Vedanta must take care not to sound like India’s next Adani

Vedanta must take care not to sound like India’s next Adani
Vedanta must take care not to sound like India’s next Adani

Summary

Highly leveraged Indian tycoons are having a rough time

Highly leveraged Indian tycoons are having a rough time. Gautam Adani’s $236 billion infrastructure empire has shrunk by more than three-fifths in a month. But while his relentless rise and spectacular fall hog headlines, a smaller storm may be brewing for another magnate. Anil Agarwal’s once-London-listed Vedanta Resources has a pile of debt, including a $1 billion bond due January. Yet, his most recent attempt to trim the load has upset the one partner he can’t afford to annoy: New Delhi.

Around this time last year, when the US Fed was still to begin raising interest rates to tame inflation and Russia’s war in Ukraine had started to send commodities surging, Agarwal was toying with the idea of merging debt-laden Vedanta Resources with its cash-rich India-listed unit Vedanta Ltd. That plan didn’t go anywhere. However, Vedanta Resources did manage to shed its net-debt burden from almost $10 billion in March last year to a little under $8 billion. With the listed unit declaring a dividend last month, its parent and majority shareholder is “highly likely" to meet its obligations until September 2023, according to S&P Global. So far, so good. But it was when Agarwal tried to secure the finances for $1.5 billion in loan and bond repayments between September this year and January 2024 that he hit a roadblock.

What was supposed to be a quick dash to the ATM has become an uncertain enough adventure for Vedanta Resources bondholders to drive the price of the August 2024 note below 70 cents on the dollar. The next few weeks would be crucial for fund-raising. If it fails, the issuer’s B- credit rating, already deep in the junk-bond category, could come under pressure, S&P said. Adani’s net debt pile of $24 billion may be three times as large as Agarwal’s, but his bonds are still rated at the lowest rung of investment grade.

What happened to get everyone worried was this: Hindustan Zinc, which Agarwal had started buying from the Indian government two decades ago in a privatization deal, has a cash pile of $2 billion. Plus, the miner garners between $300 million and $600 million ebitda every quarter. So Vedanta Ltd, which owns 65% of the firm, decided in January to offload THL Zinc Ltd, Mauritius, to Hindustan Zinc. That cash deal, representing mining interests in South Africa and Namibia, was valued at about $3 billion in phases over 18 months. Since Vedanta Ltd is 70% owned by Vedanta Resources, it would have taken care of the latter’s liquidity needs.

Except there was one problem. New Delhi, which still owns about 30% of Hindustan Zinc, balked at the transaction. “We would urge the company to explore other cashless methods for acquisition of these assets," the Indian government said in a 17 February letter, threatening to explore legal avenues if Hindustan Zinc still decided to go ahead with the purchase.

This presents two problems for the magnate. First, 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 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 giving no indication that it’s done raising rates and Vedanta Resources bonds losing value, he might struggle to raise fresh money at a reasonable cost.

Agarwal’s second challenge is political. If he tries to force the asset sale and incurs the government’s displeasure in the process, his ambition to partner with Taiwan’s Foxconn for a $19 billion semiconductor factory might come under a cloud. Already, that project is being watched closely by opposition politicians who have slammed its last-minute relocation from Maharashtra to Prime Minister Narendra Modi’s home state of Gujarat. Besides, taxpayers will bear half the cost of chip-manufacturing units, and India’s general elections are due next year. Influential voices, such as Raghuram Rajan’s, have questioned Vedanta’s involvement, citing its lack of chip-making competence. “I simply do not understand how these players are being picked," he said.

Seven years ago, Agarwal’s creditors were even more jittery than now. Back then, the zinc miner offered a special dividend. New Delhi didn’t mind because the firm then had over $5 billion in cash and as a minority shareholder, it also got its share of the bounty. This time around, though, Agarwal seems to have overreached.

Short-seller Hindenburg had accused the Adani group of stock-price manipulation and accounting fraud, allegations Adani denied even as its stocks got pummeled. With that scandal putting the Modi administration under scrutiny over entanglement of public purpose with private profit, Vedanta’s top priority should be to stay out of the news headlines.

©bloomberg

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