Billionaire Anil Agarwal faces tough choices now as the Vedanta group’s new and thus far most ambitious semiconductor venture has received a setback with the collapse of its joint venture (JV) with Hon Hai Technology Group, widely known as Foxconn, leaving Vedanta scouting for new partners.
To realise its semiconductor dream, Vedanta needs technology and money. Pronto!
On July 10, Foxconn and Vedanta group called off their JV, which planned to invest $19.5 billion to set up a manufacturing unit in Gujarat. Both said they would go ahead with their respective semiconductor business ventures with new partners.
Financing has been so challenging that the Vedanta group has had to turn to its competitors to raise funds. But can befriending foes help when friends call it quits?
"We believe that the addition of the semiconductor and display glass businesses will negatively impact the company, as it will need a large capex to set up the facility, which could impact the near-term dividend payout of the company," brokerage Motilal Oswal said in a note on the India-listed Vedanta Ltd after the JV broke up.
The Vedanta group had entered the semiconductor and display glass business venture through Twin Star Technologies Limited (TSTL), a wholly-owned subsidiary of Volcan Investments Limited, the ultimate holding company of the Indian listed entity Vedanta Ltd and part of the promoter group. The joint venture with Foxconn was under this entity. While neither has experience in semiconductor manufacturing, they were hoping to rope in a technology partner.
The Vedanta group decided to move the ownership of its new ventures from the promoter group entity to the India-listed company; this transfer is likely to be completed in the second quarter of FY24. While this seems to have acted as the immediate trigger for the JV’s split, it was a long time coming.
"There was recognition from both sides that the project was not moving fast enough; there were challenging gaps we were not able to smoothly overcome, as well as external issues unrelated to the project," Foxconn said in a statement explaining the rationale for the "mutual" split.
Technology gap
Manufacturing semiconductors is expensive and requires formidable technological expertise. Globally, there is a race among countries to establish dominance in the manufacturing of semiconductors and that means those who have the technology have many suitors.
Vedanta group, an oil, mining, and metals conglomerate, and electronics manufacturing giant Foxconn formed the JV last year to set up a semiconductor manufacturing company but have since struggled to find a technology partner. With no previous experience in manufacturing chips of their own, the success of the JV hinged on finding a suitable partner.
After calling off the JV, both entities said they were determined to take their plans forward with new partners.
On July 11, Vedanta said in a statement that it is committed to setting up the planned semiconductor unit. The company said it has a licence for production-grade technology for 40 nm from a "prominent" Integrated Device Manufacturer (IDM) and will soon have a licence for production-grade 28 nm as well. The company did not reveal the names of the technology partners.
Detailed queries sent to Vedanta seeking clarity on how it planned to take forward the project remained unanswered at the time of publication.
Vedanta will not only be competing with its former partner Foxconn to find the right technology partner but with others too who are keen to set up manufacturing in India, given the government’s focus on the sector.
Show me the money
The planned project in Gujarat requires an investment of $19.5 billion (around Rs 1.6 lakh crore), and the companies had indicated earlier that it would come on stream by 2026-27. Experts tracking the sector point out that semiconductor technology is rapidly evolving and would need deep pockets to finance it.
"This is a new business, and as has been the case in the past, large conglomerates want to enter. But it’s not easy to find technology partners. Earlier, banks made loans available for these businesses and were open to restructuring loans if there were problems. But after losing money on some big groups, they are cautious. The gold rush seen in new sunrise industries in the past may not be repeated this time around," Gaurav Dua, Senior Vice President & Head – Capital Market Strategy, Sharekhan by BNP Paribas, told Moneycontrol.
Financing a semiconductor manufacturing unit, even with government backing, may not be easy for any company. For Vedanta, it will be tougher, given that the group is already battling huge debt.
On June 13, CreditSights, the Fitch Ratings unit, said that it will closely monitor the risk of refinancing pertaining to the parent company Vedanta Resources Ltd's (VRL) term debt of $4.2 billion, which is scheduled to mature in FY24. According to CreditSights, VRL, the parent company of India-listed mining behemoth Vedanta Ltd, is expected to honour its debt obligations in their entirety within the next 12 months.
This report came right after VRL raised around $450 million from two of its rivals, triggering concerns that the company is unable to raise money from regular debt channels and banks.
The promoter group pledged 4.4 percent of their holding in Vedanta for a $250-million loan from Switzerland-headquartered mining and natural resources rival Glencore International AG. It raised $200 million in finance from commodities trading company Trafigura Group.
The Indian listed entity, which will now house the semiconductor business, had gross debt of Rs 66,182 crore as on end-March. The company’s net debt soared from Rs 38,076 as on December 2022 to Rs 45,260 crore as on March 2023. The company earlier said that its net debt-to-earnings before interest, taxes, depreciation and amortisation ratio was at 1.28 times as of March.
Agarwal has repeatedly said that debt, whether at parent VRL or the Indian arm, is not a concern. But will he be able to raise funds for a new business where he has no track record and no partner adding muscle?
All eyes will be on Agarwal at Vedanta’s Annual General Meeting on July 12. Does he have a plan on how to take the project ahead?
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