Short sellers hit Vedanta with a “collapse” warning – should you exit or hold?
Vedanta Ltd’s shares fell as much as 8% in intraday trading on Wednesday, with a low price of Rs 421 on BSE after US short seller Viceroy Research released a key report on company parent Vedanta Resources Ltd (VRL). Later, the stock cut some losses, even though BSE Sensex stayed flat, up 0.06% at 83,761% at around 1pm, but lost some losses.
The Governor disclosed that it had fallen sharply, and it lacked the debt stack of Vedanta Resources on the grounds of what it called “financially unsustainable” and “operably compromised” corporate structure.
Governor: Vedanta Resources A “Financial Zombies”
The Governor claimed that despite not having its own substantial operation, VRL was entirely dependent on Vedanta Ltd’s cash flow. It likens parents to “parasites” and warned that the proposed personnel of the group’s business would only “distribute bankruptcy among multiple weaker entities.”
“The organization was fundamentally broken and headed to collapse,” the report said.
Key red flags raised in the Governor’s report
1) Several concerns found in the Governor’s study include: Bait and switch funding: Vedanta allegedly proposed a capital-rich project to raise funds and then redirected it to the debts of serving VRL.
2) Irregular interest expenses: The interest cost is reported to exceed the amount reflected in the public documents, despite repayment and reorganization.
3) Exaggerated asset value: Several subsidiaries are said to have been overvalued and burdened with cross-compensation debts.
4) Capital expenditure manipulation: Capital expenditure capital is said to artificially increase the reported profits.
5) Undisclosed liabilities: Billions of dollars in disputed expenses are said to be turned away.
6) Governance Gap: The report cites mismanaged supervision and suspicious auditor appointments.
7) The Governor further claimed that several inconsistencies it found could constitute fraud.
Vedanta denies allegations, questioning timing
In response, Vedanta Group refuted the claims as a “malicious combination of selective misinformation and unfounded allegations”, accusing research firms of trying to manipulate market sentiment for their own interests.
“The report was released without contacting the company, with the aim of discrediting us before key companies are developed,” Vedanta said. “It causes publicly available data and the authors have added disclaimers to avoid accountability.”
The company urges stakeholders to avoid speculation and focus on its ongoing growth plans.
Before stock volatility
Just as Vedanta is preparing to incorporate its core business into multiple listed entities, trying to unlock value and simplify operations, this controversy will arise. However, analysts say the group’s high debt load and complex funding structure have long been a pain point for investors.
Despite the day’s lows recovered, Vedanta’s stock remains under pressure due to concerns about governance and group liquidity risks.
