Hind Zinc may use NCD funds as dividends to help Vedanta delist: analysts

Firm raises Rs 3,520 cr despite firm being cash surplus; It cannot use the proceeds directly for parent company

Hindustan Zinc Ltd (HZL), a subsidiary of Vedanta Limited, has raised Rs 3,520 crore through issuance of non-convertible debentures (NCDs) which analysts feel could indirectly fund the delisting of Anil Agarwal-led metal and mining company. 

“HZL being a listed entity cannot raise funds and use it for its parent. It is against regulations. Moreover, since the Union government has a stake in Hindustan Zinc, the company board will also have a government official, which will not allow such transactions,” a senior analyst with a ratings agency said. 

Vedanta owns 64.9 percent stake in HZL, while the government has a residual stake of 29.54 percent stake. “However, what HZL could perhaps do is route the funds via dividends to the promoter and separately raise from the market to enhance its cash and cash equivalent. That is a possibility,” the analyst added. 

In May, the HZL board approved an interim dividend of Rs 16.50 per equity share for FY20 amounting to Rs 6,972 crore.

In the past, the zinc producer had announced a special dividend for three consecutive years from 2015 to 2017, making funds available for Vedanta. In fact, FY16 and FY17 saw the highest dividend payouts by Hindustan Zinc in a decade. (see chart) 

This will be first borrowing by the zinc producer in over a decade. Hindustan Zinc has historically been a debt free company thanks to its industry leading profit margins and free cash flows from its operations. The company generated free cash flows worth around Rs 5100 crore in FY20 net of nearly Rs 2600 crore worth of investment and capex. 

In the last ten-years, the company has cumulatively generated free cash flows worth around Rs 76,000 crore net of capex making it of biggest cash cows among India Inc. 

“We keep managing our cash in an efficient manner. There are some investments which are long term and we do not want to break them. Hence have chosen to raise via NCDs. This is an ongoing process,” Sunil Duggal, group chief executive officer at Vedanta Limited told Business Standard.  

In a Bombay Stock Exchange filing today, the company said its board has approved the allotment of 35,200 rated, listed, unsecured, redeemable, NCDs bearing a face value of Rs 10 lakh each, aggregating to Rs 3,520 crore on private placement basis.  

HZL is the largest integrated producer of zinc and lead in the country. As on June 30, 2020, the company’s net cash and cash equivalent stands at Rs 15,480 crore as against Rs 21,596 crore at the end of FY20.

This, however, is not the first time that Vedanta has relied on its cash-rich subsidiaries to get funded. 

In 2015, Cairn India was merged into Vedanta Limited for the latter to be able to get access to the funds of the oil and gas exploration company to lower its debt. 

Separately, Vedanta today informed that it has received in-principle approval from BSE and NSE for the delisting offer.  

In May, Vedanta had announced its decision to delist from the domestic stock exchanges by buying out non-promoter shareholding, which stands at 49.86 percent as on June 30, 2020.  

Shares of Vedanta Limited today ended at Rs 140 per share on the BSE, up 1 percent from previous close, while that of Hindustan Zinc closed at Rs 212 per share, up 1.12 percent from previous close.