Vedanta open offer: Institutional investors may stay away, parent firm debt likely to rise

Anil Agarwal’s Vedanta Resources has increased the open offer price to raise its stake in Vedanta Ltd by another 17.5%. The open offer price now stands at Rs 235 per share, which is at a premium over the current market price of Rs 223. Earlier in January, Vedanta Resources had offered shareholders Rs 160 per share, looking to buy a 10% stake in the company. However, institutions such as LIC and foreign funds are still likely to steer clear of the offer. Since the beginning of February, Vedanta Ltd’s stock price has soared 39%.

After last year’s failed delisting bid, Vedanta Resources has upped its stake in recent months and the 17% stake increase through the open offer would hike the stake further, helping the parent company re-attempt delisting sooner rather than later. The open offer started yesterday and will remain open till April 7.

LIC, foreign funds, DIIs might stay away

Domestic brokerage and research firm Emkay Global said that the minimum acceptance ratio in the open offer could be as high as 49%. Emkay Global expects LIC, which holds a 5.6% stake in Vedanta, to not participate in the offer. “LIC holds 5.6%. LIC had offered its shares at Rs 320 per share in October 2020 when Vedanta Resources made an open offer to delist Vedanta Ltd shares. We believe that LIC is unlikely to participate in the open offer at the current price of Rs 235 per share,” they added. Analysts at Emkay believe foreign investors such as Vanguard, Blackrock and Charles Schwab are also likely to steer clear of the offer.

Further, analysts at Emkay Global have opined that major domestic institutional investors would also stay away from the offer. “Our current target price of Rs 217 includes a 30% holdco discount on the attributable share of Hindustan Zinc which if were to be removed will increase the intrinsic value of Vedanta up to Rs 280,” they said while highlighting why DIIs might stay away. If DIIs, Foreign Funds, and LIC stay away from the offer the acceptance ratio could increase to 64%, according to Emkay Global.

Leveraged parent firm

The open offer is likely to increase debt for Vedanta Resources. According to Edelweiss Securities, the total consideration assuming the full tendering of shares in the open offer would be Rs 15,300 crore. “We expect total debt at Vedanta Resources (standalone) to increase to USD 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,” they said.

Edelweiss has a price target for Vedanta set at Rs 186 with a ‘Hold’ rating, expecting the leverage at the parent firm to rise. Kotak Securities has a ‘Reduce’ rating on the scrip with a target price of Rs 180 apiece. However, some analysts do see positives ahead for Vedanta as the commodity prices pick up from their pandemic lows.

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