State-owned aluminium major Nalco and iron ore miner NMDC are cash rich, with a balance of over ₹4,000 crore and ₹18,000 crore, respectively, as of March. In contrast Sesa Sterlite, the largest diversified metal producer in the country, had a gross debt of ₹80,500 crore as of March 2014. The company is a new entity, created a year ago through the merger of the UK-based Vedanta group’s Indian subsidiaries — Sesa Goa, Sterlite Industries, Vedanta Aluminium and Madras Aluminium.
The amalgamated entity also holds a stake in oil major Cairn India, Balco and Hindustan Zinc. The mega entity, with capital employed of ₹1 lakh crore and market capitalisation of over ₹82,000 crore, has interests in ferrous metals, non-ferrous metals such as copper, aluminium, zinc, lead and silver as well as oil and gas and power.
So, how is it that public sector companies have piled up cash, while Sesa, the Vulcan, with an accomplished extended family to provide strength, sits on a mountain of debt?
A big chunk of this debt came from Vedanta Aluminium ($4 billion), primarily taken on to fund its alumina refinery and smelter in Odisha. Additionally, the debt taken on by the parent, to the tune of $5.7 billion, to acquire a stake in Cairn India, too, added to the tally. While Balco and Sterlite had debt which was growing, it was not sizeable.
The downturn in fortunes of metal companies after the global financial crisis has reduced the profitability of Vedanta’s Indian operations, impacting its ability to reduce its debt. The CRB metal index, which tracks composite spot metal prices, slid from a high of over 1,000 in mid-2008 to nearly 400 in early 2009.
Regulatory and environmental hurdles hurt the various arms further. For instance, Vedanta’s request to procure bauxite from the Niyamgiri Hills in Odisha for its alumina plant nearby was denied by the local authorities. Sterlite’s copper smelter was closed temporarily due to pollution concerns.
Worse, Sesa Goa’s iron ore mining operation came to a standstill in 2011, when the Supreme Court banned mining in Karnataka.
This was followed by a ban in 2012 on mining in Goa. The largest private sector iron ore miner in the country saw its output drop from 18.8 million tonnes (mt) in 2010-11 to 3.7 mt in 2012-13. Revenue from the iron ore business was slashed to ₹1,375 crore in 2012-13 from ₹8,387 crore in 2010-11.
Ventures outside India, such as Vedanta’s Liberian entry in 2011 acquiring a stake in iron ore mines for $90 million, did not yield results either. These efforts faced hurdles as transport infrastructure was not well developed in the local area.
There are no comparable numbers on a year-on-year basis, but after the merger, the company’s profits have dropped from ₹2,394 crore in the September quarter of 2013 to ₹1,341 crore in the June 2014 quarter, due to lower revenue in the oil and gas, copper and aluminium businesses.
Interest expenses stood at 9 per cent of sales in the June quarter. The company’s interest cover, as a measure of debt servicing capability, was however, quite comfortable at over 2.5 times in the June quarter.
Better times ahead With debt to equity ratio at a healthy 0.8 times, the situation is not so dire and things are also beginning to look up for Sesa Sterlite. Paras Bothra, Vice-President (Equity), Ashika Stock Broking, says the debt on Sesa Sterlite’s books is quite manageable, particularly after the merger of all the group entities.
With lack of sales growth, the company has been working to cut costs to boost profits. “Sesa Sterlite has taken many measures in Goa to bring down costs.
Apart from financial initiatives to bring down debt, the company has reduced cost on vehicles, telephone and restricted activities to a bare minimum,” said a source in the company.
“The cash accumulated in Hindustan Zinc is a major positive when one looks at the debt level on a consolidated basis,” says Deven Choksey, MD, KR Choksey Shares & Securities. The subsidiary has a cash pile of ₹25,536 crore as on March 31, but Sesa has not been able to tap the cash since the Government continues to hold a 29.5 per cent stake.
The planned divestment by the Government will help improve Sesa’s cash position.
Another subsidiary, Cairn India, with a cash balance of ₹13,707 crore plus $1.53 billion in dollar funds as on March 31, has extended a two-year loan of $1.25 billion at 300 basis points over the Libor rate. Even as this has been questioned by large shareholders such as LIC, the low interest rate loan will be beneficial to Sesa.
Revenue is also likely to improve. The iron-ore mining ban in Karnataka and Goa was lifted with restrictions in April and production has started in Karnataka.
Sesa expects that its iron ore output will reach 9.29 mt in 2014-15, up from about 1.5 mt a year ago. Also, the revival in ferrous and non-ferrous metal demand and higher global prices bodes well.
For instance, aluminium prices at the London Metal Exchange increased to over $2,000 a tonne in August from around $1,600 in February 2014.
(With inputs from Suresh Iyengar)
(This is part of a series on how companies are managing debt to gear up for better times.)