Vedanta hit the headlines last year for the biggest ever private investment in India — a gargantuan semiconductor unit it plans to build in partnership with Taiwanese chip giant Foxconn. It will be India’s first chip factory at an investment of nearly $20 billion, partly funded by the government, with Vedanta owning 63% in the joint venture.
But news agency Bloomberg reported in December last year that Agarwal was struggling to find financial backers for the ambitious venture, Citing anonymous sources, Bloomberg claimed that Agarwal’s representatives met with large funds from the Middle East, Singapore, and the US over the past three months to garner financing commitments for the manufacturing business, but all the funds gave the opportunity a pass.
And now, questions are swirling over Vedanta’s capacity to manage its debt.
The mining mogul — who rose from selling scrap metal to now making semiconductors — insists that Vedanta Group has enough funding options, and they aim to become a zero debt company. “Everybody wants to finance us,” Agarwal told the Financial Times in an interview.
A Bihar man in London
Raising money is what made Agarwal famous in 2003 when he listed Vedanta Resources on the London Stock Exchange. “I got rejected 90% of the time. I was told that my vision is good, but it was a big risk for them as I was a first-timer,” Agarwal had written in a LinkedIn post.
At a networking event, Agarwal met top investors from JP Morgan, BHP, and Linklaters who were going on a cycling trip. To challenge him, Ian Hannam (an investment banker who later became vice-president of JPMorgan) invited him to cycle with them to Oxford which was almost 100 km away. Though Agarwal was not a sporty type, the gritty businessman could do anything to get his company listed. “I don’t think I have ever felt that much pain, but the thought of not having my company listed here pained me more, so I pedaled even faster,” he wrote.Vedanta became the first Indian company to be listed on the LSE. The IPO was oversubscribed three times.
Once Agarwal laughingly described why he went to London. “What could I do? I did not get money here. I was unable to get a 100 million market cap here. Everyone would say, I am from Bihar, I eat paan. What would I do? They said I don’t know how to walk, how to talk, how to get up. I ran and went to London. There I wore a suit and tie and was able to get something,” Agarwal said jokingly at the India Economic Conclave in Mumbai a few years ago.
This wasn’t the first time Agarwal had stepped into an alien category and succeeded. In early 70’s when he came to Mumbai from Patna (where he studied at Miller High School with Lalu Prasad Yadav), the only English words he would speak were ‘yes’ and ‘no’. Born in a Marwari family in Patna, Agarwal’s father ran a small aluminium business and he understood when Agarwal refused to study beyond class 10 and went to Mumbai instead to do business. He eventually built India’s first company that produced copper. His big rise came when he rode on India’s disinvestment programme to buy sick mining public-sector companies, notably Balco, and then turned them around. That was quite a feat for Agarwal given the messy disinvestment process in a country notorious for its bureaucratic obfuscation and regulatory mazes.
The HZL controversy
Agarwal may live in London but most of his business is located in India where he has thrived by buying sick public-sector companies. But recently a public-sector unit he co-owns with the government has become a source of pain.
In what is seen as a setback to Agarwal, the government has opposed Vedanta’s proposal to sell its international zinc business to Hindustan Zinc Ltd for $2.98 billion over concerns of valuation. The government has threatened to take legal action to stop the sale of the Africa-based assets to HZL, in which it holds a 29.54 per cent stake while the rest is owned by Vedanta. In a letter to HZL, posted by the company to stock exchanges, last month, the Ministry of Mines said the deal was a “related party transaction” and the government would “like to reiterate” its dissent. HZL in January agreed to buy THL Zinc Ltd Mauritius from its parent, Ltd, for $2.98 billion in phases over 18 months.
Vedanta holds a 64.92 per cent equity share of HZL, which is an integrated producer of zinc, lead and silver. The Rajasthan-based company has long been a cash cow for Agarwal’s Vedanta group, squeezing out rich dividends. The latest proposed transaction is being seen as another way of extracting more funds out of HZL. The government objected to the proposed deal which it called a related-party transaction. Vedanta said it would resolve the differences with the government.
The debt situation
Today, Agarwal is seen as a highly leveraged tycoon whose companies are struggling to repay their debt.
Vedanta Resources has large repayments in the next quarter, including US dollar bonds of $400 million in April and $500 million in May. It has another $1 billion bond maturing in January 2024. Apart from the bond maturities, VRL has $1.1 billion term debt and $600 million interest payments and $450 million inter-company loans. It has been servicing debt through loans and dividends from operating companies like Vedanta Ltd. and Hindustan Zinc Limited.
Vedanta Resources has recently said it has pre-paid all of its debt that was due for repayment till March 2023, deleveraging by $2 billion in the past 11 months. Further, it is confident of meeting its liquidity requirements for the quarter ending June 2023.
Vedanta on Wednesday said that it has repaid $100 million to Standard Chartered Bank via release of encumbrance on March 10. Vedanta has widened its net for borrowings to credit funds such as Farallon Capital, Davidson Kempner and Ares SSG Capital to meet more than $1 billion in upcoming repayments, .ET reported on Thursday citing sources. “We have a tremendous asset base which delivers high cash flows. There is full capability to repay. With the ongoing expansions, we expect our revenue to be USD 30 billion in the near term,” the company has said.
India’s mining magnate faces two major problems, wrote Bloomberg columnist Andy Mukherjee recently. Firstly, unless China’s economic revival turns things around, the post-pandemic era of supernormal commodity profits could be over. If Agarwal can’t take Hindustan Zinc’s cash all the way up to his privately held Vedanta Resources, his ability to pay down debt may be impaired, forcing him to borrow more. But with the Fed expected to keep raising rates and existing Vedanta Resources bonds dropping in value, Agarwal might struggle to raise fresh money at a reasonable cost. Secondly, if Agarwal tries to force the asset sale on Hindustan Zinc Ltd. and incurs the government’s displeasure in the process, his ambition to partner with Taiwan’s Foxconn Technology Group for a $19 billion semiconductor factory might come under a cloud. It is a high-priority project, partly funded by the government, which will create a domestic supply line of semiconductors.