Holding company curse Valuation of Vedanta
Beauty lies in the eyes of the beholder. It is the same when it comes to valuations of companies. A market exists primarily because of such divergence of views—else there would never be a buyer or seller and no share transactions. And Vedanta’s delisting exercise brought this divergence to the fore with a floor price of a share set at Rs 87.50 and stakeholders like Life Insurance Corporation of India pegging the true value at Rs 320 per share. Today, the stock quotes at Rs 95, after the run-up ahead of the failed delisting. So, what’s the fair price for the share?
To be true, there is no fair or unfair price of a share. The price at which you can buy/sell the stock is the fair price at that point in time, for all practical purposes—because there are myriad factors that go into determining it. But let’s first look at the divergence in views on Vedanta’s stock price, and why the interests of stakeholders are conflicted.
It is also possible that the promoters were more than a little upset over how the shares of their company, Vedanta, have been valued by the market—trading at a significant discount to the market value of even its holding in Hindustan Zinc.
Direct control over Hindustan Zinc would have given easy access to the large cash pool of the company of about Rs 20,000 crore net of debt. And getting the zinc maker to pay heftier dividends would likely be par for the course, as long as it didn’t impair the company’s financial position, as the Government with a near 30% stake can also do with the money.
Large investors in the company clearly saw this for what it was—an attempt to buy out public shareholders cheap—and stymied the attempt. But that hasn’t left the small investor any better off. The stock price, which hit a high of Rs 136.90 before the delisting exercise has now receded to Rs 95. And brokerages aren’t projecting a valuation of anywhere near the Rs 320, but mostly near ~Rs 120. Why’s that?
While the undervaluation of Vedanta’s holding in Hindustan Zinc might appear quite severe, holdings of companies are generally valued well below par by the market. One reason for this is, of course, the tax incidence on any sale of shares by a holding company before the final payout to shareholders. The other is the monetization factor. The likelihood of a stake being monetized (or a monetization event) within a reasonable timeframe, or the unlikelihood of it, determines the extent of value the market is willing to ascribe to it. Hence, where there is little likelihood of monetization, the discount to market valuation is steep and vice versa.
In Vedanta’s case too, the company’s valuation has been less than the value of its holding in just Hindustan Zinc since 2019. At Hindustan Zinc’s current market capitalization of Rs 89,500 crore, the value of Vedanta’s holding of 64.92 percent is Rs 58,000 crore, which exceeds Vedanta’s market capitalization of Rs 35,000 crore.