Investors seem to have given thumbs down to the proposed restructuring plans of Vedanta Group. All the three listed companies – Sesa Goa, Sterlite Industries and Cairn India – that are being consolidated under the new entity Sesa Sterlite – ended in the red on Monday.

The merger ratio of five is to three for the Sterlite-Sesa merger was seen as negative for Sesa and neutral for Sterlite. This comes at a time when Sesa Goa itself is facing several challenges in its operations with the iron ore mining ban in Karnataka, lapse of lease agreement in Orissa and hike in export duty. The recent observations by the Shah Commission on illegal mining in Goa, which accounts for 90 per cent of its volume, may further impact its business further.

A few investors are also upset that the Group has invested Rs 15,000 crore of Sesa's cash reserve for buying stake in Cairn India, leading to unnecessary diversification into the oil exploration sector which is tightly controlled by the Government.

Mr Tanuj Rastogi, MSFL Research, Marwadi Group, said Sesa Goa shareholders have not been appropriately compensated for their holding in Cairn India and company's ability to generate superior cash flows than Vedanta's other operating assets. “We don't rule out reports of Sesa's investors protest against the deal,” he added.

The valuation of Vedanta Aluminium (VAL), which is facing a series of hurdles in its operations, has been another thorny issue in the entire reorganisation process. The company currently has aluminium production capacity of one million tonne. The high valuation of VAL after transferring a debt of $4 billion (about Rs 20,000 crore) has been contested by most investors.

Mr Dicksey Mathew, HDFC Securities, said given the strings of uncertainty posed in the business, the valuation for VAL at $473 million (Rs 2,332 crore) seems quite overvalued as against our original expectation of transfer at zero cost.

“We learn that the valuation has been arrived with an assumption of obtaining captive bauxite three years from now. While the assumption seems fair, we believe that the asset is still overvalued, given the cost curve of aluminium and uncertainty on both bauxite and coal,” he said.

With the transfer of its Cairn India acquisition associated debt of $5.9 billion, Vedanta Resources would significantly benefit in form of reduction in debt service liability by 61 per cent to $3.8 billion and interest obligation by 40 per cent to $180 million, said Mr Kamlesh Bagmar, Research Analyst, Prabhudas Liladar.

Apart from benefit of debt reduction, VRPL's economic interest at erstwhile individual entity (54.6 per cent in Sterlite and 55.1 per cent in Sesa) level would increase to 58.3 per cent in the new Sesa-Sterlite on the back of swap of its holding in VAL and MALCO, he added.

Suresh@thehindu.co.in

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