Surprising everyone with diversification into businesses that may, at first, seem unrelated has almost become second nature to Anil Agarwal. But, there is method in his madness. There is value, too.
So, the quest for a 15 per cent return may seem the obvious trigger for Anil Agarwal to write a $9.6-billion cheque and pick up Cairn’s oil assets in India. But it’s not so simple. Why would he invest in the Indian oil exploration sector when most global majors or domestic players are either scaling down their Indian operations or going oversees in search of acreage?
Is this yet another vintage Anil Agarwal counterintuitive investment?
Vedanta’s avuncular chairman, or ‘taoji’ (uncle) as many call him within the group, has an uncanny ability to spot opportunities ahead of the curve. “India is at an inflection point. We are an emerging economy with 1.2 billion people and a huge importer of oil. So, we are at the tip of an iceberg. Cairn will give us an opportunity to make an Indian natural resources champion,” Agarwal told analysts, explaining the rationale for his buys.
Many would argue the journey from bulk commodities to energy (coal, power and now oil) is a natural progression. It’s already in downstream energy with interests in power generation, so picking up stakes in gas blocks could be backward integration to fuel his power projects. “Cairn was a natural step for us,” Agarwal said at the analysts’ conference.
In a way, Agarwal is following in the footsteps of Australian mining giant BHP Billiton, or even fellow NRI Lakshmi Mittal, who had already tied up with India’s largest oil and gas company, ONGC, to hunt for oil exploration assets overseas. Mittal has also revived plans to build a 9-million tonne oil refinery in landlocked Punjab. Even the Tatas have diversified into oil via Tata Petrodyne.
Most commodity players, say analysts, believe that having stakes in metals and oil could pay off as the cyclical nature of the two industries is complementary. “The group has been consistently diversifying into various commodities. When it acquired Sesa Goa, it moved from base metals to bulk commodities and now into crude oil. It will inherit a very good management team and Vedanta will be operating in a playground it knows well,” said Dhanpal Jhaveri, MD at Everstone Capital and former director (corporate strategy) at Vedanta.
Jhaveri has a point. In 2008, Agarwal snapped up Sesa Goa in a keenly contested bidding war that pitched him against Mittal and the Aditya Birla Group. It was his entry into ferrous metals — a move that stumped many, as they felt he was moving away from his core non-ferrous business of making zinc, copper and aluminium. But in just two years, Sesa Goa is a cash cow, and Agarwal will dip into its cash reserves to part finance his mega oil acquisition. Sesa Goa, with an operating margin of 60 per cent, will chip in with $3 billion.
The Cairn acquisition gels well with Agarwal’s strategy to create a diversified portfolio that can generate enough cash to fund complex and large projects in cyclical businesses. Agarwal calls it his “Four-Box Strategy”: sweat existing assets to become a low-cost producer; pump cash into greenfield and mega brownfield expansions using modern technology and low capex; maintain a robust and fully-funded balance sheet; and tap inorganic “blue sky” opportunities to leverage homegrown skill sets.
“Vedanta’s focus is on the basics of the business. Once you have natural resources, downstream is only a converter. In today’s context, whether it is steel, aluminium or copper, business is viable only if you have natural resources because that is where the money is,” said Jatinder Mehra, director of the diversified Essar group.
But, this time around, Agarwal’s target is sky high. “We are India’s BHP Billiton,” he has said. The Australian mining giant — the largest in the world — has exposures in coal, iron ore and even oil. In 2009, it produced more than 376,000 barrels of oil a day. In the first six months of this financial year, out of a total cash flow of $8.7 billion, its highest operating margin came from petroleum at 56 per cent. That’s almost nine percentage points higher than its margins from iron ore. A quarter of its revenues come from global oil and gas operations.
“We have signed a non-compete agreement for four countries. But as and when the Cairn management looks at opportunities outside India, we will back it… If it wants to look at shale gas, we will also support that. The existing management has the required bandwidth and we support it 100 per cent,” Agarwal has said.
Unlike most oil blocks under the government’s new exploration licensing policy (NELP), profit sharing with the government in Cairn’s Rajasthan block will begin only after the entire production cost is recovered. Therefore, Vedanta’s decision to buy into Cairn India is all about good timing. As the deal was being finalised, there were reports that Cairn made another discovery in one of its K-G basin blocks under NELP-V, which will have to be vetted by the director-general of hydrocarbons. Some estimates place a $7-billion potential upside to Vedanta by just selling oil from the Mangala oil basin in Rajasthan.
But Cairn, pumping 125,000 barrels of oil a day (bpd) from Rajasthan, might soon hit a plateau, fear some analysts. Its management is already putting in place an ambitious billion-dollar capex plan that will take production up to 240,000 bpd.
Agarwal’s post-acquisition turnaround stories are the very basis of his business DNA, a theme that is recurring from BALCO to Sesa Goa and Hindustan Zinc (HZL), which has seen a 400 per cent jump in capacity in seven years under Agarwal’s leadership to emerge as the largest zinc maker with the highest margins and mines in Zambia that can feed smelters for the next three decades. It’s the same story in Tuticorin, the site for his massive copper expansion.
“He has always paid top dollar for assets in India, while his overseas bids have been conservative. Most people have initially criticised his choices. In Balco, the smelter was shut, there were labour issues. Zinc was not a favoured metal when he picked up HZL. Sesa Goa, again, was a diversification story. But today, all stakeholders have been handsomely rewarded, productivity has shot through the roof and in most states, these companies are the biggest contributors to the exchequer,” points out B Anand, director-finance, Future Group and former director (corporate finance), Vedanta.
Rajasthan, especially, is emerging as one of Agarwal’s favourite playgrounds. “Synergies with Cairn in the backyard to our zinc operations will only strengthen our growth pipeline,” he has said.
But, beyond the great business plan, argue many, lies another strategic reason for diversification. Vedanta and many of its peers in the metals and mining industry are facing fierce criticism from sections of the government, environmental NGOs and even Maoists for their operations in areas that they argue are ecologically fragile or inhabited by tribals.
| EXISTING OPERATIONS | |
| RAJASTHAN | % |
| Cairn (Operator) | 70.0 |
| ONGC | 30.0 |
| CAMBAY | |
| Cairn (Operator) | 40.0 |
| ONGC | 50.0 |
| Tata Petrodyne | 10.0 |
| RAVVA | |
| Cairn (Operator) | 22.5 |
| ONGC | 40.0 |
| Videocon | 25.0 |
| Ravva Oil | 12.5 |
As coincidence, or luck, would have it, even on the day when Agarwal announced his Cairn deal came a damaging report from a government panel, slamming Vedanta’s Orissa operations. “We will comply with whatever the government says. Not a blade of grass will be removed,” Agarwal has categorically said.
A $10-billion pricetag is bound to raise eyebrows — and questions. Agarwal and his top deck will be busy soothing investor nerves trying to convince them that roping in group firm Sesa Goa will also pay handsome dividends. “All our expansion plans are in place and will not be affected. The alumina smelter, refinery in Orissa or the purchase of the government’s residual stake in HZL, Balco, the funds are all in place,” Agarwal has said.
But, will he be able to convince regulators and the government that his inexperience in oil exploration will not be a hindrance? Agarwal has had several face-offs with investors and policymakers. Be it while trying to delist Sterlite from Indian exchanges or taking on Alcan for a stake in its Indian arm. In many cases, he has had to retreat. But the billionaire from Patna knows where to draw the line in the same way he remembers his humble roots and old friends.
This straightforwardness and unassuming demeanour has over the years also won him close friends who still would stand by him — from home minister P Chidambaram, who had also been on Vedanta’s board, to Naresh Chandra, former Indian ambassador to the US, who is still a non-executive board member of Vedanta. “The man has always believed in the India story, always participated in any divestment programme. From Balco to IFCI to even the Delhi and Mumbai airport privatisation. He has always created value for his shareholders,” said a colleague who did not want to be identified.
Perhaps the Cairn deal will be seen some years from now as another example of this.
