GREAT INVESTMENT VS GREAT BUSINESS

 

Who here hasn't heard the name Vedanta? The company is a giant that has been in business since 1965. The company was started by Mr. Anil Agarwal. Vedanta has a presence in two very important sectors: mining and oil & gas. The company runs the oil and gas operations under their subsidiary, Cairn Oil and Gas. The company is in the upstream business, which deals with the exploration and production of oil. The company contributes around 24% of India's domestic crude oil production. Cairn has 58 blocks in India, out of which 51 blocks are under open acreage licensing policy in the states of AP, Assam, TN, Raj, MH and Guj. Then comes the mining operations, for which Vedanta is world renowned. The company is one of the largest mining players in India and also holds the title of being the largest producer of aluminum, zinc, and copper. Vedanta also mines a special type of iron ore from the seas of Goa. That iron ore is used for making rockets and spacecraft. No other type of iron ore can be mixed with steel to produce a spacecraft. It's a monopoly as far as India is concerned. 

 Let's open Vedanta's historical pages and have a look at the decisions that made Vedanta what it is today. Anil Agarwal entered the business world in the 1970's and found that his cable manufacturing business wasn't stable because of the two main raw materials, copper and aluminum, which fluctuated a lot. It was in the 1990's that he made up his mind to enter the metals business. He acquired Madras Aluminum Company and set up India's first private copper smelter. Smelting is a process where the metals are extracted from their ore by a process which involves heating and melting. Rio Tinto, the world's largest mining company, had followed a model of buying mining assets cheap during the downward spiral in commodity prices and keeping the production prices low enough to make money at pit bottom. Guess what? Mr. Agarwal chose the same strategy. His first awkward hostile takeover was of a Canadian copper company, Alcan's local arm, Indian Aluminum. However, Mr. Agarwal lost the bid to Hindalco. He had an eye on Asarco. He waited for the copper prices to fluctuate. Copper peaked at $8950/ton and then started to fall and hit a low of $2875/ton. Asarco's cost of production was $3300/ton. At bottom, low copper prices were hurting their profits and were unviable for business. That's when Mr. Agarwal stepped in and bought the company. During the boom of 2000, commodity prices were flying, and at that time, Mr. Agarwal did nothing, except raise a lot of money on the rich valuation that his company was experiencing because of increased commodity prices. He raised around $5 billion via equity. The underlying principle of Vedanta has been to build large capacities at a minimum cost. In 1986, Agarwal imported a second-hand plant from the US at a cost of $1.5 million, whose manufacturing cost was $10.5 million. The plant was for a copper cable. People like him have business running in their veins, and I think that makes their blood group cheapskate positive.

Well, every coin has two sides. There is a reason why he is called "the patient predator". Speaking about the mines that he acquired in Zambia and Australia; voices were raised because of the way he acquired those mines wasn't ethical. Many environmentalists have also raised concerns regarding the way his companies mine. Sesa Goa, the iron ore company which Vedanta acquired had a production capacity of 10MT (million tons). The government had warned Sesa goa that the maximum capacity expansion can be tolerated up to 12 MT. Today, Sesa Goa's production capacity is 80000 tons per month. Much of that information is hidden. Speaking of his Indian operations, one of the best cunning moves yet was the way he became the majority shareholder in his own company. As Mr. Modi announced the lockdown on the 24th of March, Mr. Agarwal came forward and started playing mind games. He said that ''since there is a lockdown, I can't really predict how the company will perform in the years to follow, and hence I am planning to delist the company from the exchange''. Now, we, as shareholders, have to consider a few things over here. Number 1: Vedanta is one of the largest mining companies in India and also holds the position of being the largest producer of copper, aluminum, and zinc in the country. Second, whenever a company wants to delist itself from the exchange, at least 90% of the shareholders should agree with the plan, says SEBI. Third, as I have already mentioned before, India's 24% of domestic crude demand is satisfied by Vedanta. You all know how much tax we pay on our petrol. Imagine how much tax revenue the company would lose if they decided to go out of the market. And we should also not forget the fact that if there are no metals, how is the economy supposed to grow? There won't be any infrastructural development in the country, which directly correlates to less government spending, followed by a decrease in GDP. So, back in 2020, when Mr. When Agarwal confronted his shareholders, saying that he wanted to delist Vedanta, there was a panic created and everyone started selling Vedanta. At the same time, Mr. Agarwal, via open markets, bought more than 280 crore shares of Vedanta at an average cost of Rs 80. Before the panic, the shares were trading above Rs 250. You can imagine what kind of money that guy must have saved. As mentioned before, he is a cheapskate and wanted to buy those shares at dirt cheap valuations. He now owns approximately 69% of the company, which equates to approximately 280 Cr shares. 

After 2020, we saw that Vedanta, out of nowhere, started paying hefty dividends. A majority of that dividend was going in his pocket, as he was the majority shareholder. In 2021, Vedanta paid a dividend of Rs 32/share. According to my calculations, Mr. Agarwal earned Rs. 8960 Cr in dividends. In 2022, the price doubled to Rs 64/share, and he earned Rs 17920 Cr. His delisting plan did wonders for him. The money required to pay for the dividends is taken out of the reserves that the company has. Even if we apply basic knowledge, we can clearly see that the money is indirectly flowing back into the company as Mr. Agarwal is the majority shareholder. Because of this move, there was no need for Mr. Agarwal to raise money or borrow. His plan worked wonders for him. In fact, his entire 69% shareholding is pledged. Which means that he can borrow or raise funds on his pledged shares. What a move. 

My motive behind today's blog is to make you all aware of the fact that there is a difference between a great business and a great investment. Great businesses are rare. They are different. They have an enduring competitive moat which their competitors can't even think of replicating. These businesses are blessed with amazing managers who know how to run a company effectively. Vedanta definitely falls into the category of a great business. Being a low-cost producer in the mining sector and maintaining that advantage is rare and difficult. Vedanta is blessed to have a manager like Mr. Anil Agarwal. But Vedanta can't be a great investment. The management is not at all shareholder friendly, and we don't want to invest in such a company. Even though Vedanta should be worth more than Rs 900/share, it still is a risky bet. Vedanta's share valuation on the basis of Sesa Goa should be more than Rs 250. A great investment can be one where you were expecting a 50% return and the company gives you 200%. Great investments don't have to have a great business or a great manager. A company like Satyam computers could have been a great investment if you had invested early. The shares went from trading at Rs 60/share to Rs 600/share in a matter of 12 months. Finding a combination of great investment and great business is rare, and when you find something like that, we get companies like Berkshire Hataway, Amazon, Tata, etc. 
I hope you find one for yourself as well. If you find one, please do inform me as well. 😁