Decoding the grand game plan of Vedanta’s Anil Agarwal

Anil Agarwal doesn’t always succeed in seeing his plans come to fruition. But that doesn’t seem to deter the mining and metals billionaire from taking big, contrarian calls anyway. 

In 2020, he wanted to take his flagship conglomerate, the Vedanta Group, private. He failed as he did not get the requisite support from the other institutional and retail shareholders. 

And now, he wants to do something that almost all his competitors are shying away from. 

Cairn Oil and Gas, a unit of Vedanta Ltd, will spend as much as $4 billion over the next three years, to more than triple its oil and gas production, as high crude prices make energy investments attractive. 

This will be on top of the $2.5 billion it had spent over the last three years, even though international prices of crude oil actually fell owing to the global lockdowns that came in the wake of the coronavirus pandemic. 

Prachur Sah, Cairn’s deputy chief executive officer, said in a recent TV interview that India’s biggest non-government energy producer wants to explore new reserves across its 51 blocks. “Our target is to reach half a million [barrels of oil] production in a very short time by doing these investments,” he said. “This investment is not just a number, but we have projects in line. We are looking at exploration heavily over the next few years to get to these levels.”

This, when all his competitors are wary of the uncertainty around the Russian invasion of Ukraine and are looking to play it safe by not committing big monies into the capital-intensive sector, which typically has high gestation periods.

Agarwal clearly expects that oil prices will remain high, above the $100 per barrel mark, at least for the foreseeable future, and that will help some of his company’s latest finds including in Barmer, Rajasthan, come on stream, viably.  

At an average production of 159,000 barrels of oil equivalent, Cairn makes up for a little over a fourth—26% to be precise—of India’s domestic oil and gas production. It wants that proportion to go up to half.    

If Cairn’s ambitious plans do succeed, it will only be music to the ears of the Indian government, which shells out precious dollars to meet the country’s energy demand, about 85% of which is met by imports. Sah says the company is working with the government for a friendly policy play. 

And, if and when the government decides to put oil marketing company Bharat Petroleum Corp Ltd (BPCL) on the block, Agarwal will be one of the suitors vying for it.

In a recent interview, he said he would “evaluate everything” since, in his words, Vedanta has the experience, the entrepreneurship and “huge backing from the financier” along with $7 billion in cash flows. He was, however, quick to add that Vedanta wouldn’t bid for BPCL alone but would “like to bring in all financial partners”.

Commodity price cycle

But it is not just inflated oil and gas prices that he is banking on. Over the last couple of years, the commodity price cycle has been favourable for companies like Vedanta which draw a lion’s share of their revenue from metals and mining.

All of this sounds grand, but whether Agarwal’s plans will impress Vedanta shareholders is another matter. 

In 2020, when he wanted to delist the India-listed Vedanta Ltd and take it private, his plan failed because the other shareholders demanded a higher price for the company. 

The mining, metals and energy conglomerate is India’s biggest natural resources company, with interests in sectors such as zinc, lead, copper, oil and gas, aluminium and power. Although a bulk of its revenue comes from its businesses in India, the London-headquartered Vedanta also operates in South Africa, Namibia and Australia. 

Vedanta Resources Ltd, the group holding company, which itself had been delisted from the London Stock Exchange in 2018 and is now owned by Agarwal’s investment company Volcan Investments Ltd, has under it three major listed entities, along with a handful of private subsidiary companies. 

Vedanta Ltd, the flagship listed company itself is majority owned by Vedanta Resources. Vedanta Ltd, in turn, controls Hindustan Zinc Ltd, in which it owns a stake of 64.9%, and Bharat Aluminium Ltd (Balco), in which it owns 51%. 

Vedanta Ltd also controls several other subsidiaries including Cairn Oil and Gas, Sterlite Copper, Sesa Iron Ore, Zinc International and Electrosteels Steel Ltd, to name some. Another unlisted entity directly controlled by the holding company is Konkola Copper Mines. 

In fact, Vedanta Ltd draws a significant proportion of its value from Hindustan Zinc, which controls nearly 77% of India’s zinc market, while Balco commands 37% of the aluminium market. 

Along with these, the group is also India’s biggest copper miner and one of the largest producers of iron ore in the country. 

Cash cow

All of this makes Vedanta a cash cow for its owners, who want to control all of it. But the Indian government had other plans. 

The largest among Vedanta Ltd’s minority shareholders was the government-owned insurer Life Insurance Corp (LIC) of India, which put its foot in the door. 

LIC, which had bought the shares at a price much higher than the then prevailing market price, demanded a minimum price of Rs 320 per share, as against the Rs 87.5 per share that the promoter group led by the Agarwal family had offered. 

The proposal failed as Agarwal could not get the requisite 90% of the shareholders to sign off on the offer. 

Agarwal grossly miscalculated and did not anticipate that his move to take the company private on the cheap will be thwarted by the hand of the state, which, like him, wanted to extract its pound of flesh from a cash cow.   

And, thanks largely to a global surge in commodity prices over the last two years, LIC’s move appears to have paid off. Vedanta Ltd is presently trading at Rs 357 per share levels, higher by at least 10% than what it had asked for. 

Incidentally, Agarwal has sought to buy peace with the state, by agreeing to end an ongoing arbitration around a second call option he had exercised back in 2009, to acquire the government’s residual 29.5% stake in Hindustan Zinc. This will finally pave the way for the government to sell the shares in the open market and net Rs 39,000 crore, whenever it chooses to. 

Warning bells

While a rise in commodity prices obviously bodes well for the conglomerate, not all is hunky dory. 

For one, a Thoothukudi, Tamil Nadu-based copper smelting plant owned by Sterlite has been shut since 2018, after 13 people protesting against the company were shot dead in police firing in May that year. The protests began after the company got an approval to double its plant capacity to 8 lakh tonnes, sparking environmental concerns. The case went to the courts, and after the Madras High Court refused to open the plant, it has now escalated to the Supreme Court. 

Second, there is the question of debt. Although Vedanta Resources did manage to reduce its pile of debt by $300 million in the first half of 2021, as of August last year it was still sitting on a debt of $8.6 billion.

“About US$3.1 billion of Vedanta Resources’$8.6 billion of debt is issued at intermediate holding companies with guarantees from Twinstar Holdings and Welter Holdings, who collectively hold a 44.63% shareholding in Vedanta Ltd,” credit rating firm Moody’s said in a report last year while changing its outlook on Vedanta from negative to stable.

Following this, in February this year, CRISIL Ratings upgraded its rating on Vedanta’s long-term bank facilities and debt instruments, on stronger-than-expected operating profitability driven by elevated commodity prices during the current financial year.  

CRISIL says that while commodity prices are expected to soften in the coming financial year from their current elevated spot levels, they will remain healthy. It adds that Vedanta’s EBITDA in 2021-22 was expected to be Rs 44,000 crore, up from Rs 27,500 crore in the last financial year. The figure, CRISIL says, is likely to remain above Rs 40,000 crore even during the coming financial year. 

This extra cash, CRISIL says, will help Vedanta pare its outstanding consolidated debt, helping its net leverage drop to 2.2-2.3 times as on March 31, 2022, and to sustain below 2.5 times thereafter. The net leverage was 3.1 times as on March 31, 2021.

Interestingly, although he did not get his way around delisting his company, Agarwal has been increasing his stake in Vedanta Ltd, from 50.1% in December 2020 to 69.7% in December 2021, through an additional debt of nearly $2.4 billion.

The improved profitability of Vedanta in fiscal 2022 could help cut down debt at Vedanta Resources Ltd from levels of December 2021, and thus support consolidated deleveraging, CRISIL says. 

And Agarwal will be hoping that is exactly what comes to pass.