"Vedanta will catalyse global investments inthe vast untapped mineral wealth of India, and the IPO is the first step in that direction" Anil Agarwal, Chairman, Sterlite Group

What An LSE Listing Means

» A higher valuation for the base metals group » Access to a wider network of global investors » Greater credibility in international markets » Opportunity to acquire companies globally » A chance to make it to the FTSE 250

Ramesh Venkat still vividly recalls the afternoon of April 18 this year. Oblivious to the opulent beauty of the Udaivilas Palace in Udaipur, a group of middle-aged men sat hunched over, staring fixedly at a screen in the palace-cum-hotel's conference room. Although Venkat, a 39-year-old President of Finance at Sterlite Industries, and the others-comprising chief executives and finance heads of sister companies-were veterans of many a presentation, the afternoon's powerpoint show was unlike any they had ever seen. For slide after careful slide, the room's 16 exclusive occupants were being let in on Sterlite group Chairman Anil Agarwal's bold new vision for the mining and base metals major. The highlight: a $700-million (Rs 3,220 crore) IPO on the London Stock Exchange, which, many analysts believe, could be Agarwal's springboard to the global big league of mining and metals majors.

When Business Today went to press, Agarwal and his men had hit the international investors circuit, showcasing the Rs 4,513-crore group's gameplan and offering them a chance to buy box-office seats. Agarwal's Vedanta Resources, where his holdings in group companies Sterlite Industries, Hindustan Zinc, Bharat Aluminium, and Madras Aluminium have been consolidated, is offloading 40 per cent (or 110 million shares) in a bid to raise $700 million (Rs 3,220 crore), which makes it the second-biggest IPO on LSE this year and the biggest ever from India. The offer price puts Vedanta's valuation at a staggering $1.75 billion (Rs 8,050 crore). Says Agarwal, who started out modestly with his family's metals trading business in Patna back in the 70s: "Vedanta is the vehicle that will catalyse global investments into the vast untapped mineral wealth of India, and the IPO is the first step in that direction."

One doesn't know about India, but Vedanta for sure has lined up big investment plans. Over the next three years, it intends to invest $2 billion (Rs 9,200 crore) in expanding existing capacities and setting up newer ones. For example, Balco's aluminium smelter capacity is to be increased from 1 lakh tonnes to 3.5 lakh tonnes per annum; Hindustan Zinc, a public sector enterprise acquired by Agarwal last year, will get a new zinc smelter and a lead smelter at Chaderiya, Rajasthan, upping production of zinc from 1.7 lakh tpa to 2.7 lakh tpa, and that of lead from 50,000 tpa to 85,000 tpa. Besides, the group is setting up a $1 billion (Rs 4,600 crore) alumina refinery at Lanjigarh in Orissa with a capacity of 1 million tpa.

Agarwal's rush to ramp up capacities is easily explained. He already is No. 1 in copper in India, but in aluminium trails the A.V. Birla group by about 2 lakh tpa. Both the base metals are commodities and their prices are determined by the mood on the London Metal Exchange. So Agarwal, like other metals producers, finds himself in an uneviable situation where input costs are more or less fixed, but the price of his output varies. To ensure profitable growth, two things then become absolutely critical: Size, which yields lower cost per tonne of metal produced, and costs, which can be driven down by improving production efficiencies. It costs Indian producers like Sterlite around $1,100 (Rs 50,600) to produce a tonne of aluminium and 8 cents (Rs 3.70) per pound of copper compared to $1,200 (Rs 55,200) and 12 cents (Rs 5.50), respectively, internationally.

Worse for Agarwal, while the bottom of the metals market is highly fragmented with hundreds of players competing in it, the top of the pyramid has just a handful of giants, including Alcan, Alcoa, and Anglo American, among others, who control a chunk of the market. It is this exclusive club that Agarwal wants admission to. "The only concern I see as of today is size; international players like Alcoa or Alcan have capacities that are 10 times those of most Indian producers. To be a global player you have to be big," says Mukesh Agarwal, Head (Corporate Ratings), Crisil.

"The underlying idea is to have an optimal mix of debt and equity so that the cost of capital is lower" Tarun Jain, Director (Fin.), Sterlite Group

The Lure Of LSE

A listing on the London Stock Exchange, then, is important for a variety of reasons. For one, it dramatically expands the scope of investors and, therefore, Vedanta's ability to raise money. More importantly, the stock exchange has investors who are willing to see value in the commodity business of metals. It is not incidental that most of the big metals companies are listed on LSE. Says Jigar Shah, Head of Research at Mumbai-based brokerage, K.R. Choksey: "Typically, the global (metals) companies have PE ratios in mid-teens or even 20s. Not long back, Indian companies like Hindalco and Sterlite had single-digit PEs. Even now on a prospective basis, they are available at single-digit PEs." Besides, an LSE listing gives Vedanta a much-needed credibility with investors, customers and governments the world over. In fact, Agarwal's ambitious script reads increasingly like that of Ispat International's L.N. Mittal, who has built a sprawling steel empire out of sick state-owned companies bought at bargain prices.

With so much riding on the IPO, Agarwal-who owns two gold mines in Armenia, and has recently proposed to buy a 51 per cent stake in Konkola Copper Mines of Zambia-is leaving nothing to chance. He has roped in Brian Gilbertson, a minor metals industry legend, as Vedanta's non-executive Chairman. After Gilbertson was sounded out in May this year, he flew into India with the Chairman of JP Morgan on his private jet for a five-day, whistle-stop tour of Sterlite's facilities. "(The tour) was the clincher," says a company insider. Also on Vedanta's board are David Gore Booth, former British High Commissioner to India, Peter Sydney Smith, former head of finance at the world's largest plasterboard maker BPL Plc, and India's former Union Minister P. Chidambaram.

Just the same, Agarwal has issues to sort out. One of it is getting Sterlite's shareholders to agree to swap shares with Vedanta's, and there's no guarantee that they will-given that last year Agarwal tried to delist Sterlite by offering shareholders (much to their chagrin) a price half its book value. Similarly, it wants to increase its holdings in Balco from 51 per cent to 70 per cent and in Hindustan Zinc from 65 per cent to 95 per cent. Some of the money for that will come from the IPO. Says Tarun Jain, the group's Director of Finance: "The underlying idea is to have an optimal mix of debt and equity so that the average cost of capital is lower."

In a way, with a listing on the London Stock Exchange, Agarwal would have crossed the rubicon. He would have begun on a journey where a narrow path divides stunning success from spectacular failure.