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India’s Red Tape Is Tying Up Businesses
Vedanta Resources VED.LN -0.65% wants to play in the big leagues. The London-listed Indian miner made news recently when it hired Rio Tinto’s former chief executive Tom Albanese as an adviser. And for years, the company has been trying to emulate a key strategy of another mining heavyweight, BHP Billiton BLT.LN -0.82% .
After a series of acquisitions, including that of Cairn India 532792.BY -0.49% in 2011, Vedanta is a complex conglomerate with three listed subsidiaries spanning both traditional mining and oil and gas. That combination is very unusual, though BHP is a notable example. Though it provides diversification, there are no real synergies between the mining and oil businesses. What’s more, it doesn’t help with a key risk for Vedanta: its lack of geographic diversity.
Two-thirds of the company’s revenue comes from India. Vedanta says its home market offers long-term potential. But right now India’s red tape is tying up its businesses.
For example, Indian authorities banned all iron-ore mining in two key states in 2011 and 2012 in response to allegations of illegal activity, including at a Vedanta unit. The company denies any wrongdoing. Iron-ore accounted for almost a fifth of earnings before interest, tax, depreciation and amortization in the year to March 2012. But profits have since cratered and may not fully recover soon, since there’s little progress in restarting mining in the more important of the two states. Officials let Vedanta restart operations in the other state earlier this year.
In aluminum, too, Vedanta built a $7 billion facility in eastern India with its eye on acquiring a bauxite mine nearby. But it hasn’t secured the necessary environmental permits. Getting bauxite from sources further away means this aluminum costs an extra $300-$400 per metric ton to produce—equivalent to roughly one-fifth of aluminum prices. The company says the refinery is still competitive because it’s kept other costs low, though it had to suspend operations recently because of poor bauxite supply.
At least the oil division looks promising. In the year ended March, Cairn delivered half of Vedanta’s Ebitda. Yet there are concerns. Cairn doesn’t pay income taxes right now thanks to a tax holiday—though it pays other taxes, like that on production.
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