By Manu Balachandran| Oct 4, 2023
The $18-billion group has piled up over $15 billion in debt during its expansion, and the demerger might not be a way out in the immediate future. Here's why
[CAPTION]Anil Agarwal, Chairman, Vedanta Resources
Image: KT Watson[/CAPTION]
Anil Agarwal has always been a tough cookie, a survivor of sorts.
Nothing else can possibly explain how the Bihar-born Agarwal built an empire spanning metals and mining over half a century, after starting as a trader in scrap metal in Mumbai. Today, his diversified conglomerate makes everything from steel and iron ore to aluminium and oil among others, at the $18-billion Vedanta Group. That’s why Agarwal’s remarkable story finds many takers who admire his risk appetite and grit in building up an empire from the bottom.
But that phenomenal growth had also come at a cost, something that’s come to haunt him as he turns septuagenarian, and leaving him to slug it out now. Vedanta Resources, Agarwal’s London-based parent company, has a debt problem, with over $15 billion in dues as of March this year, including over $8 billion at Vedanta Limited, the Indian company owned by Vedanta Resources. Vedanta Limited owns assets such as Hindustan Zinc Limited, Bharat Aluminium, Sterlite Copper, and Cairn Oil. As of March 2023, Vedanta Limited had a debt of Rs 66,182 crore ($8 billion), an increase of Rs 13,073 crore ($1.5 billion) since the year before that.
_RSS_At Vedanta Resources, the parent arm, the standalone debt stood at some $7 billion in March, and Agarwal has been busy firefighting to pare it all down, after growing cynicism around repayment abilities. As of June, that debt level has come down to $5.9 billion. Still, Vedanta’s complex ownership structure involving dividend payments from group companies to keep the coffers running, and immediate debt repayment requirements for its maturing loans has meant that Agarwal just can’t find any breathing space.
Although he has consistently denied that to be the case, it's perhaps that desperation, coupled with a deep desire to veer his business for the future, that has now led the billionaire to go for some serious restructuring of his business, a decade after he went on a consolidation spree.
The Indian arm, Vedanta Ltd, on September 29 announced a demerger of its businesses into six separate businesses, which it claims will unlock significant value for shareholders. “By demerging our business units, we believe we will unlock value and potential for faster growth in each vertical,” Agarwal, Vedanta Group’s chairman, said in a statement. “While they all come under the larger umbrella of natural resources, each has its own market, demand, and supply trends, and potential to deploy technology to raise productivity.”
The six independent listed entities include Vedanta Aluminium, which currently boasts the largest smelting facility in the country, Vedanta Oil & Gas, which will comprise Cairn’s oil business in India, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals, and Vedanta Ltd. Vedanta Limited will continue to comprise Hindustan Zinc in addition to emerging as an incubator for new businesses, particularly the semiconductor business that Vedanta is trying desperately to set up.
Vedanta expects the demerger to be completed in the next 15 months and shareholders of Vedanta Ltd will get one share in each of the five-newly listed entities for every share they hold in the currently listed entity. “It will clearly be an investment choice, an opportunity to provide global investors, including sovereign wealth funds and strategic investors, with direct investment opportunities in dedicated pure-play companies linked to India's remarkable growth story through Vedanta's world-class assets,” Ajay Agarwal, president, finance at Vedanta said during an analyst call on September 29.
Also read: Can Vedanta pull off its semiconductor project without Foxconn?
In contrast, five years before that, in 2007, Vedanta Resources’ total debt stood at $1.7 billion, growing to $2.9 billion in 2008 on the back of a bridge loan taken to acquire Sesa Goa. By 2011, the gross debt at Vedanta Resources rose to $9.8 billion, after rising to $8.2 billion the year before that. But it was really the $4.4 billion debt funding for Cairn, then the largest private sector crude producer in India that hit Vedanta hard.
“If you look at the overall number, we have one of the best balance sheets in the world,” Agarwal told Forbes India in May 2023. “We have a debt-equity ratio of 1:2, which is very comfortable. We have put in $80 billion in cash in the last 25 years in the company. We have put $22 billion of cash in oil and gas. We have put $20 billion into zinc, $20 billion into aluminium, and $20 billion in the other business that we have.” [CAPTION]Hindustan Zinc's open cast mine at Rampura Agucha, Rajasthan. It was commissioned in 1991 as an opencast mine. It is located 230 km north of Udaipur, in the State of Rajasthan in India. Rampura Agucha is stratiform, sediment-hosted, high grade zinc & lead deposit.[/CAPTION]
“Against that, the total debt in the company is $13 billion ($6.5 billion at Vedanta Limited and $6.5 billion at Vedanta Resources Limited),” Agarwal had told Forbes India. Agarwal’s calculation of $13 billion is based on net debt, factoring in cash and cash equivalents to the gross debt. “Against that $13 billion, we make a profit of $8 billion. It is one of the best balance sheets. We have certain payments that are getting due, and we are very comfortable making those payments.”
For many years, Vedanta had relied on Hindustan Zinc, a group arm, and dipped into its cash reserve to pay dividends to the promoter group. That reserve, too, has steadily seen a decline in recent years. Last year, Vedanta Limited received a staggering Rs 31,901 crore as dividend from Hindustan Zinc (HZL), leaving HZL with cash of only Rs 10,061 crore while borrowings stood at Rs 11,841 crore. Then, in July this year, Hindustan Zinc announced an interim dividend which would see HZL pay Vedanta nearly Rs 3,000 crore, adequate enough to meet some repayments.
"VRL has not made any meaningful progress on refinancing its upcoming debt maturities, in particular the $1 billion bonds maturing each in January 2024 and August 2024," Kaustubh Chaubal, a Moody's senior vice president and lead analyst on Vedanta, said in a report on September 26.
It also hasn’t helped Vedanta that commodity prices, particularly for base metals such as aluminium, zinc, and copper, have seen a decline due to weak global demand, affecting cash flows. Vedanta Resources earns its revenues through brand fees and dividends from group companies. Of this, some $2.5 billion came from dividends last year. Among them, Hindustan Zinc is the group’s crown jewel, with its profits alone accounting for as much as the combined profits of the other group companies including aluminium, oil and gas, power, base metals, and steel.
“I think 24 months ago, any of energy transition, China Plus One, India's growth, inward investment, resource nationalism were probably nascent themes, but probably not nearly as advanced as we see today, particularly in respect of the explosion of interest that we see,” Omar Davis, the president for strategy at Vedanta, said during the investor call. “We see it in our asset base, I presume our peers do as well across India. So, our ability to point the company towards those pools of capital we began to feel was more constrained in our current format than it will be going forward in the new structure.”
For many months, Vedanta has been trying hard to secure funds, and last raised some $850 million in a five-year loan deal with JP Morgan Chase & Co and Oaktree in May this year, as a crisis loomed large. Now, the London-headquartered company is also reportedly in talks with JPMorgan Chase and Standard Chartered Bank (StanChart) to secure a $3 billion refinancing facility.
But all that could have been avoided had the company managed to make HZL acquire the global zinc assets of Vedanta for $2.9 billion. The Indian government, which has a 30 percent stake in HZL, opposed the plan, forcing Vedanta to drop the idea.
“When you sell something, you come with a condition,” Agarwal had told Forbes India about the Indian government blocking HZL’s plan. “I'm giving you x percentage now and after one year I'll give 20 percent. The proper formula has been put into the agreement. We got all the clearances from the government. Then the government machinery says, don’t do it. Somehow this mindset that people will make more money has to go away.”
Also read: Vedanta's Anil Agarwal and Wipro's Azim Premji make it to 'Asia's 2021 Heroes of Philanthropy' list