Vedanta wants to create one major behemoth that deals with the entire commodity complex, just as BHP Billiton and Anglo American, says the group's Chairman Anil Agarwal.
In an exclusive interview with CNBC-TV18, Agarwal talked about the rationale behind the Cairn India-Vedanta India merger proposal and why it needed to be sweetened.
He also talked about the group's other ventures and shared his views on steps that the government has taken to ease doing business in the country and unlock growth.
Below is the verbatim transcript of Anil Agarwal's interview to Nisha Poddar & Kritika Saxena on CNBC-TV18. Nisha: You are creating a large conglomerate by merging two large companies that you have in India. What is the vision behind this large merger? A: Every continent has a natural resource company. Brazil has one, there is Anglo in Africa, BHP out of Australia. That was the vision -- India has 1.3 billion people, it has natural resources, one company has to come out of India. That is the vision: to create [a company] which can eradicate poverty from India, create phenomenal jobs in India. Kritika: You have already shared it with the shareholders but also help us understand how the merged entity will fit into Vedanta's Vision 2020. What are the targets that you are looking at and what is the value that you will create for the shareholders currently of Cairn, of Vedanta in the long-term? A: I am looking at balancing everything. For me developing the business, creating value, unlocking value, rerating our company, we are the people of ground level and it was important to create a diverse company; to diversify the risk, to create a stronger balance sheet, to give better dividend and create tremendous value. For this you need a diversified resource company and merging Cairn into Vedanta is a right move. Nisha: What are the benefits for the shareholders of Cairn India by way of this merger? A: The oil price fluctuates. Risk has been balanced for them (Cairn). They will have balancing on the metal side as well as on the oil side. So this is a biggest thing that has happened and then you have a stronger balance sheet putting it together. So we can expand our business much faster, much bigger. Kritika: In the last one year, we are talking about Cairn shareholders, the deal has been sweetened to appeal all shareholders and ensure that there is value for every shareholder, be it Vedanta, be it Cairn. Help us understand, post the volatility that you have seen in the last one year - take us through the reasons why the deal was sweetened and changed and are you confident that this will be in line with what the shareholders would want and what would be in the best interest. A: I will [share] everything once I am confident. I believe that this is a right thing to do. We are going in the right direction. I can see the mood of the people, people have cheered about it and I think this is a win-win situation for Cairn India shareholder as well as the Vedanta shareholders.
Nisha: When you talk about win-win situation, of course for Vedanta shareholder, when I look at the numbers, the debt equity in number have substantially improved just by way of merger. Now the kind of free cash flow that the entire conglomerate will generate after merger, what is the strategy going forward. Will it be used more for debt reduction or on the other hand since it's a commodity play and you have seen some bit of revival come in most of the metal companies. Would you be using that cash for more investments and expansion at the moment?A: The board has to take a view but I am a growth man and we are still on a ground level as far as resources are concerned and everything will be balanced. We will be balancing and seeing the market situation, the board will decide, something can go to debt reduction and something will go for the expansion.Kritika: The cash flow that Cairn has is very healthy and the overall balance sheet over the last one year, if I am correct, in terms of cash flows has been improving. Help us understand the kind of synergies that will take place in the next couple of months while you are completing the merger and will you be able to use Cairn's cash to be able to repay the debt that you are seeing on Vedanta PLC's books?A: I have no pressure on debt. If you look at our debt equity ratio, we never have been pressured for paying our debt. We always paid our debt on time. We have always balanced our situation. However, if we don't have a growth plan, we can always reduce our debt. If we have lot of cash and if there is a growth opportunity then we will look at that too.Nisha: I was look at your capital expenditure plan for this year, for merged entity, it will be close to about Rs 5,000 crore, standalone is Rs 4,000 crore. Next year it will decrease substantially but you have put in a lot of capital expenditure just before the downturn hit the metal and mining the commodity cycle. So do you think now the time has come with aluminium also turning around a little, zinc obviously has been doing well all the time? So do you think this is the time when a lot of capex done in the past three recessions is now going to start showing results?A: Absolutely. The need of the hour for India is to look at aluminium. It is a green metal. It is a metal that will slowly replace 30-40 percent of steel. Its nonferrous, all the railway wagons, automobile, aerospace, aeroplane, construction, anything and everything of aluminium. It is one of the major to create job in India because maximum small and medium enterprises (SMEs) can be built in the manufacturing sector or in the aluminium sector. I am excited that once we run our full capacity, 2.6-2.7 million tonne, 1,000s of new factories will come up in SMEs to process this metal.Nisha: You are very buoyant on aluminium sector and your aluminium production is also set to increase in the next financial year - FY17, you have some targets as well. Do you think in your entire portfolio of metal and mining as well as of other commodity like oil and gas? Is this the most promising factor coming in for future growth or is there something else?A: All our five businesses have same growth. Oil and gas has a tremendous opportunity. We produce 30 percent oil of the country and I am looking at 50-100 percent increase. There is so much of potential in India. I am very centric about India and I have always said that India has tremendous potential on hydrocarbon and we need ten companies like Vedanta to invest in India. So oil and gas is one sector, other is aluminium, copper. In India we have a lot of resource on copper. We do not produce copper et al.So we are looking at how we can get into copper mining, it's some time to come, but we do copper smelting and it's a phenomenal business. Look at zinc; it's shrinking in the world in terms of world production but we are the largest producer of zinc. We are the only silver producer in the country. Iron ore -- Tom Albanese always says that India should produce 600-700 tonne of iron ore, but we only produce around 100 million tonne. We are the largest producer of iron ore in the country. So all these five sector has a tremendous growth potential. Kritika: The fact of the matter is that with the merged entity now the scale is much bigger, so what are your targets. You have mentioned all the specific criteria from aluminium to zinc. Can you take us through the production expansion target that you are looking at either it's in the near term or if you want to look at wider timeframe. What are the production expansion targets that you can look at as a merged consolidated entity and even for the oil and gas business for that matter?A: I am looking at about 20 percent growth of the company and that is how I generally look at. However, when I talk to our CEO, I say India is in a position where you can grow 15-20 percent and we make the target but India should produce all what I am talking about, at least five times more of what we are producing with other companies coming in.Nisha: With kind of a run rate you are now, post the merger you will be a USD 10 billion company in terms of market capitalisation that is the rough estimate. What is your plan in terms of the overall value of the group going forward say in near future and up to 2020 as well if you have a target in place?A: See value, I don’t understand much about the market. I understand that in my cost of production going to be the one of the lowest in the world. In terms of quality we will be one of the best quality producers in the world. I am very keen on the sustainability, on safety environment, I am going to set the standard very high for my company, so we can stand up in the world and say we maintain this standard. These are my target. It is how I look at.Kritika: You also have Hindustan Zinc in your bouquet and your portfolio. Help us understand how you leverage Hindustan Zinc to be able to expand the broader footprint that you are looking at. It is a larger dream that you have and you will end up using all these different entities in the larger 2020 vision target. Help us understand how you will use Hindustan Zinc and give us an update about the conversation with the government. I believe I had a conversation with Tom yesterday, who said that for now zinc is a separate that the government want to stay invested in, so can we assume that right now for some time the government will stay invested in Hindustan Zinc?A: I don’t think so, it was the agreement that there is a call option, there is a put option so we have given the option to acquire the 25 percent, government is considering, whenever the government is ready we will come forward, but I don’t think government the day they have divested in Hindustan Zinc that was the intention that this is how they are going to divest and I don’t think that anything has changed in the government. They must have delayed and as such we are concerned we are running our company well. We are giving the very good dividend which unprecedented to the government, to everybody what we are doing. Each of our business we are very passionately run. I could say that our team in Vedanta one of the best team that I have seen ever in the world. I am very, very excited about our team and very excited to take it forward our company at a growth level. I am very keen on India side we have, is the time has come we have looked at enough above the ground and we must continue to look at above the ground. Time has come we must look at below the ground.Kritika: Because Hindustan Zinc is an important portfolio in the larger vision that you want to achieve. At a later date when you are able to complete the agreement, is the broader vision once Cairn and Vedanta merger is completed. Is the broader vision to eventually bring Hindustan Zinc also into the portfolio, look at a further merger at a later date?A: Who knows, this goes on, something will keep happening about to create more value for the shareholder anything can happen._PAGEBREAK_ Nisha: Now that you are getting into new innovative technologies. You want to bring international standards in metal and mining space and that really costs money. Tell me how you are going to balance out you still say you want the cost to be lower, how you are going to balance that competitive advantage of yours of cost competitiveness by bringing in science in the mining and metal business as well?A: The time is changing rapidly whether it is a oil and gas, whether it is a mining and it is a very, very good time for India, because India is not in the top in producing this metal and today’s time and technology is where in olden times when we use to do the heart surgery, you used to open up the heart, all the bloodbath is used to happen. Today with microscope you can do things, same thing with the mother earth with less activity you don’t have to dig out the entire thing to find out where is the metal. You don’t have to do too much of activity to take out the metal, so those advantage will be to the Vedanta and to the other company who will be coming in for this business.Nisha: I have never heard anybody give such an example of mining business are always open cast mining compare to now of course underground mining that you are entering into India.A: It is mother earth is that like our cow. How we milk our cow in most sustainable manner that’s very important and that’s how we have to treat our mother earth and that we are very conscious the entire Vedanta team is very, very conscious if you look at we don’t have technology for the mining. The technology prime minister visit to South Africa has made a huge dent. South Africa has a tremendous technology in underground. We have spent almost USD 200 million on South Africa getting their one of the best companies who is coming up and giving us technology for the underground.Underground is a need of power in India and we have done that. Of course, it was two way transactions. We are also investing about a billion dollar into South Africa, USD 200 million already invested for a zinc mine.Kritika: In terms of the volatility that we have been seeing in the last one year, the fact of the matter is that macro environment has seen volatility be it in terms of crude prices, be it in terms of realisation there have been volatility across segments. What are the areas that you will be conscious of when you look at the macro environment right now as thing stand for Vedanta resources as a whole, what are the watchful areas that you need to look at and what are the levers you can put in place to ensure that you can counter that and I am sure there is a plan for the merged entity in mind?A: Technology is very important. Vedanta will be top of the technology to use to make sure we remain the best in terms of cost. I have seen jokingly all the time everybody is going to die, I must die last that’s the kind of discipline we should have, the kind of rationale we have in with us that how I am looking Vedanta.Nisha: You have a very good mix of both organic and inorganic growth throughout. In fact, in the last 10 years I haven’t seen any other company or track any other company as active as your group in terms of mergers and acquisitions expansion. Now talking about the future strategy after this behemoth is created, are you going to go for inorganic growth, are there more acquisitions that you are looking at, which are the areas which are looking more attractive because commodities is on a down cycle right now and things are cheap across the world.A: We have what suit us so at the moment nothing on the hand, but if there is any opportunity our group will move forward. We will look at it if there is any opportunity and there will be some opportunity, but I am also very excited about what’s happening in India with this government. If you can’t grow in this government you can’t grow anywhere, because the way they are doing the reform. The way I live in London and I have recently gone to the South Africa, I have seen the kind of goodwill India has created, the kind of positivity, everybody is looking to invest in India.The climate is very definitely positive for us. I have always said Indian entrepreneur, Indian corporate has delivered everything whatever government has asked for whether to create the airport or whether to create a telecom company or to a manufacturing company or the oil company anything you talk about they have built it and this government is supporting entrepreneur, they are supporting corporate. They are definitely looking FDI to come in this is very balancing, very, very balancing.Kritika: In terms of the reform measures that have gone through, yes there have been measures that have been put into place for the industry specifically as far as the aluminium sector is concerned. Industry has been betting you have betting for cushions to ensure that aluminium has the pace of growth that you can expect till 2020. Help us understand what are the demand that you put forth with the government and what are the areas that you are working with, be it in copper, be it in zinc, be it aluminium what are the areas that need to be ironed out by the Indian government as thing stand for Vedanta to be able to reach that 2020 vision that you have.A: Aluminium it is surprisingly 50 percent of the metal being dumped in India, because other countries especially China they subsidies to their company and I am very keen the government should be more quicker to help the industry to come forward, to protect their own industry, same thing in the oil and gas. Oil and gas its tremendous potential what we produce 80 percent of the revenue goes to the government and producing our own oil has given us a tremendous feel that we are producing our own oil, to boost that I think government has to be more simplify the process what they are doing, to be very quick in taking decision. It is the time when people are watching India and this government is all out, they have all intention to support the industry and I am looking forward this industry to develop.Kritika: We have investors on our channel who end up saying that India is not as bullish a story as it was two years ago, if there are reforms why is that the case?A: We are the ambassador; people were looking us all the time. I live in London who can be the more example than us, last 13 years I raise USD 30 billion outside being largest FDI to the country. Most of the investor invested in India and investor see that we have given the dividend. Our money was paid on time. I raise money abroad putting here is best example, so we want to set an example more and more like Vedanta.Nisha: But what about corporate investments have they picking up, are there any signs of that picking up because even though the economy is slightly looking better that’s not something we are seeing.A: You have to have a little bit more patience. I think you just wait for a year and year and a half thing will change for sure.Nisha: Even in metal and mining sector you have seen several cycles of these commodities. How are you seeing, are there green shoots now visible?A: India has to go into to get the larger investment in natural resource, whether it is an oil and gas, whether it is gold, whether it is a copper, whether it is a fertiliser, whether it is iron ore. To eradicate poverty one of the very important pillar is to look at natural resource under the ground in more sustainable manner. I have always said at the top level 25 companies or the project must be monitored, the large size that will give 2 percent of GDP, that will give 2 percent of GDP and if those project completes thousands of industries will develop, because these 25 projects will develop lot of raw material, lot of base for ancillary and other industry to come and today’s time is the time of SMEs.Kritika: Since we are talking about reform, we are talking about change. The one issue that investors shied away because of is the retrospective tax issue and we need your clarity on that. I understand it’s a Cairn Plc case, but as far as Cairn Plc stake in Cairn India is concerned, has that stake been frozen by the income tax department, is there any clarity that we have with respect to how this can progress?A: This government the retrospective tax is definitely give a little negative feeling in the people who are investing because it show the mind that retrospective we can do something. I don’t think this government has any of these such thing in their mind and if the retrospective tax one way or the other if they come out of it clean and say that we in India we don’t have these kind of practices. We don’t bring these kind of practices in our country will give lot of boost. The last small hitch and I believe the government is very keen to resolve, they are coming out scheme after scheme, coming out for anything and I am looking forward this thing to be resolved as quickly as possible.Kritika: Have the government being cooperative in resolving this issue and can you help us clarify because there were reports saying that the income tax department has frozen that equity share in Cairn India, will that have an impact on the merger.A: I don’t think so; merger is a very bigger aspect, a broader aspect, everybody looking this thing to happen. Government is also very growth oriented. For the growth the retrospective taxes it doesn’t matter, it has to be resolved of course and the matter is with the Cairn Plc in the international court, I have been told it has gone to international arbitration and whatever comes out, but I don’t think merger will have any kind of impact.Nisha: And as far as the tax case is concerned you are confident that it is government is looking at a resolution in sight.A: I have a very strong feel because these are very growth oriented government and they also know that this is the only question has remained in the mind of investor and which has no issue and they are not going to get anything out of it, they are not going to get anything out of it, it is going to after appeal and after appeal and it gives unnecessarily bad feeling and definitely government whatever I understand they do not have that kind of feeling to get anything out of it and they are looking definitely to resolve this.Kritika: Could that be an out of court in that case.A: I have no idea, I don’t know. It is not related to us I don’t know.Nisha: Talking about the larger group considering that in September the voting will happen and you have sweeten the offer for the shareholders also, so if the merger really has to happen you will have this behemoth. Till 2020 and that is the theme we are discussing for the entire group as well, what are the various milestones that you would like to reach if you could give us a little sense on the strategy and the growth in which this entire group is going to go into.A: I am definitely looking gold to come in, we have recently win a gold project of government in Chhattisgarh and we are looking to open up, that is a nice pillar we will be looking, but I am definitely looking growth I think in 2020, we will be very large size of any of all this in the world standard, we will be third, fourth level whether you talk about aluminium, oil and gas, copper, zinc, iron ore that’s how I look at.Nisha: So in each of these metals you had earlier given a target of 1 million tonne and you have crossed that in most of the metals. Now gold is a new investment, coal is a new investment are these the sectors that are going to grow further in the sector and also are there new areas that you are looking at anymore addition to the diversified portfolio that you have.A: At the moment it is a diverse, if the government come out with a various schemes which they are looking at, we will participate.Kritika: So for instance what are the schemes that would make sense? The government has of course come out with schemes across the board, but specifically would you look at leveraging to be able to reach that larger expansion plan.A: For me the biggest thing is I need more people to be in my field. This is biggest constraint I find because I am very loner in my business especially in India.Kritika: You are loner in the business? Why would you say that?A: I need lot more people to come whether to invest in the resource sectors. I appeal all the large company in the world whether it is the Exxon or Shell or BP is already there. They all come in big way to invest in India, I am looking forward I am looking for Rio, BHP all these company to come in because India has a vast potential and is very important because this is the only country which you can have a tremendous patch of natural resource. It has a huge consumption and you have a tremendous capability to process this metal with today’s technology. So at the moment I feel more and more people to come and join the club.Kritika: Would you in that case look at, you mentioned several names, would you then create joint ventures in the form of equity partners, are there tie-ups, are there synergies that you can create with foreign domestic players to be able to create that expansion?A: Yes, we can look at it but they can come on their own also because India has opened up very well. We are producing what we need, not even 10 percent. Today to fill our coffer to India government to do the whole infrastructure work, to develop the country, to create all the cities, they need revenue and this can come from development of natural resource and this will create millions of jobs. Nisha: Are you looking global as well. You have some presence overseas. South Africa is the new area that you are developing. Which are the other geographies?A: We are in Namibia, South Africa, Zambia and we produce lot of copper in Zambia. We are in Liberia where we are looking iron ore. However, for me, if I look at any other country apart from India, Africa looks interesting for me.Kritika: You have already invested heavily and you were on the channel detailing your Africa investment. How will you use that to be able to increase your international footprint and if you can give us a sense of the plan with respect to production, with respect to the outlook in the African market because the fact is that even in the African market there is volatility as well?A: Yes but African market is something where I can add value. Why should Vedanta go anywhere where we it cannot add value. We still remain Indian; Indian way of thinking. So we take everybody together and we have pride and proud of what we are and we carry that culture wherever we go. However, I am very excited to built Vedanta, to create entire span of natural resource. I am excited because I can increase the quantity. If I can create lot of SMEs out of my company because I have a view that I am not going to make finished material and I will make sure that a lot of SMEs come in and use our metal to produce whether its iron ore, aluminium, copper or oil and gas, a lot more downstream business can develop.Nisha: Love for commodities is very well-known and you have been in the old economy, sectors for a very long time but you have a small presence in Sterlite Technologies in the name of Sterlite Technologies. In the new economy and the newer age technology and that particular sector as well, what are your plans over there? How big do you want to see that because in comparison to your metal and mining and oil and gas business - that is still very miniscule?A: That is catching up. We have significant presence in Sterlite Technologies. It has different mindset but it's natural because we started producing optical fibre. We are one of the largest optical fibre producers in the world and we have created several patents in this which has phenomenal potential in fibre. So we are in fibre. Entire India should do the network, its data, data and data today. We have a system integration business which is a tremendous business whereby we are doing the defence work, the new cities being connected, so the system integration doing extremely well. We are developing telecom software. I am excited about this whole package and on the top of it the Prime Minister is very keen to develop the semiconductor. We have gone in a big way in semiconductors; we will be producing glasses for televisions, cell phones and computer. We are looking forward to start that project. Kritika: There is Cairn-Vedanta, Hindustan Zinc, there is Sterlite Technologies. Help us understand the group's strategy to create synergies in all these companies because Sterlite Technologies has been used for synergies across the group. What are you doing to create that synergy and create that cohesive group strategy?A: One will be Vedanta Limited which will have natural resource and that is what we are doing. It has one subsidiary, Hindustan Zinc, so this is one company. However, when we demerged about 12 years back, we kept our cable division separate and that has grown into technology and that is doing well, a very independent management, they are developing themselves. What we need in India today is system integration, developing the software. So these are only two areas and they will grow on their own.Nisha: What about leadership in this group. How are you going to form the future succession plan for such a large conglomerate?A: These companies are institutions. It's beyond succession. Succession can be on the wealth but as far as business is concerned, it has to be institution and the top management; top professional has to run this company. I am not the CEO. I am the chairman. And going forward these companies can match with any of the best company in the world and that is how the culture will come.Kritika: How closely synced are management profiles in terms of handling Cairn, handling Vedanta. How closely synced are the management operations or management conversations when you are looking at larger group strategy?A: Now, all these five businesses are independent, they run their company independently. They have certain synergies which we work together and develop the strategy, but all these businesses have separate management, separate CEOs and they run the company independently.Kritika: Help us understand the broader capital expenditure plan that you are looking at a group level Cairn-Vedanta merger roughly about Q1 of calendar year 2017 is when you are looking at completing.A: Yes.Kritika: So post that what is the capital expenditure plan that you have in mind, to be able to cross the targets that you have been talking about.A: At the moment we have shown I think about USD 2 billion, but I am going to look at again because seeing the potential of the business, seeing Indian situation if we need to change that after the merger scenario how thing will change and if the change we will look at and open up and maybe create a large if we can afford and if the environment is good and the market is good, we will expand further.Kritika: So you increase it to from USD 2 billion.A: It can be.Kritika: To what how much can it go up?A: I am saying hypothetically, but at the moment what it is, what it is.Kritika: And you won’t shy away from fund raising if required to be able to reach that target?A: Company is throwing so much of cash. It is nice cash we have and we will be using those cash, I think banks are. I don’t have any plan to raise the equity at the moment.Nisha: But the best use of free cash flow that you will have on a consolidated basis, what will it be?A: It has to be balanced to give back dividend to the shareholder. I am very keen that dividend must be given to the shareholder, it is important and to put in money into expansion is very important. Research and development is very important for me and I am going to allocate some fund for the research and development, so we remain on the top of it and keep some money for the reserve for anything happen.Kritika: How realistic is that timeline, what is the process now by when are you expecting to reach, you have a very, very ambitious target. By when are you expecting to be able to complete that?A: I have said everything by September I think the court hearing will take place, after that I think within few months it should get over. When you work in India have some patience. In India you have to have some patience.Kritika: Since last one year we have been waiting for the merger to be completed. Was it complicated, was it difficult in the last one year and I asked Tom and Sudhir as well, because we were on the edge of our seat waiting for the merger to be completed. Are you second time lucky?A: For other people maybe impatience, I was very comfortable. I knew we are doing the right thing, we are doing the right cause, now they are seeing the big, big thing happening and they are getting adjusted with that. Otherwise, we had the atmosphere of a public sector, now things are changing.Kritika: You outlined the origin, you outlined your strategy, you outlined the merger timeframe that you are looking at. In the last say 10 odd years time that you grow Vedanta to the next level, when you look back what are the key milestones you think have helped you to come where you are today.A: I think we always taken a risk, a calculated risk and we always played on India that always been in my benefit when acquiring Hindustan Zinc, acquiring Balco, acquiring Madras Aluminium, acquiring Cairn, acquiring Sesa Goa, acquiring Konkola copper mine all these gigantic company and learning was phenomenal and when we acquire the company, earlier we used to send 50 people, 100 people to manage the company, now we even don’t send one or two people. These things changed because the confidence, trusting people, believing on them so this thing helped.Kritika: Any regrets, anything you could have done differently.A: Of course, there always be retrospective you think that you could have done better, but going forward looks great.Kritika: No regret?A: No regret.
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