Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Vedanta Vaulting Near 2020 Highs On Higher Commods, Higher Forecasts, But Open Offer Remote?

Vedanta Promoter Launches Offer to Buy 4.98%

Vedanta (VEDL IN) Promoter To Launch an Open Offer To Buy More

VEDL Delisting Fail Day1 - Reading Between the Lines of the Trading Data

Vedanta Delisting Proposal/Offer Fails (We Think)

Vedanta - Someone Is Playing Silly Buggers But Even On The Last Day Investor Strategy Matters

Quiddity Advisors

Equity Bottom-Up

In Comedìa (later named La Divina Commedia), Dante Alighieri constructed a framework for understanding the faults and foibles of humans and how their souls progress after Death to their final state. The work follows Dante through 'his' discovery (with the help of guides Virgil, Beatrice, and St Bernard of Clairvaux) and realization of inherent human sinfulness, to human penitence (in Purgatorio), which eventually leads the Righteous on their path to God and Heaven (Paradiso). 
It starts, as occasionally happens in markets as well, with a descent into Hell.
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/166/382/original/Bartolomeo_Di_Fruosino_-_Inferno,_from_the_Divine_Comedy_by_Dante_%28Folio_1v%29_-_WGA01339.jpg?1603246987" class="editor-image img-responsive" data-smartkarma-image-id="166382"></figure>
<div class="content-caption">source: Dante's Inferno by Bartolomeo di Fruosino (painted 1430-1435)</div>
</section>
From the forest of Perdition through the vestibule of Indifference, one crosses the river Acheron into Limbo - the first Circle of Hell. The next 8 Circles of Hell are split into three sections. Upper Hell is for the self-indulgent - indeed Circle 3 is for the Gluttonous and Circle 4 for the Avaricious &amp; Prodigal, who spend eternity paired up with each other, rolling boulders around colliding with each other (watched over - in a "coincidence" which will be believed by no observer of Japanese M&amp;A - by Plutus). Sinners bound for worse punishment pass through the City of Dis where reside the Heretics, and on the other side one encounters the second category which is the Violent. Beyond that travellers enter Nether Hell, reserved for the Malicious and Fraudulent, with the bottom circle reserved for the Traitorous. The deeper one goes, the more grave the sin.
It could be argued that <a href="https://www.smartkarma.com/entities/vedanta-ltd" target="_blank" data-smartkarma-citation="entities:514:1" rel="noopener">Vedanta Ltd (VEDL IN)</a> had fallen, "realized" its sin in 2019 through a corporate governance discount because of Cairn India funding the Volcan investment in Anglo, and lawsuits which have caused stoppages in the copper and iron ore business. The Covid-19 crash in March took the stock to below 0.4x accounting book value per share and below 0.3x book if one marked Hindustan Zinc to market. 
Vedanta Limited (VEDL) has just ended a months-long process by which it could have been taken out by its promoters through a Delisting Offer - a possible shortcut back through Purgatorio to Paradise. However, VEDL got lost along the way, and is now firmly back in Purgatory. 
<h3>Vedanta Resources on the other hand probably never got out of the Inferno.</h3>
Some observers may believe it firmly ensconced in the 4th Circle. Creditors may put it lower down, viewing VEDR's actions as Violence against one's neighbours and oneself. Those creditors most upset might go further, putting VEDR into the 8th Circle of hell - the one reserved for Grafters, Hypocrites, Thieves, and False Counselors. Hell hath no fury like a scorned creditor (at least not until you get to the Ninth Circle). 
VEDL may be in Limbo looking up to Purgatory, but VEDR today saw Moody's place Vedanta Resources' B1 Corporate Family Rating (CFR) <a href="https://www.moodys.com/research/Moodys-places-Vedanta-Resources-ratings-under-review-for-downgrade--PR_434665" target="_blank" rel="noopener">under review for downgrade</a>.
<blockquote>
The review follows 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 Limited that would have improved access to group cash.
Moody's review will focus on the holding company's ability to refinance its upcoming debt maturities in the fiscal year ending March (fiscal 2021) and fiscal 2022. Moody's expects to conclude the review within 90 days.
</blockquote>
<h2>The NEW News</h2>
Yesterday, the board of <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>, the subsidiary of Vedanta Limited, and the biggest source of cash in the corporate chain announced the result of its Board Meeting which considered the release of its unaudited Q2 results and an "Interim Dividend", where the decision was made to pay <a href="https://www.bseindia.com/xml-data/corpfiling/AttachLive/59711E9D-683B-4BA9-8F3A-3B897E334161-181347.pdf" target="_blank" rel="noopener">a dividend of INR 21.30/share</a> to shareholders as of record date 28 October 2020. 
This is a big dividend - roughly 10% of market cap - on top of what was near 10% of market cap in May - but neither were "special dividends" which means both dividends fall squarely within the purview of Vedanta Limited's official <a href="https://www.vedantalimited.com/CorporateGovernance/vedl_dividend_policy_may_15_final.pdf" target="_blank" rel="noopener">Dividend Distribution Policy</a> which states... 
<blockquote>
In every financial year, the Board aims to distribute to its equity shareholders...
1.1.  The entire dividend income (net of taxes) it receives from its subsidiary, Hindustan Zinc Ltd. (this does not apply to any one‐time special dividends received from Hindustan Zinc Ltd. which will be at the discretion of the Board); and
1.2.  a Minimum 30% (including taxes, cess, and levies, if any relating to the dividend) of Attributable Profit after Tax (before exceptional items) of the Company excluding its share of profits in Hindustan Zinc Ltd for the year. Such profits will be net of dividend payout to preference shareholders, if any.
</blockquote>
In May this year HZL paid INR 16.5/share and now this will be INR 21.3/share. That is a total of INR 37.8/share or INR 34.02/share after tax. VEDL owns 2,743,154,310 shares of HZL which ends up being INR 93.322 billion.
Based on the number of VEDL shares outstanding as of the end of September, that is INR 25.106/share owed to every shareholder of Vedanta just from the HZL dividends plus the amount from VEDL. <a href="https://economictimes.indiatimes.com/markets/stocks/news/vedanta-to-receive-rs-5843-crore-as-dividend-from-hindustan-zinc/articleshow/78770756.cms?utm_source=contentofinterest&amp;utm_medium=text&amp;utm_campaign=cppst" target="_blank" rel="noopener"></a>
Of course, that doesn't solve the problem. 
In the past months I rarely, if ever, get questions about court cases, commodity market fundamentals, average selling prices, production estimates, environmental issues being resolved, etc. The questions I get asked are two-fold. 
<ol>
<li>Does VEDL have good enough governance to follow the Board's stated dividend distribution policy?</li>
<li>Will VEDL instead lend those funds to its parent in contravention of good governance and appropriate stewardship of VEDL financial assets? </li>
</ol>
My answers remain: 
<ol>
<li>I do not know, but the board should follow its stated policies. </li>
<li>I do not know, but the board should receive independent advice about doing so and if it chooses to lend money to its own parent company in contravention of the spirit of the rules against related party transactions, it should set rates and terms and conditions on an arms length basis as determined by a third party. Certainly, if there is money to be invested, lending it to VEDR cannot be the single best investment target from both a return and risk perspective for VEDL shareholders in the whole universe. </li>
</ol>
The fact that a body of independent directors with serious backgrounds should have some weight and should be able to make appropriately independent decisions on behalf of VEDL shareholders is usually met with a hearty guffaw. 
Independent board members of Vedanta Limited should take note. Minority investors do not trust your independence unless you act like independent directors. Expectations will build. The dividend owed is 25% of the current share price. 
More, of course, below the fold.

In Comedìa (later named La Divina Commedia), Dante Alighieri constructed a framework for understanding the faults and foibles of humans and how their souls progress after Death to their final state. The work follows Dante through 'his' discovery (with the help of guides Virgil, Beatrice, and St Bernard of Clairvaux) and realization of inherent human sinfulness, to human penitence (in Purgatorio), which eventually leads the Righteous on their path to God and Heaven (Paradiso). 
It starts, as occasionally happens in markets as well, with a descent into Hell.


source: Dante's Inferno by Bartolomeo di Fruosino (painted 1430-1435)

From the forest of Perdition through the vestibule of Indifference, one crosses the river Acheron into Limbo - the first Circle of Hell. The next 8 Circles of Hell are split into three sections. Upper Hell is for the self-indulgent - indeed Circle 3 is for the Gluttonous and Circle 4 for the Avaricious &amp; Prodigal, who spend eternity paired up with each other, rolling boulders around colliding with each other (watched over - in a "coincidence" which will be believed by no observer of Japanese M&amp;A - by Plutus). Sinners bound for worse punishment pass through the City of Dis where reside the Heretics, and on the other side one encounters the second category which is the Violent. Beyond that travellers enter Nether Hell, reserved for the Malicious and Fraudulent, with the bottom circle reserved for the Traitorous. The deeper one goes, the more grave the sin.
It could be argued that Vedanta Ltd (VEDL IN) had fallen, "realized" its sin in 2019 through a corporate governance discount because of Cairn India funding the Volcan investment in Anglo, and lawsuits which have caused stoppages in the copper and iron ore business. The Covid-19 crash in March took the stock to below 0.4x accounting book value per share and below 0.3x book if one marked Hindustan Zinc to market. 
Vedanta Limited (VEDL) has just ended a months-long process by which it could have been taken out by its promoters through a Delisting Offer - a possible shortcut back through Purgatorio to Paradise. However, VEDL got lost along the way, and is now firmly back in Purgatory. 
Vedanta Resources on the other hand probably never got out of the Inferno.
Some observers may believe it firmly ensconced in the 4th Circle. Creditors may put it lower down, viewing VEDR's actions as Violence against one's neighbours and oneself. Those creditors most upset might go further, putting VEDR into the 8th Circle of hell - the one reserved for Grafters, Hypocrites, Thieves, and False Counselors. Hell hath no fury like a scorned creditor (at least not until you get to the Ninth Circle). 
VEDL may be in Limbo looking up to Purgatory, but VEDR today saw Moody's place Vedanta Resources' B1 Corporate Family Rating (CFR) under review for downgrade.

The review follows 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 Limited that would have improved access to group cash.
Moody's review will focus on the holding company's ability to refinance its upcoming debt maturities in the fiscal year ending March (fiscal 2021) and fiscal 2022. Moody's expects to conclude the review within 90 days.

The NEW News
Yesterday, the board of Hindustan Zinc (HZ IN), the subsidiary of Vedanta Limited, and the biggest source of cash in the corporate chain announced the result of its Board Meeting which considered the release of its unaudited Q2 results and an "Interim Dividend", where the decision was made to pay a dividend of INR 21.30/share to shareholders as of record date 28 October 2020. 
This is a big dividend - roughly 10% of market cap - on top of what was near 10% of market cap in May - but neither were "special dividends" which means both dividends fall squarely within the purview of Vedanta Limited's official Dividend Distribution Policy which states... 

In every financial year, the Board aims to distribute to its equity shareholders...
1.1.  The entire dividend income (net of taxes) it receives from its subsidiary, Hindustan Zinc Ltd. (this does not apply to any one‐time special dividends received from Hindustan Zinc Ltd. which will be at the discretion of the Board); and
1.2.  a Minimum 30% (including taxes, cess, and levies, if any relating to the dividend) of Attributable Profit after Tax (before exceptional items) of the Company excluding its share of profits in Hindustan Zinc Ltd for the year. Such profits will be net of dividend payout to preference shareholders, if any.

In May this year HZL paid INR 16.5/share and now this will be INR 21.3/share. That is a total of INR 37.8/share or INR 34.02/share after tax. VEDL owns 2,743,154,310 shares of HZL which ends up being INR 93.322 billion.
Based on the number of VEDL shares outstanding as of the end of September, that is INR 25.106/share owed to every shareholder of Vedanta just from the HZL dividends plus the amount from VEDL. 
Of course, that doesn't solve the problem. 
In the past months I rarely, if ever, get questions about court cases, commodity market fundamentals, average selling prices, production estimates, environmental issues being resolved, etc. The questions I get asked are two-fold. 

Does VEDL have good enough governance to follow the Board's stated dividend distribution policy?
Will VEDL instead lend those funds to its parent in contravention of good governance and appropriate stewardship of VEDL financial assets? 

My answers remain: 

I do not know, but the board should follow its stated policies. 
I do not know, but the board should receive independent advice about doing so and if it chooses to lend money to its own parent company in contravention of the spirit of the rules against related party transactions, it should set rates and terms and conditions on an arms length basis as determined by a third party. Certainly, if there is money to be invested, lending it to VEDR cannot be the single best investment target from both a return and risk perspective for VEDL shareholders in the whole universe. 

The fact that a body of independent directors with serious backgrounds should have some weight and should be able to make appropriately independent decisions on behalf of VEDL shareholders is usually met with a hearty guffaw. 
Independent board members of Vedanta Limited should take note. Minority investors do not trust your independence unless you act like independent directors. Expectations will build. The dividend owed is 25% of the current share price. 
More, of course, below the fold. 

Vedanta Limited - Caught in Economic Purgatory but Governance Hell?