Controversies over valuation apart, Sterlite's acquisition of Balco has few downsides to it.

By Roshni Jayakar

A controversy is great for a magazine strapped for space. This report on the Balco sell-off, for instance, can start virtually mid-way, assuming that readers know all about Sterlite winning the bid, the ensuing brouhaha, and its eventual triumph in the Parliament a day after the budget. The popular press has covered the event in such detail that everyone is aware that Sterlite bid almost twice as much as the Aditya Birla Group's Hindalco. Why, even the most passive among readers must have been impressed at the knowledge of the science of valuation our politicos suddenly acquired.

Amidst all the heat the deal was generating, Sterlite's Chairman & Managing Director, Anil Agarwal, speaking to this correspondent from his Berkley Square office in London-he flew down to India a day after the deal was announced, and back a day later-sounded unruffled: ''I am not uncomfortable... everything is there in black and white.'' When pressed to comment on Chattisgarh cm Ajit Jogi's threat to cancel Balco's mining lease, Agarwal suggests the just-born state should be happy to welcome investors, not turn them away.

The Valuation Equation

For those who missed out on the numbers, courtesy all that noise, Sterlite will acquire 11.2 crore shares (face value: Rs 10) of Balco for Rs 551 crore. That amounts to Rs 49 a share. Agarwal won't have a problem finding the money to consummate the deal. Sterlite's debt-equity ratio is a healthy 0.6, and it generated cash profits of Rs 123 crore in the first half of 2000-01 (year-end estimates: Rs 275 crore). Avers Jigar Shah, an analyst at the Mumbai-based KRC Securities: ''For Sterlite, the Balco acquisition could just be a two-year cash-flow in terms of financing.''

That number, Rs 551 crore, could be too low as some politicos wish us to believe, or it could be too high, as some defenders of Agarwal claim. But beyond the numbers, Balco makes a great acquisition for Sterlite. It allows Agarwal to buy into one of the country's largest aluminium makers (See Balco's Assets). In one stroke, Sterlite will end up with an integrated presence in aluminium: from bauxite that costs Rs 300 a tonne to foils that cost Rs 150,000. Analysts point out that with the quantum of aluminium produced in the US declining, and global demand for the metal rising, integrated producers in India could look beyond national boundaries.

There is also the issue of size. The deal will turn Sterlite, which acquired an ailing Malco from the Board for Industrial & Financial Reconstruction (BIFR) in 1995, into a major player in aluminium. Agrees Monika Agarwal, an analyst with First Global: ''With Balco, Sterlite can reinforce its foothold in aluminium.'' The former, after all, is the third-largest aluminium company after Hindalco and Nalco.

The Challenge At Balco

With the deal sealed-on March 1, the Lok Sabha overwhelmingly voted in favour of Balco divestment-Agarwal must now manage a company that is among the most expensive producers of aluminium in the world. Every tonne of aluminium produced by Balco costs Rs 75,000; in contrast, it costs Hindalco just Rs 46,000 per tonne. The company is profitable (Rs 56 crore in 1999-2000, expected to dip to Rs 25 crore in 2000-01), but its plant is outdated (set up in 1965) and it boasts a workforce of 7,000. Agarwal, who thinks India is the best place to produce aluminium for global markets, hopes to make a beginning by slashing Balco's production costs.

''We faced something similar when we took over Malco,'' says Agarwal, ''but we managed to up productivity and profits without retrenching anyone.'' For the record, Malco is upping capacity to 49,000 tpa from 33,000 tpa. But having swung the deal against all odds, Agarwal must now grapple with the equally daunting management challenges that await him at Balco.

Ajit Jogi, Chief Minister, Chattisgarh, on Balco:

Q. What are your objections to the Balco disinvestment?
A. Something that was worth Rs 5,500 crore has been sold for Rs 550 crore. Nobody was told about this sale; even I as the Chief Minister of the state where the mines are located was not consulted. This entire deal was done surreptitiously.

How did you get that sort of valuation? 
I am going by what the three Balco unions and my administration, as in the district collectors, have told me. There is a power plant, which is worth Rs 1,500 crore, there is land and the plant itself was set up 30 years ago. If you were to set up the same plant today, it would cost so much more.

But the land will remain with Balco and the government retains a large holding, so the dividend will keep flowing? 
Sterlite is buying the land, it can do what it wants with it. And how much dividend will the government get?

But the second bidder, Hindalco offered only Rs 275 crore? 
Obviously, those who are not interested in buying, won't make a serious bid.

So, what now? 
The government should cancel the deal. I have spoken to people and I can guarantee a higher bid.

What about the mining lease? 
Once Balco ceases to be a public sector company, the mining and land lease automatically get cancelled. That's because according to Schedule 5 of the Constitution, you cannot give tribal land to a private company.

You have alleged that Rs 100 crore was paid as a bribe for the Balco deal. Where's the proof? 
All I've said is that these are the rumours floating around in Delhi. These should be verified. 

-Bharat Ahluwalia

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