From Orissa investments to Goa mining & more
Two captains of Indian industry expressed their regrets last week, Ratan Tata on the incorrect positioning of the Nano and Anil Agarwal on his $10 billion investment in Orissa that is languishing for want of bauxite. While Tata’s regret is easy to address, indeed is being addressed by Tata Motors, the same can’t be said of Agarwal who has pointed out that he would have been better off buying US copper producer Asarco at the time he chose to invest in Orissa some years ago. Combined with the ban on iron ore mining in Goa which brought Agarwal’s Sesa mines to a close, the Orissa debacle has forced the company to scale back its expansion plans—in FY13, along with the change in global commodity prices, this made Sesa-Sterlite’s ebitda collapse to R437 crore from R3,626 crore in FY12. To understand the impact of government/court actions on the company’s fortunes, a CLSA update on the group says that full normalisation of mining operations will see segment ebitda rising from R100 crore in FY14 to R2,900 crore by FY16—it was R3,600 crore in FY12.
Similarly, CLSA points out that, were the government to sell its residual stake in Hindustan Zinc Ltd (HZL) to Agarwal, this would result in a 10% accretion to FY16 earnings per share and take up its target share price of Sesa Sterlite from R225 to R275 if HZL is merged. The sale, however, is caught up in the CBI’s decision to investigate whether even the original privatisation move was kosher—according to a complaint, since HZL was formed by an Act of Parliament, it required Parliament’s nod for privatisation. Even if that is true, this is hardly Agarwal’s fault, but it is important to keep in mind that in the 11 years he has had the company, its revenues have risen 10 times, profits 101 times and market capitalisation 78 times, taking the value of the government’s stake from R536 crore to R16,500 crore even though its shareholding is down from 76% to under 30% today.
If Agarwal’s HZL performance isn’t enough, in a relatively short period of time, Cairn India already accounts for around a fourth of India’s crude oil production. And, as our page 1 copy points out, it has just submitted details of a reasonable-sized oil-cum-gas field to the oil regulator. While there is little doubt the government has simplified procedures in oil/gas exploration, as Agarwal has said, decisions continue to take a long time. Since Cairn has been finding oil/gas regularly, it has been asking for its concession to be extended so as to give it enough time to extract the oil/gas on the same terms as it has right now—80-85% of revenues go to the government. But since no decision has been taken, this discourages firms—and not just Cairn—from continuing to aggressively look for oil/gas once they approach the half-life of their exploration licences. If India has to achieve its potential as an industrial giant, this is something that the government has to work on urgently—indeed, Agarwal regularly cites examples of how India is simply not doing enough to exploit its mineral resources, the result of which has not only been lower industrial production, but also huge strains on the current account deficit.