Why this demerger now?

In the last few years, Vedanta has been trying hard to create value for owners. The stock did rally but has not shown the kind of frenetic rally that stocks like Hindalco, Tata Steel and JSW Steel have shown in the last few months. Agarwal feels that Vedanta has each of these businesses in its overall structure, but due to the combined structure, the value impact is not visible in the market capitalization of the group. Demerger is an attempt to get back valuations. Vedanta wants to look good in the eyes of its investors. Firstly, there were some serious corporate governance issues with its UK based parent, which ticked off on the group valuations. Secondly, the company had to shut down its copper plant in Tamil Nadu over serious environmental lapses and a series of protests, which even turned violent. The plant remains shut. Lastly, Vedanta had to shelve its plans to delist Vedanta Ltd from the Indian bourses at the bottom of the cycle, after LIC objected strongly to the price offered. All these have not gone down too well and this demerger will be an effort to create value? 

Why merge in the first place

Interestingly, Vedanta has had an aggressive growth–based inorganic M&A strategy. Over the last 2 decades, it bought majority stakes in Balco, Sesa Goa, Hindustan Zinc, Madras Aluminum, and Cairn India. In 2018, Vedanta integrated all the units, except HZL and Balco, into the Vedanta group. The idea then was the typical SOTP story where the whole would be more valuable than the sum of total parts. That has not really played out to the extent Vedanta would have wanted. It has left Anil Agarwal with the feeling that creating focused units would be the best way to cerate value for its shareholders. It remains to be seen if this works out. 

Being everything for everybody

In a way, the Vedanta group tried to pit itself against the likes of Anglo-American group of South Africa or Broker Hill of Australia. These are global mining and metal giants. However, most of these companies have never been among the most valuable companies in the world. In the last few years, the pandemic put a lot of pressure on mines and due to weak demand the supply cuts did not bring about a price rise. It is only now that prices are on the ascendant but the cream of value creation is cornered by the steel and aluminum focused stocks that have gone up manifold. It remains to be seen if this bet is right or it is perhaps too late in the day for it.