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Vedanta nears end of investment plan

Friday, May 18, 2012

  Group is at ‘inflection point’ as earnings rise 13%; to sweat assets for production growth, cash flow & debt reduction.

  Vedanta Resources has reached an “inflection point”, according to its chairman, after years of heavy investment and the $9bn deal to take control of Cairn India .

  “Our capital expenditure plan is nearing completion,” Anil Agarwal, founder and executive chairman of the UK-listed Indian natural resources group said, at a time when global mining groups are pruning ambitious spending plans amid a flattening outlook for commodities.

  “We are the only natural resources group out of India that is fully diversified,” added Mr Agarwal, as Vedanta reported earnings before interest, tax, depreciation and amortisation of $4bn for the year to March, up 13 per cent.

  “We have created this company, we are making money to de-lever the balance sheet and pay a dividend and we are looking forward to balancing the company.”

  After the Cairn buy – among the largest to date by an Indian company – investors hope Vedanta will make good on pledges to sweat its assets for production growth, cash flows and debt reduction.

  The shares, down more than 50 per cent in the past year, fell another 3.5 per cent on Thursday to 990p after losses in aluminium, interest costs and one-off items pushed pre-tax profits down from $2.68bn to $1.75bn. However, the company increased its dividend from 52.5 cents to 55 cents, payable from earnings per share of 21.9 cents.

  Dogged by investor complaints about its complex structure, the company in February said it would reorganise, consolidating several subsidiaries into Sesa Sterlite, a new operating company created by a merger of its iron ore and metals units.

  The rejig, expected to be finalised later this year, should also address another of shareholders’ concerns, shifting about $5.9bn of debt down to the operating company and reducing the burden held by its parent.

  Tarun Jain, Vedanta’s director of finance, said the company’s $10.1bn of net debt was “comfortable”. “We are below our peak target gearing of 35 per cent and we have no major new [capital spending] planned,” he added.

  The company’s balance sheet remains “manageable”, said analysts at Liberum.

  “The restructuring would be of transformational significance for Vedanta shareholders, removing considerable debt burden and improving cash flow to the [holding company], however a number of hurdles remain and therefore the road to deal closure may not be entirely straightforward,” they added.

  As part of the restructuring Vedanta has offered to buy the Indian’s government’s minority stakes in Hindustan Zinc and Bharat Aluminium Company. “It is up to them”, said Mr Agarwal, adding that it was hard to put a timeframe on when the government would make its decision.

  Also in flux are restrictions on mining in parts of India, such as in Karnataka where the ban has weighed on Vedanta’s iron ore production.

  However, Mr Agarwal said the outlook for commodities was robust, arguing oil prices were set to stay above the $80 a barrel level which underpinned the Cairn deal. “$100-plus is the price,” he said.

  The company believes constraints on new supply would help keep copper prices between $7,000-8,000 a tonne and underpin a recovery in zinc, he added.

  As investors in mining companies ponder whether the commodities cycle, powered by China’s rapacious appetite for raw materials, is approaching its end, Mr Agarwal had a confident message.

  “India will substitute for China’s demand,” he said, pointing to double-digit growth rates in requirements for natural resources. “Indian demand will take over.”

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