How Vedanta’s Debt Burden Turned Hindustan Zinc Into A Net-DEBT Company

The pressure peaked in 2023, when market chatter began hinting at the possibility of a default. In Response, Anil Agarwal, Vedanta’s Promoter, Assured Investors that the company had Never defaulted and wouldn’t start now. But to keep that promise, vedanta needed cash. A lot of it.

That’s when vedanta turned to hzl. What followed was a string of heavy dividend payouts, draining its reserves to support its parent’s financial needs. So, how exactly did this strategy unfold? How Much Cash was Pulled Out, And What’s Left Now?

Let’s break it down.

Vedanta’s Mounting Debt and the search for cash

Vedanta expanded rapidly through the acquisition of distressed assets. Much of that growth was fuelled by debt. Its key acquisitions inclined Bharat Aluminum Company (Balco) and Hzl. But the real strain began after its $ 9.6 billion acquisition of oil and gas giant cairn India in 2011.

By December 2011, The Parent Entity, Vedanta Resources (VRL), Had a Debt of Around $ 9 Billion, with a repayment obligation of $ 500 million. To manage this, VRL restructured its Indian subsidiaies by merging sterlite industry and sesa goa into a single unit named Vedanta (Formerly SESA STERLITE).

The move aimed to simplife operations and improve cash flow. As part of this, $ 5.9 billion of debt was transferred to vedanta, Reducing vrl’s debt by 61% to $ 3.8 billion. This Eased VRL’s Annual Interest Burden By $ 300 Million. It was also expected to be earnings-actress from the first year.

While this consolidation was positioned as a strategic cleanup, it left vedanta carrying the debt burden. However, VRL Still needed a substantial Amount of cash to repay the loan. As a result, vrl became heavily dependent on two things to Stay Afloat: Dividends from Vedanta and Regular Refinancing of its liabilitys. Refinancing was cheaper then due to lower interest rates.

Rising Rates, Downgrades, and the Dividend Shortcut

However, that model started to crack after 2022. Bond yields surged, and rating agencies Downgraded VRL, Limiting Access to Fresh and Cheap Capital. By FY22, VRL’s Net Debt Study at $ 8.9 Billion, and $ 2.75 billion was due for repayment in FY23 Alone.

This is when fears of default gained Momentum. To avoid a cash crunch, vedanta ramped up dividend payouts. In FY23 Alone, Vedanta Paid 37,730 Crore in dividends. Part of this came from its balance sheet, but the lion’s share came from hzl.

Hzl’s cash was the first to go.

Vedanta Owned 64.9% of Hzl Till June 2024, and hzl has historically been a cash-Rich business. In FY23, Hzl Declared a dividend of 75.5 per share, Amouning to 32,000 Crore. This payout was 3x its fY23 Profit of 10,520 Crore and far Above Its Three-Year Average of 18.6 per share.

Vedanta received 20,709 Crore, and with VRL Holding 68.1% of Vedanta, Its Indirect Gain Stood at 25,717 Crore, providing a much-needed liquidity boost.

But this came at a cost, as hzl’s balance sheet weakened. Its cash and cash equivalents fell from 20,800 Crore in FY22 to 11,300 Crore in FY23, while reserves dropped from 33,437 Crore to 12,097 Crore. On vedanta’s side, it fell from 32,700 Crore to 21,900 Crore, and Reserves declined from 65,011 Crore to 39,051 Crore.

The payouts didn’t stop, even as cash reserves shrank

Hzl Moderated Its Dividend in FY24, Paying 2,535 Crore, of which 1,646 Crore Went to Vedanta. At the same time, vedanta declared a 11,000 Crore payout, of which VRL received 6,815 Crore. In FY25, it again paid a dividend of 9,585 Crore to vrl. This underscored its continued reliance on dividends to service vrl’s debt.

That trend continues in fy26 as well, with bot companies announcing their first interim dividends. Hzl declared 10 per share, Amouning to 4,225 Crore, While Vedanta Announced 7 per share, totalling 2,737 Crore.

Meanwhile, VRL also began offloading stakes to reduce debt. Promoter Shareholding in Vedanta Fell to 56.4% by FY25, from 69.7% in March 2022. This fiscal, too, vedanta solder 1.6% stake in hzl for 3,028 Crore on 18 June. The proceeds will primarily be used to strengthen its balance sheet.

Short-Term Fix, Long-Term Pressure Remains

These measures helped. VRL’s net debt declined from $ 8.9 billion in March 2022 to $ 7.2 billion by March 2023 and $ 4.9 billion in FY25. The group net debt-to -bitda ratio improved to 2x, from 3.3x in FY20. VRL Now Targets Another $ 2 billion in deleveragging over the next three years and aims for leverage below 1x. Ebitda Stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

But the problem hasn’t disappeared. The remaining $ 4.9 billion in debt repayment is spores over the next nine years Till fy34. Of this, $ 1 billion is due in fy26, $ 0.7 billion in FY27, $ 0.15 billion in FY28, and $ 0.3 billion in FY29. This means that consistent dividend payouts from vedanta will remain key to vrl’s debt strategy.

Borrowings Rise Despite Strong Cash Flows

While these payouts Helped VRL Reduce Debt, they also LED to Rising Borrowings at Both Vedanta and Hzl. Both operate in capital-home sectors that Need Regular Capex, and High Dividend Payouts Limit Their Ability to Fund Growth Growth Internally. Vedanta’s Total Debt Rose to 73,853 Crore in FY25, From 53,109 Crore in FY22. Hzl’s borrowings more than tripled to 10,651 Crore, From 2,823 Crore during the period.

The debt surged despite healthy free cash flow generation. Vedanta generated total free cash flow of 60,800 Crore, and Hzl 40,700 Crore in the four years ending fy25. Their cash and cash equivalents also fell. Vedanta Cash Stood at 20,700 Crore in FY25, Down from 32,700 Crore in FY22, and Hzl Fell to 9,300 Crore from 20,800 Crore.

Even so, both businesses remain fundamentally sound. Vedanta’s net debt-to -bitda ratio study at a manageable 1.2x in fy25, down from 1.3x in FY23. It aims to brings it down to below 1x in the near term.

Hzl, Thought, has Seen a Quiet Shift. From a 17,966 Crore Net Cash Surplus in FY22, IT’s Now Moved to a Modest Net Debt of 1,169 Crore. It’s not a cause for concern just yet, but it does reflect how much cash has been gradually pulled out over time. Hzl aims to become net-debt free in FY26.

What’s Next?

Fundamentally, both continue to churn duty. Vedanta’s Net Profit Rose 172% From Last Year To 20,535 Crore in FY25, Albeit on a low base. Hzl’s profit rose 32% to 10,279 Crore.

To simplife its debt structure, vedanta is demerging its business into five separate companies. Debt will also be allocated among them, thought the proportions are not yet disclosed. This move come after Vedanta Failed Multiple Times to Delist from Stock Exchanges.

Vedanta avoided a crisis, but not without cost

Hzl used to be a net-cash company. Now, it carries some debt. While Its Core Operations Remain Strong, The Financial Cushion It Once Had is Now Smaller. For Minority ShareHolders, The Worry Isn�T About Immediati Risks, but wheether the company will maintain financial discipline over time.

When a promoter continuously draws on a listed company’s cash to settle its debt issues, it naturally rays concerns about governance. Vedanta may have kept its no-default promise, but in the process, it quintly turned its operating companies into a source of funding.

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Madhvendra has over Seven Years of Experience in Equity Markets and has cleared the Nism-Series-XV: Research Analyst Certification Examination. He specialises in written detailed research articles on listed Indian companies, sectoral trends, and macroeconomic developments.

Disclosure: The writer does not hold the stocks discussed in this article. The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is not a recommendation. If you want to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.