Chart Fun | Vedanta Ltd
Vedanta Ltd (VEDL) delisting offer has been receiving a lot of attention.
Most of the junta’s demands for a higher price is based on:
- Some variant of the general argument of VEDL having enough cash to pay more (needn’t mean an automatic obligation to pay more),
(I̶ ̶p̶a̶i̶d̶ ̶o̶v̶e̶r̶ ̶R̶s̶.̶3̶0̶0̶/̶s̶h̶a̶r̶e̶)The stock has seen north of Rs.300/share, so how can ‘management shaft shareholders’ by paying less?
Casting aside emotional arguments for a moment, here’s a look at the valuation that the business can support intrinsically. This is always a stronger basis on which to base one’s arguments when weighing the attractiveness of the delisting offer price.
Some historical context.
Over the past decade, VEDL’s revenues have grown at a CAGR of 28%. It has achieved this growth on a profitability matrix (margins, return on capital) in the double digits. This is an impressive showing.
Operating cash flows have been used primarily for capex (40% of operating cash flow), dividends (28%) and debt repayments (20%). For all the negative perceptions on the promoter, Vedanta has paid out dividends even in years when it posted losses. The company has a 25-year history of uninterrupted dividend payments.
WHAT DO PRICES SAY?
The attached picture depicts VEDL valuation based on a range of operating conditions.
Left panel depicts range of fair values for VEDL at different growth rates.
Middle panel depicts range of fair values at different margin profiles. The horizontal yellow line depicts the current market price.
Finally, the right panel depicts a distribution of fair values, with the Current Market Price marked in Cyan.
The Current Market Price reflects negative imputed growth and historically low profitability.
What would I do if I were Anil Agarwal and saw this constellation? I’d perceive the market’s collective pessimism, and perception discount as a vividly attractive opportunity to delist the company!
If external share holders believe that this reflects too pessimistic a view of the future, they should do the rational thing and Hold, and await a higher price. On the other hand, if they collectively believed the pessimistic future painted by prices, they should tender and walk away.
If promoter perception was a problem, one fails to fathom why people invested in the company in the first place! It is perfectly fine to expect a higher exit price than one’s purchase price. But the markets have no obligation whatsoever to gift us one.
Ultimately, the final delisting price should boil down to what markets believe the business is likely to deliver over the medium-term.
In this case, it is more likely to reflect the clearing price for jittery hands who’d rather hunt for gains elsewhere.
Disclaimer: This, of course, is not a recommendation etc. It should be viewed as a picture lover’s musings on interesting events.
