reaching The End Game</a>, the money available would provide well more than that near-term to Vedanta Resources.  </p>
</div>
<p>But that INR 231+ number was ignoring the value of the inventory or any eventual rebound in any part of the business. It ignores the pre-paid tax on the dividend to come from HZL. It dismisses the idea that VEDL ex-HZL might be worth more than 3x EBITDA. It also ignores any number of legal situations which might favor Vedanta Limited going forward. </p>
<p>One legal issue I had previously mentioned was the Supreme Court's final hearing - due quite soon - to deal with Vedanta's suit to win approval to have the government sell its remaining stake in Hindustan Zinc. The government wants to sell it. Vedanta wants to buy it. There are "complications" but positive news should come soon. </p>
<h2>The NEW News</h2>
<p>One I had NOT mentioned was a suit Vedanta had brought with another party - Videocon - against the Government of India. This involves a historical dispute on developing and producing in an offshore oil field called Ravva off the coast of Andhra Pradesh where the interests started in 1993 and the works in question appear to date from 2000-2007. There was a complaint, a suit, an arbitration, a denial, then Vedanta took the GOI to court. Today they won.</p>
<p>The headline says US$500mm but the real number will be different. </p>
<h2>The ONGOING News</h2>
<p>Q1 results continue to be delayed. The Annual Report for the last fiscal year has been delayed leading the NYSE to get upset with Vedanta. This may not be unplanned. The results of Vedanta Limited for Q1 were supposed to be approved yesterday but at the last minute Vedanta <a href="https://www.bseindia.com/xml-data/corpfiling/AttachLive/00a6233b-9d9c-4dea-827f-e85b704c4cd6.pdf" target="_blank" rel="noopener">announced</a> (on the 14th) that <em>"due to the ongoing pandemic and other unforeseen circumstances which are beyond the Company's control, the Company is unable to hold its Board Meeting on September 15, 2020 and accordingly we will reschedule the Board Meeting on or before September 30, 2020 for release of Q1 results for which the Company will give the intimation separately in due course."</em></p>
<p>Helpfully, by that time, it is most likely that the Reverse Book Build auction schedule will be determined because if it is not, it is unlikely that Vedanta Limited would be able to complete the process in time to avoid a breach of the covenants of the US$1.4bn bond issue.</p>
<p>As always, more below the fold. </p>
<hr>
<div>
<p><em>Insights previously published in the timeline of the Vedanta Delisting Offer are listed below.</em></p>
</div>
<div>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="3" style="width: 724.8px;">
<h3>Relevant Insights To Date</h3>
</td>
</tr>
<tr>
<td style="width: 72px;"><strong>Date</strong></td>
<td style="width: 134.4px;"><strong>Theme or Ticker</strong></td>
<td style="width: 476.8px;"><strong>Insight Title</strong></td>
</tr>
<tr>
<td style="width: 72px;">2019</td>
<td style="width: 134.4px;">Indian M&amp;A Guide</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/quiddity-india-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:30885" rel="noopener">Quiddity India M&amp;A Guide 2019</a> </td>
</tr>
<tr>
<td style="width: 72px;">24 May 2020</td>
<td style="width: 134.4px;">Delisting Offers</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/indian-delisting-exit-offers-know-your-process-and-the-games-played" target="_blank" data-smartkarma-citation="insights:39683" rel="noopener">Indian Delisting/Exit Offers - Know Your Process and The Games Played</a> </td>
</tr>
<tr>
<td style="width: 72px;">19 Jun 2020</td>
<td style="width: 134.4px;">Failed Exit Offers</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/failed-exit-offers-in-india-lessons-for-vedl-adani-and-hexw" target="_blank" data-smartkarma-citation="insights:40492" rel="noopener">Failed Exit Offers in India: Lessons for VEDL, ADANI, and HEXW?</a> </td>
</tr>
<tr>
<td style="width: 72px;">27 May 2020</td>
<td style="width: 134.4px;">
<a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> </td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-delisting-offer-how-it-goes-from-here" target="_blank" data-smartkarma-citation="insights:39761" rel="noopener">Vedanta Delisting Offer - How It Goes From Here</a> </td>
</tr>
<tr>
<td style="width: 72px;">22 Jun 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-delisting-offer-opportunities-and-timing" target="_blank" data-smartkarma-citation="insights:40528" rel="noopener">Vedanta Delisting Offer: Opportunities and Timing</a> </td>
</tr>
<tr>
<td style="width: 72px;">25 Jun 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-buyout-loan-huge-hindustan-zinc-div-but-may-change-vedanta-rbb-timing" target="_blank" data-smartkarma-citation="insights:40653" rel="noopener">Vedanta Buyout Loan = HUGE Hindustan Zinc Div But May Change Vedanta RBB Timing</a> </td>
</tr>
<tr>
<td style="width: 72px;">14 Jul 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/putting-sightlines-on-the-vedanta-discovered-price" target="_blank" data-smartkarma-citation="insights:41236" rel="noopener">Putting Sightlines on the Vedanta Discovered Price</a> </td>
</tr>
<tr>
<td style="width: 72px;">18 Aug 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/putting-sightlines-on-the-vedanta-delisting-offer-timing" target="_blank" data-smartkarma-citation="insights:42260" rel="noopener">Putting Sightlines on the Vedanta Delisting Offer TIMING</a> </td>
</tr>
<tr>
<td style="width: 72px;">7 Sep 2020</td>
<td style="width: 134.4px;">Vedanta Limited</td>
<td style="width: 476.8px;">
<a href="https://www.smartkarma.com/insights/vedanta-reaching-the-end-game" target="_blank" data-smartkarma-citation="insights:42969" rel="noopener">Vedanta: Reaching The End Game</a> </td>
</tr>
</tbody>
</table>
</div>

Several days ago it was noted in the media that Vedanta Resources (VED LN) affiliates were looking to borrow an additional US$600 million in order to finance the take-private of Vedanta Ltd (VEDL IN). That sum would be added to the US$1.75bn of short-term loan facility set up in July, and the US$1.4bn borrowed in a bond issue in late August. 
That brings the prima facie total to be raised to US$3.75bn or roughly INR 275bn. 
Considering the public holding of 1.85358bn shares, that comes to INR 148 per Vedanta Ltd. share. 

That would be a low price for the Reverse Book Build. A very low price. 
At last traded price (INR 219.25), Vedanta Ltd (VEDL IN)'s shareholding in Hindustan Zinc (HZ IN) was worth roughly INR 161.8 per Vedanta share. Getting the rest of Vedanta for negative value would be a serious win. 
I had previously calculated that buying out the non-Hindustan Zinc portion of Vedanta Limited at 3x EV/EBITDA would be worth an additional INR 73/share. 
Assuming one ascribes a 20% discount to buying VEDL minorities out of their Hindustan Zinc position and pays 3x EV/EBITDA for the rest would get you a price of INR 191.4/share, but that too ends up being quite generous. Take zero discount for the HZL and it is INR 231+.
As discussed in Vedanta: Reaching The End Game, the money available would provide well more than that near-term to Vedanta Resources.  

But that INR 231+ number was ignoring the value of the inventory or any eventual rebound in any part of the business. It ignores the pre-paid tax on the dividend to come from HZL. It dismisses the idea that VEDL ex-HZL might be worth more than 3x EBITDA. It also ignores any number of legal situations which might favor Vedanta Limited going forward. 
One legal issue I had previously mentioned was the Supreme Court's final hearing - due quite soon - to deal with Vedanta's suit to win approval to have the government sell its remaining stake in Hindustan Zinc. The government wants to sell it. Vedanta wants to buy it. There are "complications" but positive news should come soon. 
The NEW News
One I had NOT mentioned was a suit Vedanta had brought with another party - Videocon - against the Government of India. This involves a historical dispute on developing and producing in an offshore oil field called Ravva off the coast of Andhra Pradesh where the interests started in 1993 and the works in question appear to date from 2000-2007. There was a complaint, a suit, an arbitration, a denial, then Vedanta took the GOI to court. Today they won.
The headline says US$500mm but the real number will be different. 
The ONGOING News
Q1 results continue to be delayed. The Annual Report for the last fiscal year has been delayed leading the NYSE to get upset with Vedanta. This may not be unplanned. The results of Vedanta Limited for Q1 were supposed to be approved yesterday but at the last minute Vedanta announced (on the 14th) that "due to the ongoing pandemic and other unforeseen circumstances which are beyond the Company's control, the Company is unable to hold its Board Meeting on September 15, 2020 and accordingly we will reschedule the Board Meeting on or before September 30, 2020 for release of Q1 results for which the Company will give the intimation separately in due course."
Helpfully, by that time, it is most likely that the Reverse Book Build auction schedule will be determined because if it is not, it is unlikely that Vedanta Limited would be able to complete the process in time to avoid a breach of the covenants of the US$1.4bn bond issue.
As always, more below the fold. 


Insights previously published in the timeline of the Vedanta Delisting Offer are listed below.






Relevant Insights To Date



Date
Theme or Ticker
Insight Title


2019
Indian M&amp;A Guide

Quiddity India M&amp;A Guide 2019 


24 May 2020
Delisting Offers

Indian Delisting/Exit Offers - Know Your Process and The Games Played 


19 Jun 2020
Failed Exit Offers

Failed Exit Offers in India: Lessons for VEDL, ADANI, and HEXW? 


27 May 2020

Vedanta Ltd (VEDL IN) 

Vedanta Delisting Offer - How It Goes From Here 


22 Jun 2020
Vedanta Limited

Vedanta Delisting Offer: Opportunities and Timing 


25 Jun 2020
Vedanta Limited

Vedanta Buyout Loan = HUGE Hindustan Zinc Div But May Change Vedanta RBB Timing 


14 Jul 2020
Vedanta Limited

Putting Sightlines on the Vedanta Discovered Price 


18 Aug 2020
Vedanta Limited

Putting Sightlines on the Vedanta Delisting Offer TIMING 


7 Sep 2020
Vedanta Limited

Vedanta: Reaching The End Game 





Trung Nguyen

<p><br/> We view Vedanta Resources (VRL) as "High Risk" on the LARA scale, mainly due to the difficulty in upstreaming cash to service debt at the holdco level (which could improve after Vedanta Ltd's privatisation and the removal of the Dividend Distribution Tax in FY 2020-21) and volatility in commodity prices. The company's fundamental profile is supported by: [1] a large and diversified resource asset base; [2] production efficiency, with sound earnings and cash-flow capabilities, albeit segmental contributions fluctuate from year to year; and [3] sound liquidity. Conversely, VRL's risk profile is affected by: [1] the complex corporate structure, with related-party transactions; [2] regulatory risk (especially in the aluminium and iron ore segments); and [3] the inherent volatility of commodity prices.<br/><br/> The company has grown rapidly in the past, with assets tripling from 2009 to 2012 alongside a softening in the financial risk profile. We view this as a weakness, given the operational challenges inherent for such a diverse group. VRL (issuer of the bonds) is a holding company. Its main assets include 63% of Vedanta Ltd (formerly Sesa Sterlite, the holding company for most of its activities) and 79% of Konkola Copper Mines (nationalised by the Zambian government, though Vedanta has since approached the courts to overturn this decision). Holdco creditors are highly dependent on a continued stream of dividends or intercompany loans from these interests.<br/><br/> Our fundamental Credit Bias on VRL is "Negative", due to: [1] the volatile operating environment; [2] the evolving regulatory environment, as reflected by the loss of Konkola Copper Mines, as well as the suspension of the Tuticorin smelter and Goa mine; [3] our belief that the delisting of subsidiaries will result in weaker transparency/regulatory oversight; and [4] the Chairman's apparent appetite for M&A.<br/><br/> We view VRL as "Weak" on the LAGA scale, mainly driven by the likelihood of the company or its subsidiaries being used to support the debt of parent Volcan Investments.<br/></p>

  We view Vedanta Resources (VRL) as "High Risk" on the LARA scale, mainly due to the difficulty in upstreaming cash to service debt at the holdco level (which could improve after Vedanta Ltd's privatisation and the removal of the Dividend Distribution Tax in FY 2020-21) and volatility in commodity prices. The company's fundamental profile is supported by: [1] a large and diversified resource asset base; [2] production efficiency, with sound earnings and cash-flow capabilities, albeit segmental contributions fluctuate from year to year; and [3] sound liquidity. Conversely, VRL's risk profile is affected by: [1] the complex corporate structure, with related-party transactions; [2] regulatory risk (especially in the aluminium and iron ore segments); and [3] the inherent volatility of commodity prices.   The company has grown rapidly in the past, with assets tripling from 2009 to 2012 alongside a softening in the financial risk profile. We view this as a weakness, given the operational challenges inherent for such a diverse group. VRL (issuer of the bonds) is a holding company. Its main assets include 63% of Vedanta Ltd (formerly Sesa Sterlite, the holding company for most of its activities) and 79% of Konkola Copper Mines (nationalised by the Zambian government, though Vedanta has since approached the courts to overturn this decision). Holdco creditors are highly dependent on a continued stream of dividends or intercompany loans from these interests.   Our fundamental Credit Bias on VRL is "Negative", due to: [1] the volatile operating environment; [2] the evolving regulatory environment, as reflected by the loss of Konkola Copper Mines, as well as the suspension of the Tuticorin smelter and Goa mine; [3] our belief that the delisting of subsidiaries will result in weaker transparency/regulatory oversight; and [4] the Chairman's apparent appetite for M&A.   We view VRL as "Weak" on the LAGA scale, mainly driven by the likelihood of the company or its subsidiaries being used to support the debt of parent Volcan Investments. 

Vedanta Resources - Tear Sheet - Lucror Analytics

India

Vedanta Resources Limited operates as a diversified natural resource company. The Company extracts and process zinc, lead, aluminum, iron ore, copper, and silver, as well as focuses on oil and natural gas. Vedanta Resources serves clients worldwide.

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Vedanta Resources (VED LN)

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