Last week's news of Vedanta Ltd putting out an advertisement for selling its copper operations in Tuticorin in Tamil Nadu has made some question the rationale behind the natural resources powerhouse, controlled by billionaire businessman Anil Agarwal, selling the plant.
But first a quick recap.
Sterlite Copper has a 400,000 tonne-a-year copper plant built over 250 acres in Thoothukudi or Tuticorin. During 22-23 May 2018, at least 13 people died and more than 120 were injured in police firing after over 25,000 local citizens protested against the plant’s operations on grounds of alleged pollution. Subsequently, the Tamil Nadu government asked the state pollution control board to permanently close the plant. Vedanta challenged the order before the National Green Tribunal (NGT). After it got a favourable verdict from NGT, the Tamil Nadu government challenged this order before the Supreme Court.
Since then, the matter has been pending before the apex court.
Back in May 2018, when the state stopped all internet access in the Tuticorin district, Mint’s ground report looked at how things came to a boil.
In the fiscal year ended March 2018, Vedanata’s revenue from operations totalled ₹92,011 crore and its Ebitda or earnings before interest taxes depreciation and amortization was ₹24,900 crore. Revenue from the copper business was ₹24,951 crore while it had ₹1,055 crore in Ebitda.
Put simply: In 2018, the copper business accounted for 27% of Vedanta’s revenue and 4.2% of its Ebitda. Besides its plant in Tuticorin, Vedanta also has a small copper plant in Silvassa, the capital city of Dadra and Nagar Haveli.
The infographic reflects the revenue, profitability and copper price over the last seven years at Vedanta:
Revenue from the copper business has witnessed a 39% decline in the last four years. Despite copper prices rising 50% during this period, profitability took a hit: from a ₹1,055 crore Ebitda in 2018 to a ₹115 crore loss at the end of last year.
Since the plant was shut in 2018, accumulated losses totalled ₹827 crore from the copper business.
Vedanta’s revenue totalled ₹1,31,192 crore and its Ebitda was ₹45,311 crore last year.
Would a paltry ₹115 crore loss (or ₹827 crore in accumulated losses) make a deep-pocket entrepreneur like Agarwal put its copper business in Tuticorin on the block? Probably not.
There is another irritant: The auditor called the shutdown a key audit matter since the plant was closed down.
“As of March 31 2021, the Company had significant amounts of property, plant and equipment, capital work in progress, exploration intangible assets under development and investments being carried at cost," said S.R. Batliboi & Co. LLP, the Indian affiliate of EY in Vedanta's annual report in the year ended March 2021. “We focused our efforts on the Cash Generating Unit ("CGU") at Tuticorin within the copper segment as it had impairment indicators and had a total carrying value of ₹2,144 crore."
Carrying costs are expenses a business pays for holding inventory in stock. The auditor has flagged the company’s ability to recover these expenses as a concern in its annual review.
Agreed, Vedanta could have faced investor ire. But Agarwal owns about 70% of the company and any adverse remarks from the auditor should not pose a challenge from public investors.
For these reasons, Vedanta’s decision to ask for interest from potential investors for its business in Tuticorin may well be a case of posturing rather than a decision forced by considerations related to its balance sheet, which does not appear to pose any serious challenges.
When most state governments are looking to attract investments, Vedanta naturally wants that the Tamil Nadu government should review its stance of not allowing the company to restart its operations, and hopes its decision will nudge the government to act.
The risk of course is that Vedanta's approach could prove to be a gamble because it would also like the Supreme Court to adjudicate in its favour, allowing it to go ahead and restart operations at the Tuticorin plant. The question then arises how the news of the potential sale of the plant will be interpreted inside the courtroom before a decision is pronounced. The delay is probably another reason behind Vedanta's decision to sell the plant. It could also be out of frustration over the case continuing to be argued and debated inside the courts for four years with the Supreme Court yet to pronounce if the copper plant can be reopened in Tuticorin. A quick decision from the court will be welcome.
