After delivering its highest ever quarterly profit and significantly reducing debt, Tom Albanese, outgoing chief executive officer of Vedanta Ltd., said Vedanta has more room to grow. His optimism is based on the benign commodity markets, which according to him, are still below the highs seen five years ago.
Under Albanese, the company turned the corner on its debt position. Gross debt reduced by Rs 4,000 crore during the year while the net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) stood at 0.4 times.
The company will continue on the path of production ramp-up and deleveraging after he steps down in August this year, Albanese told BloombergQuint in an interview. “A year from now you will see a stronger company than today,” he quipped.
Here are edited excerpts from that conversation.
The Last Three Years
After three years of being in the company and overseeing the Cairn-Vedanta merger, what is next on your plate?
The past three years have been a wonderful time for me. There is a sense of accomplishment. We have had a number of hurdles. We had some volatile market conditions and the organisation as a whole had an objective in mind, a very clear cut strategy, and I am proud of what the entire organisation and board have done in terms of delivering shareholders’ returns.
We said a couple of years ago that we would be ramp up production taking assets that had been built, but that were not yet up and running; we’d use that to pay down the debt and we’d also look to the merger with Cairn to simplify the corporate structure. All of these things shareholders said they would like to see improvements on and I think with record production, the Cairn merger being complete, the improvement in overall balance sheet, we delivered on that transformation.
Vedanta has a very strong trajectory ahead of it. It should have higher production next year than the year before. The commodity market is still pretty good. Not as good as three or four months ago but supply-demand is pretty tight. The board is very focused on deleveraging even further. So my guess is a year from now you will see a stronger company than today.
Hindustan Zinc Merger: Unfinished Business
Mr. Anil Agarwal has a vision for consolidation of the company. So when can we expect Hindustan Zinc merger?
The government of India owns about 30 percent in Hindustan Zinc, we hold about 65 percent and the public market share is about 5 percent. The government of India already owned that 30 percent. If they want to hold it, we are fine with that. They have been a very strong supportive shareholder and part of the Hindustan Zinc board. If they consider divesting that share for any reason any time, we certainly support that process too, and we would look forward to working with the government with whatever process they would put in place.
Has there been any talks with the government so far?
I don’t think there has been anything specific that has been planned. At different times, they have been hot or cold on it. We just have to see.
What is your overall outlook on the sector?
We are in much stronger position now that we were a year ago. We have seen our overall basket of commodities increase by 35 percent year-on-year and we are still well below the highs of the commodity market five years ago. So there is still some room to grow. Global demand has been relatively stable on any of our metals over that past period of time.
With the tougher times we have had in the past five years, the oil industry, the mining industry globally has reduced its capital spending. So less new supply coming in the market. So, year-on-year you are seeing a tightening of supply and demand, which should be good for market prices for our commodities.
You have been in the industry for a long time. And in India especially is there any regulation that the government needs to do away with in order to revive the sector?
The government very clearly realises that as India grows, it cannot afford to be importing raw materials. We saw that with coal two years ago; when coal imports were rising it was hurting all parts of economy. So government recognised it had to increase domestic coal production , which it did. I guess as we go forward we will see the same things happening with metals and oil and gas. So that at certain point if too much of the limited capital exchange (foreign exchange in India) is going to import raw materials, it will have a negative effect on the economy.
So the government has been very receptive in terms of some of our recommendation for increasing expiration, increasing investments, both domestic and overseas investments, into mining industry, eliminating red tape making it easier to properly develop best practice and opening up more ground for exploration and improving the database for exploration and again more and more auction so that private capital can come into the sector. It’s all been a part of the process that I have been encouraged by in the past three years and I hope the government continues that for the next three to five or ten years.
About Vedanta..till last year we were all talking about the debt levels of the company. But this year the gross debt has come down. How did you achieve that and what’s the target going forward?
As we have been focusing on ramping up existing assets, we have been very careful about what capital we spend on a going forward basis. We have been more careful on our operating costs. By keeping the teams motivated, looking at innovation, driving better production has driven us towards record volumes on all our products in an environment of stronger prices. So there have been very strong cash flows which we used to bring down the overall debt and also improve the dividends for our shareholders. That is what we said we would do and that’s what we have delivered.
Was the initial opposition of minority shareholders in the Cairn-Vedanta merger a big challenge for you?
Whenever you look at an M&A transaction and if you recognise you have multiple constituencies that have been brought on board. And when we first went to the shareholders two years ago, that was the point when oil prices were stronger, we had not yet seen the increase in some of our base metal production.
But in that period, up until September 2016, we saw the market recognised that these guys are actually increasing their zinc production, they are increasing their aluminium production, Zinc prices have gone from being the poor boy in the room to the rich guy. So all of a sudden it was seen as a favourable commodity. So the scene has been changed quite a bit.
And the board last summer decided, to get overwhelming support of all the Cairn shareholders, they upped the bid a bit to the Cairn shareholders’ advantage. So we had very strong support, back in September of 2016, for the merger from all shareholders and since then, has been getting the various regulatory approvals. So by the time we got through the end of April, we had it done. We should be looking at the new Vedanta listing and bigger market cap, bigger free float in about a couple days’ time.