Jury out on whether it can do so uphill, to join ranks, as it says it wants to, with BHP and Xstrata
Though Anil Agarwal has always surprised everyone with his continuous diversification spree into businesses that may, in first glance, seem unrelated, he had till recently stayed away from buying oil fields. For, he believed, he didn’t understand “the algorithms of oil”.
Ten months of logjam, delay and uncertainty later, Aggarwal has surely got a clear understanding of the sector. That the great game played over our oil acreages will continue to be played by a volatile bunch of ministers, babus, PSUs and big corporate houses. Contracts may get modified even after a decade and its sanctity challenged. Similarly, business models can go haywire.
| VEDANTA IN BHP BILLITON FOOTSTEPS | ||
| WHERE THEY STAND: | ||
| Vedanta Resources* | BHP Billiton** | |
| Market Cap (billion $) | 8.70 | 218.6 |
| Mineral Resources (million tonnes) | 1137.00 | over 15,000 |
| Petroleum Resources (million barrels) | 3,770 # | 321^ |
| Revenue (2009-10) ($billion) | 11.42 | 52 |
| Operating Profit ($billion) | 2.53 | 20 |
| EBITDA (2009-10) ($billion) | 3.56 | 24.5 |
| Basic EPS (2009-10 in US cents) | 283 | 228.6 |
| *yr ended March 2011, **yr ended June 2010, # 58 per cent of Cairn India’s reserves, ^In addition to 2,370 billion cubic feet of gas reserves | ||
But the metals maven has hung on. And, after the government’s conditional clearance, Vedanta will finally be able to rub shoulders with BHP Biliton of Australia. “We are India’s BHP Biliton. They have diversified in metals and oil and gas. We are looking at a similar model. Cairn will contribute 25 per cent of our group revenues,” Agarwal had told Business Standard, after announcing the Cairn deal last August.
When crude oil is over $100 a barrel, the upside in an upstream oil exploration company still exists. But, at what cost? And, at what price will it give Agarwal his cherished goal of a 15 per cent return?
So, even after the clearance from the government, Vedanta officials refrained from outlining its road ahead. All Vedanta said in a late night release was they were awaiting "official intimation of the approval and details of the pre-conditions" before deciding what to do. After the deal mathematics got revised earlier in the week, it became clear that both Vedanta and Cairn Plc were eager to simply move on.
The challenges begin now. Cairn India’s four-year partner, Petronas, has left. So have several executives from the company, primarily for foreign jobs, frustrated over the uncertainty. If Agarwal and the existing Cairn India brass are not able to keep the flock together, rival firms, always on the prowl, will further poach talent.
After the Rajasthan discovery, Cairn’s professionals have become the poster boys in the sector. Yet, over the past few months, they have seen production from its fields remain unchanged as the government has been unable to decide. Many would argue Cairn’s partner in the Rajasthan fields, ONGC, has done precious little to push for speedy decisions. The two are now engaged in a bitter fight over resources in the KG Basin.
Agarwal’s former director (corporate strategy) at Vedanta, now CEO of Everstone, Dhanpal Jhaveri, is optimistic. “Vedanta has consistently followed a strategy of growing from a single resources company to a diversified natural resources company. Every time it has gone for an acquisition, it has also inherited organisations with a high-quality talent pool. Cairn offers a similar opportunity to diversify and grow, with a company with proven credentials in the oil E&P business,” he says.
In retrospect, Agarwal’s contra-investing style has always given him an uncanny ability to spot opportunities ahead of the curve. Cairn, too, will give him a chance to create a diversified portfolio that can generate enough cash flows and give room to fund complex and large projects in cyclical businesses. Aggarwal calls it his “4 box strategy”, of sweating existing assets to be the low-cost producer, pumping cash into expansion using modern technology and low capex, maintaining a robust and fully funded balance sheet and tapping the “blue sky” for inorganic opportunities to leverage the home-grown skill set.
