Vedanta may top race for stressed assets

Vedanta is almost a debt-free company net of cash and equivalents on its consolidated balance sheet

Metal and mining firm Vedanta seems to be in the pole position to grab stressed assets that are up for auction under the Insolvency and Bankruptcy Code. The Anil Agarwal-promoted company, which has built its iron ore mining to energy conglomerate through a series of acquisitions in the last decade and a half, could snap more assets in the metal space, thanks to the cash pile it inherited from Hindustan Zinc and erstwhile Cairn India. 

At the end of September, it was sitting on cash and liquid investments worth about Rs 38,000 crore, nearly half of which was accounted for by its listed arm Hindustan Zinc, according to Capitaline database. Besides, Hindustan Zinc and its Cairn division continue to generate robust cash flows, thanks to a surge in metal and crude oil prices. 

According to analysts, Vedanta is almost a debt-free company net of cash and equivalents (investment) on its consolidated balance sheet. Netting out cash and investments, Vedanta net debt to equity worked out to be around 0.1 at the end of September. It is also the country’s most valuable metal company with a market capitalisation of Rs 1.2 lakh crore. 

“It can now easily raise couple of billion-dollar worth of fresh equity capital through minimal equity dilution. Other firms may have to make large equity dilution to raise equivalent amount, hitting their share price,” said an analyst.

This provides Vedanta an edge over firms such as Tata Steel, JSW Steel and Piramal Enterprises, which are also in the race to acquire stressed assets such as Essar Steel, Monnet Ispat and Bhushan Steel and Power, among others.

Tata Steel’s net debt to equity on a consolidated basis, for example, works out to be 2.2 times at the end of September, one of the highest in the industry. It reported gross debt of around Rs 89,500 crore and cash and investment worth around 

Rs 15,000 crore at end of the first half of FY18. Analysts say this would make the firm to either make fresh borrowings or look for equity support from its parent to fund large acquisitions.

However, Tata Steel’s domestic division, which is also the holding company for its global business, still has the financial headroom, with net debt to equity of around 0.5x at the end of first half. It might also leverage this to make additional borrowings to fund acquisitions.

 

JSW Steel is in a similar situation, with net debt to equity ratio of 1.8x at the end of September. It reported gross debt of around Rs 43,300 crore and cash and investment worth Rs 2,433 crore at the end of the first half of FY18. Analysts say the firm would have to raise fresh loans, further stretching its balance sheet. It might also raise additional equity capital by selling shares to new investors, resulting in equity dilution that may upset the stock market. 

A lender said: “We expect JSW to raise additional funds from equity markets, while Tata Steel may have to resort to taking loan from Tata Sons.” 

While Piramal Enterprises has announced it would raise Rs 7,000 crore through a qualified institutional placement and a rights issue, sources say, Tata Steel and JSW Steel are also readying their fund-raising plans to take over the toxic assets on sale. The acquiring companies would require around $1 billion each to make aggressive bids, while banks are expected to take a haircut of 50-60 per cent on the existing loans, so as to make such firms attractive. This money would be used to service the truncated debt of the respective firms.

Piramal is ready with its cash pile. Piramal and Bain Capital Credit have already launched a billion-dollar fund to buy distressed assets and are in talks with a private bank to take over its non-performing assets at a discount. After the initial funding, Piramal and Bain would raise funds from other institutional investors. 

Tata Steel is in the race to buy Essar Steel's Hazira plant in which promoters are likely to make a bid. The Essar group has reduced its debt pile by half (approximately Rs 75,000 crore) with the Rosneft transaction. With the sale of Aegis closing any time, cutting Ruia's debt by another Rs 2,000 crore, the Ruias can be a formidable player, too.

 “The Ruias have tied up with VTB Bank of Russia to give a tough fight to the Tatas. This is good news for lenders,” said a source close to the development.