Daily Brief 464 Vedanta Demerger And Sovereign Loans

TITLE: Can the demerger save Vedanta? | Uncovering the truth about sovereign loans | The Daily Brief #464 CHANNEL: Markets by Zerodha DATE: 2026-05-13 ---TRANSCRIPT--- In today’s episode, we’ll talk about two interesting stories. In the first one, we see how Vidanta is demerging its business into five different entities. And in the second one, we’ll see when a country gives loan to another country, it’s not always because of economic reasons. Hello and welcome to the daily brief show by Zerodha, where our aim is to cut through the noise and bring you the biggest news in the financial markets in a way that’s one level deeper as compared to other news channels. I’m your host, Kashish Kapoor. Today’s Wednesday, 13th of May. Anil Agarwal spent two decades assembling Vanta into one of India’s most diversified resources groups. He has spent the last 2 and a half years taking apart the group’s crown jewel Vanta Limited. On May 1st, the process finally completed. Vidanta Limited was broken into five separate listed companies. That’s Vanta aluminium, Vanta oil and gas, Vanta power, Vanta iron and steel and the residual Vanta limited that keeps the group’s stake in Hindustan zinc and few smaller businesses. By the end of the June, all four new entities will start trading on the Indian exchanges. This marks one of the largest corporate restructurings in Indian history. The group’s sheer scale beggars belief. It’s one of India’s largest commodity producers. It controls roughly half of India’s primary aluminium market. Runs India’s largest integrated zinc and silver businesses through its majority stake in Hindustan zinc and is one of country’s largest private upstream oil and gas player through Ken India. It also has substantial copper, iron ore and steel exposure rounding out its portfolio. All of this is controlled through a holding company in London. On April 29, two days before the de merger took effect, the combined Vidanta Limited delivered its last ever set of quarterly results. A swan song for the mining giant. Sparting numbers was some of the best it has ever posted. Revenues up 29%, net profit up 89%, Ebida margin coming to a record 44% and leverage at its lowest level in 14 quarters. But that chapter is now closed. A new era lies ahead. Why did Vidanta decide to take this monumental decision? What happens when its five businesses head into their independent lives? Let’s dive in. Anil Agarwal was a 19-year-old in mid 1970s when he moved from Patna to Mumbai. Dropping out of school to trade scrap metal. He started the company that would become Vidanta in 1976 when he bought a small enameled copper manufacturer called Shamshare Sterling Corporation. A decade later he founded a new company Sterite Industries to make telephone cables. Sterite expanded into copper and aluminium through the 1990s building India’s first private sector copper smelter at Tutti Kurin in 1993 then reviving the defunct Madras aluminium company in 1995. Anil Agarwal during early days of his business. It was in this established multimetal form that Sterite walked into the Bachai government’s privatization program in 2001. The central government was then trying to sell stakes in two of its largest resources companies. Sterite bought into both. It picked up a 51% controlling stake in Balo, that’s Bharat Aluminium Company, and a 26% stake in Hindustan Zinc, which it later expanded into a majority. Both deals were controversial with political critics disputing the valuation for years. In fact, the Hindustan zinc divestment is still being heard in the court more than two decades hence. Sitting above these was Vidanta Resources PLC, the London-based holding company through which Agarwal controls the group. Going through London made sense back then. India’s capital markets weren’t deep enough to fund a multicommodity resources business. The LSE on the other hand had an entire framework for a company like Vidanta specialist resources analysts, the Footsie Mining Index and an institutional capital base interested in emerging market commodity bets. And so Vidanta Resources listed there in December 2003 in the exchanges second largest IPO that year. That money went into major acquisitions like Zambia’s Concola copper mines or the iron ore mines in Cesago. But the group’s most transformative was its $9 billion acquisition of Kane India from Kain Energy. By 2013, the whole portfolio was rolled together as Cesa Sterite which was renamed Pedant Limited in 2015. But the Kane India deal was also a curse. Roughly half of it was funded by acquisition debt which was hard to shake off. It was the origin of the most debt vidanta still carries an inheritance that has been rolled over and refinanced through international bond markets ever since. By 2018 meanwhile the rational for London listing had run out. The stock continuously underperformed peers like BHP and Riotinto. The LSC compliance burden too was high and they saw a lot of backlash for the death of 13 protesters in Tamil Nadu. Agarwal took the parent private that October paying roughly $1 billion in buyout costs. But this only added more debt to the company. All this debt was becoming a problem. From October 2022 onwards, Moody’s downgraded Vanta Resources repeatedly citing what it called an unsustainable capital structure. Moody’s was pointing to a structural problem. The London parent had no operating cash flow of its own. It had been servicing its debt almost entirely from dividends and brand fees paid up by its subsidiaries. Its conglomerate structure was making refinancing much harder. International bond investors looking at the consolidated Vanta couldn’t see how much of the group’s cash would actually be available for its parent company’s needs. Hundreds of millions were flowing out of the company to meet its debt. The parent was scrambling to refinance. It sold a 4.3% stake in Vidanta Limited for about $500 million in August 2023, raising non-convertible debentures and spoke to private credit funds about a short-term loan. But the pain won’t relent. By September 2023, Moody’s had downgraded Vidanta’s bonds to CA3. They were practically speculative junk. Vidata structure, it appeared, had ceased to serve its purpose. The parent entity’s valuation had been dragged down by conglomerate discount. Most of its value was tied to Hindustan zinc alone. The rest of its businesses across aluminium, oil and gas, power, iron and steel, copper were being valued at very little. They could be worth much more as five separately listed companies, each of which would attract sector focused investors. If they were separate, each business would have a cleaner balance sheet than a consolidated entity while distributing the parents debt service burden across multiple cash flow sources. And so on September 29, 2023, Vdanta announced its de merger. The demerger has turned every Vidanta limited share into five. In addition to their original Vidanta limited shares, investors will get one share each of Vidanta aluminium, Vidanta Oil and Gas, Vidanta Power, Vidanta Iron and Steel. The four new scripts will start trading on the Indian exchanges by the end of June. Underneath this though are a variety of decisions on how the group’s existing policies and obligations will flow into the newer structure. For one, the Londonbased parents debt was pushed down to its subsidiaries. Net of cash Vanta resources owed about $5.5 billion before the merger. Each of the new entities shall now inherit a portion of that. Vidanta aluminium took the largest piece of $3.5 billion. Vidanta Power took over a chunk borrowed from Power Finance Corporation and RECC secured against its long-term power purchase contracts. The residual business of Vidanta Limited took about a billion dollars. Another 200 million was parked at Vidanta and Steel. Now, this structure was meant to match each piece of debt to the cash generating ability of the inheriting entity. Its cash cow, the aluminium business with incredible operating margins of 40% took on the most, especially since it has a clear growth runway with planned increases in smelter capacity. Its power entity has longdated power purchase contracts with durations of 15 to 25 years and was therefore given long tenure debt and so on. The second decision was a change in dividend policy. Consider this. Hindustan Zinc is by far the single largest cash generator in Vidanta and it has long paid generous dividends to its shareholders. Vidanta Limited owns 61% of Hindustan Zinc, the Indian government another 28% while the rest is public. When Hindustan Zinc paid a dividend, Vdanta Limited would get 3-fifth of it. And what did Vidanta Limited do with that cash? Until now, it was heavily constrained. Under its current dividend policy, it had to pay out at least 30% of its attributable profits as dividends while sending all of Hindustan Zinc’s dividends to its own shareholders within 6 months. A lion share of that would go to London-based parent. Under the new policy, Vidanta Limited’s board will decide what to pay and when. It can hold its cash and deploy it more flexibly. The third decision was regarding the brand fee. Vidanta Resources biggest assets perhaps is the Vidanta trademark. Every Vidanta entity pays a percentage of its revenue for the right to use that name. And the rate has crept up every time the London-based parent has faced debt pressure from 0.75% in 2017 to up to 2% in 2021. Under the new arrangement, it will increase further to roughly 3% for most entities except Copper Business, which shall pay 0.75% because of its thin margins. Now, that’s an astounding amount of money. The group’s revenue in FI26 was around 1.74 lakh crores. A 3% brand fee on that base produces around 5200 crores that covers Vidanta Resources annual interest bill with room to spare. The new architecture effectively solves Vidanta Resources problem from two directions. The parents $4.8 billion debt has been broken into five pieces sitting on five different balance sheets. The cash flowing to the parent now arrives at a higher rate cleaning up its remaining obligations. Hindustan zinc substantial dividend cash which used to be upstream to all Vanta limited shareholders within 6 months now stays at the residual entity with a parent can draw on it through fees and management charges without pushing it to other shareholders but as it enters this new era what are the shape its operating businesses are taking for that let’s look at the most recent results this quarter most of Vidanta’s record cash flow came from two businesses its aluminium man and Hindustan zinc the zinc Ink and silver business in Rajasthan. These are the two big pillars that hold up Vid with Ananta’s tent. The operating profit from its aluminium business grew 43% for the year, crossing 25,000 crores with margins of 38%. This was the payoff from investments that had crushed the company’s costs. There are two things you need to make aluminium in industrial quantities. Electricity, which is generated from coal, and boide, the ore that is refined into the metal. Vidanta’s aluminium business was spent years acquiring its own coal and boxite mines so it doesn’t have to buy these raw materials at open market prices that pushed its cost of producing a ton of aluminium down to $1,752 the lowest in 5 years. Meanwhile, Hindustan Zinc’s annual operating profit came in at around 22,000 crores, up 27% year-onear with margins of 56%. This was possible because the cost of producing zinc fell to $959 per ton, the lowest in 5 years. These are remarkable numbers. Few large industrial businesses anywhere have operating profits at more than half the revenue. This business will remain with Vidanta Limited after the de merger and with the new dividend policy, the entity will get a lot more discretion over it. There’s more of a shadow over its remaining entities. Their challenges are significant and they’re heading into independent life with the conglomerates’s implicit cushion gone. Vidanta Power, for instance, was reeling from a fatal accident at one of its plants which killed at least 13 and injured more than 20. The plant, one of the two main ones it operates, has been shuttered. There’s no clarity if it’ll open anytime soon. Vidanta Oil and Gas has declining reserves. Vidanta Ion and Steel, meanwhile, has a smaller asset base than the market has yet to test. Next quarter we will see the first earning calls of these five separate entities. It will be the first time each management faces a sector specific analyst community without the conglomerates averaging effect. We’ll keenly watch how they survive the test. And now onto the next story for the day. In 2007 Sri Lanka wanted to build a port in the city of Hanto. It asked India to help finance it but we realized that the project was commercially unviable. So we said no. Then Sri Lanka asked the US they also said no. After that, Colombo turned to China, which agreed to lend $37 million at 6.3% fixed interest rate. Now, this is a normal commercial rate at a time when Sri Lanka’s own treasury bills were paying 12 to 14%. A decade later, the humba port would become world’s most famous case of what commentators called the debt trap diplomacy. It’s the idea that China deliberately lends money to poorer countries knowing they cannot repay, then seizes their assets when they default. When one country sends money to another, the money is usually the smallest part of the deal. A sovereign loan is almost never just commerce. But it’s almost never just a trap, as the Sri Lankan example might appear. It’s a bundle of development objectives, export contracts, foreign policy positioning, and sometimes even monetary strategy. All of which move inside a single agreement. And that’s what we’ll be dissecting in this story. All of this hinges on a fundamental question. Why do states lend at all? There are many, but we’ll tackle four of the most important ones. Now, the oldest motive is soft power. After World War II, for instance, the US ran the Marshall Plan partly to rebuild Europe and partly to keep it out of the Soviet sphere. The second motive is export promotion. Every economy that builds infrastructure needs buyers for what it builds. Chief finance to foreign government conditional on the procurement of your own engineering and construction firms is one of the most effective ways to keep your exports busy. Then there’s resource and logistic security. Take Angola for example. After emerging from a deadly civil war in 2000s, Angola financed much of its reconstruction through Chinese loans collateralized against future oil exports. The repayment for the loans wasn’t really fixed. It was a percentage of oil revenue that Angola would make from these reconstructed assets. That oil revenue would be routed through a Chinese controlled bank account before the money ever reached Angola and China would take its cut. By one estimate, Angola alone accounted for roughly 70% of China’s resource seccured lending in Africa. And then finally, there’s a macro fininancial recycling angle. The boring but the largest motive of all. When an economy runs huge structural trade surpluses, what it accumulates has to be deployed somewhere. Ben Bernanke, the former chair of Federal Reserve, described this in 2005 as the global savings glut. China runs persistent trade surpluses through its exports and the dollar it saves can’t all sit in the US treasuries forever. So lending to developed countries is one way to recycle them productively. Accordingly, the financial instruments used for state-to-state lending also reflect the motives needed to be achieved. The simplest one is a grant. It’s a no strings attached free money with no repayment terms and it’s usually given for humanitarian relief, public health or governance. Most of India’s bilateral assistance to Bhutan for instance is grant-based as is much of what passes for foreign aid. Then there’s concessional loan or the official development assistance loan or ODA. It is simply a loan that’s almost generous enough to count as aid under international rules. The OECD’s development assistant committee defines ODA as government lending where at least 25% of the value is effectively a gift usually delivered through below market interest rates and very long tenurs. It’s these kind of loans that we will primarily be focusing on on this story. For instance, the loans given by the Japanese International Corporation Agency to the Mumbai Ahmedabad bullet train project at 0.1% interest over 50 years with 15-year grace period is a textbook ODA. It’s partly a development gesture and partly a reminder of who India’s most reliable infrastructure partner has been for 40 years. Then there are policy bank loans. State-owned institutions like China Development Bank, China XM Bank, Japan’s JBIC, Germany’s KFW, and India’s Exem Bank lend at rates closer to commercial benchmarks and take strategic direction from their governments rather than chasing profit. Their signature product is the tide export credit. It’s a loan to a foreign government on the condition that the borrower uses the money to buy goods and services from the lender’s own firms. For instance, Japan’s Tide Yen loans typically required around 30% of contracts to go to Japanese suppliers. India’s line of credit through XM bank are more aggressive here, requiring 75% of procurement to come from Indian firms. In many ways, it’s just industrial policy with the aid label attached. Most Chinese lending to Africa works the same way. Lastly, you have the central bank swap line, which is emergency liquidity from one central bank to another. A bailout depressed as a monetary cooperation. Of course, there are also sovereign wealth funds, but their primary instrument of influence is equity rather than debt. The world uses China’s example, but almost nothing they’re doing today is conceptually new. Japan ran the same ODM model for 30 years. From the 1970s through the early 1990s, Japan built a sovereign finance machine combining ODA loans, policy bank lending, and tied the procurement that funneled the work back to Japanese engineering firms. By 1989, Japan was the world’s largest aid donor. Indonesia, Philippines, and Vietnam absorbed massive amounts of Japanese capital, and Japanese firms built much of the region’s modern infrastructure on the back of it. China arrived with the same model in the 2000s, but with three things it had way more of than Japan did. First was capital. China savings rate hovered near 45% of GDP for two decades nearly double the rich world average generating massive surpluses with nowhere to go at home. Second was idle factories in the wake of 2008 crisis China had issued a massive stimulus which contributed to building far more steel cement and construction capacity that the country itself could absorb. Third is its unique political system that could move policy banks, state firms, and soal capital in coordinated push. Chinese overseas lending peaked in 2016 at roughly $136 billion in commitments. It has been falling ever since. Many of the early signature projects turned out to be commercially weak. The Herman Tota didn’t generate enough traffic. Kenya’s railway project also lost money and Zambia defaulted on its sovereign debt in 2020. As the projects struggled, Chinese state lenders increasingly found themselves refinancing older loans rather than writing new ones. The composition of Chinese lending has flipped as a result. Aid data describes Beijing as world’s largest official debt collector with rescue lending to distressed sovereign borrowers now outpacing new infrastructure project lending. By the end of 2021, China had run 128 rescue operations across 22 distressed borrowers worth roughly $240 billion. Average penalty interest rates on overdue Chinese loans roughly doubled between 201417 period and 2018-21 period. However, beyond the scale, there is one feature that genuinely distinguishes China from the Japanese playbook, and that’s the contract design. A 2021 study examined 100 actual Chinese loan contracts across 24 countries and found three features that aren’t standard in Japanese World Bank or any other sovereign lending arrangement. One, the Chinese contracts contain confidentiality clauses that prevent the borrower from disclosing the loans terms or in some cases even its mere existence. Secondly, the contracts also used escrow accounts controlled by the Chinese. The borrower’s commodity export revenues get routed through a Chinese bank account before reaching the borrower’s treasury. Lastly, they include clauses that try to keep Chinese debt out of the collective restructuring with other creditors. None of this decisively proves the debt trap thesis, but the contract architecture does mean that Chinese lenders tend to build a system optimized for seniority, which is getting paid first when borrowers run into trouble. That matters a lot when things go wrong. Now Sri Lanka did go wrong but not in the way general consensus suggests. The 2022 sovereign default was not caused primarily by Chinese debt. At the time of the default, Sri Lanka owed about $ 37 billion externally. Roughly 36 to 40% was held by Western bond holders through international sovereign bonds carrying coupon rates of 5 to 8%. About 19 to 20% was by Chinese creators and the rest was a mix of Japan, India and other bilateral lenders. The trigger for the default was the international bond maturities, not the Chinese loans. Sri Lanka had issued $12.5 billion of bonds through 2010s when credit looked cheap and rating agencies were much more tolerant. But when co collapsed tourism in 202021, the country couldn’t generate the dollar inflows to roll them over. Yet the Chinese contracts did complicate the eventual debt restructuring that Sri Lanka needed to pursue to pay the bonds off. Sri Lanka signed restructuring deals with Western bond holders in December 24 and with Japan in March 25, but the talks with China over its remaining 4.75 billion debt are still unresolved. The contracts didn’t really cause the default, but they made it fixing it harder and slower and more expensive. The cleanest illustration of this is the Humbotra port itself. The port couldn’t generate enough revenue to service the Chinese loans that built it. So in 2017, Sri Lanka leased it for 99 years to a Chinese state shipping operator which took a 70% stake in the operating company in exchange for $1.12 billion in cash. The port wasn’t seized as a collateral or as a debt for equity swap. Though the original Chinese loans for the ports are still on Sri Lanka’s books today. What changed hands was the operational control of a failing asset sold to raise dollars for Sri Lanka’s other foreign debt. Now what matters now is what happens as these loans mature. China is roughly $1.5 trillion in outstanding sovereign lending across developing world and a growing share of it is distressed. The shift from infrastructure lender to a debt collector isn’t a choice Beijing made. It’s a consequence of the lending binge of the 2010s catching up. But even as the old loans s they’ve already done something more durable. The tide procurement clauses embedded Chinese firms deep into the supply chains of these borrowing countries. Those contracts created relationships, dependencies, and maintenance cycles that outlast the original loan. Meanwhile, swap lines with over 40 central banks, loan repayments denominated in Renmanb, and escrow accounts routed through Chinese banks have wired the yuan into the financial plumbing of dozens of countries. The yuan still accounts for a small share of global reserves. But in the countries that owe China the most, it’s already embedded in the everyday machinery of government finance. The loans may not have all worked as investments, but as instruments of influence in a world that’s already being forced to decide between great powers, they may have already paid off. And now on to the tidbits for the day. FMCG companies expect the new VBG Ram act replacing Mandrea to support stronger and more stable rural consumption. The scheme guarantees 125 days of work versus 100 earlier and focuses more on rural infrastructure which companies say could improve incomes and boost spending on daily use products. Next up, Eli Lely has halted its obesity awareness campaign in India after regulators warned it could indirectly promote prescription drugs like Monaro. The company said that the campaign was meant to educate people about obesity, but the episode highlights growing scrutiny around marketing of weight loss medicines in India. And finally, the Indian Biogas Association has proposed 10% blending of organic manure with fertilizers by 2030, saying it could save India $2 billion in imports annually. The plan aims to improve soil health, reduce dependence on chemical fertilizers, and create a stronger market for biogas linked organic inputs. And that’s it for today. We’ll see you in the next one. Disclaimer, this content is forformational purposes only. 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