Vedanta to Sell 14 Crore Shares in Hindustan Zinc via OFS, Expected to Raise ₹8,064 Crore

Team FS

    14/Aug/2024

Key Points:

1. Vedanta Ltd. is set to sell 14 crore shares of Hindustan Zinc Ltd. through an Offer for Sale, amounting to 3.3% of the total equity.

2. The sale is expected to generate ₹8,064 crore based on Hindustan Zinc's closing price on Wednesday.

3. Hindustan Zinc's free float will increase from 2.5% to nearly 6% post-sale, with a potential impact on market liquidity.

Vedanta Ltd., a major mining conglomerate led by Anil Agarwal, has announced its decision to sell 14 crore shares of its subsidiary, Hindustan Zinc Ltd., through an Offer for Sale (OFS). This strategic move amounts to 3.3% of the total equity in Hindustan Zinc and is expected to raise a substantial sum of ₹8,064 crore. This figure is based on Hindustan Zinc's closing price of ₹576 per share on Wednesday.

The Strategic Decision:
On Tuesday, Vedanta had initially announced plans to sell up to 11 crore shares or 2.6% of the total equity in Hindustan Zinc through an OFS. However, the decision to increase the number of shares to 14 crore indicates Vedanta's intent to maximize its returns from this transaction. The earlier sale plan would have fetched Vedanta ₹6,400 crore, but the revised figure of ₹8,064 crore highlights the potential financial impact of this strategic move.

The specific details of the Offer for Sale, including the date and the price at which the shares will be sold, have not been disclosed yet. However, market analysts are closely watching this development, as it will have significant implications for both Vedanta and Hindustan Zinc.

Implications for Hindustan Zinc:
For Hindustan Zinc, this Offer for Sale will have a notable impact on the company's free float, which is currently just 2.5%. Post-sale, the free float is expected to more than double, reaching nearly 6%. This increase in free float will likely enhance market liquidity and could attract more investors to the stock.

Hindustan Zinc's ownership structure is currently dominated by Vedanta, which holds a 64.92% stake as of the end of the June quarter. Other key shareholders include the government, which owns 29.54%, LIC with 2.76%, and India's mutual funds holding a mere 0.06%. Small shareholders, those with an authorized share capital of less than ₹2 lakh, collectively own just 1.51% of Hindustan Zinc, with approximately 4.33 lakh such shareholders as of the June quarter.

In a separate exchange filing, Hindustan Zinc also announced that its board will consider a second interim dividend at a meeting scheduled for August 20. This potential dividend declaration is being closely monitored, as it could further impact the stock's performance and investor sentiment.

Vedanta's Financial Strategy:
Vedanta's decision to sell a portion of its stake in Hindustan Zinc comes at a time when the company is navigating through significant financial obligations. The proceeds from this share sale are expected to be strategically utilized to address these financial challenges.

Brokerage firm PhillipCapital has speculated that the funds raised through the OFS could be used for a part payment of Vedanta's India debt. Additionally, a portion of the funds may be distributed as a dividend to the parent company, Vedanta Resources, to assist with its debt repayment. Vedanta and its parent company, Vedanta Resources, are facing considerable debt obligations, with $1.2 billion and $1 billion, respectively, due in the financial year 2025.

This move follows Vedanta's recent financial maneuver, where the company released some pledged shares of Hindustan Zinc by utilizing ₹8,500 crore raised through a Qualified Institutional Placement (QIP). The release of these pledged shares was a significant step in enhancing Vedanta's financial flexibility and reducing its reliance on pledged securities.

Market Reactions:
The announcement of the Offer for Sale and the potential increase in free float had a noticeable impact on the stock market. On Wednesday, shares of Hindustan Zinc ended 0.7% lower at ₹576, reflecting a cautious response from investors. Similarly, Vedanta's shares also experienced a slight decline, closing 0.6% lower at ₹420.

The market's reaction highlights the mixed sentiment among investors, who are weighing the potential benefits of increased liquidity in Hindustan Zinc against the dilution of Vedanta's stake in the company. The strategic implications of this share sale, combined with the broader financial context, make this a closely watched development in the Indian mining sector.

Conclusion:
Vedanta's decision to offload a significant portion of its stake in Hindustan Zinc through an Offer for Sale is a bold move that reflects the company's ongoing efforts to manage its financial obligations while optimizing its asset portfolio. The successful execution of this sale could provide Vedanta with the necessary funds to address its debt challenges while potentially benefiting Hindustan Zinc through increased market liquidity.

As the market awaits further details on the Offer for Sale, including the pricing and timing, stakeholders are keenly observing how this development will unfold and its subsequent impact on both companies' financial health and stock market performance. The upcoming board meeting of Hindustan Zinc on August 20, where the second interim dividend will be considered, is another key event that could influence investor sentiment and market dynamics in the coming weeks.

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