Slugging It Out For The Top Slot

Updated: Nov 11 2003, 05:30am hrs
Kumaramangalam Birla should be worried. Anil Agarwal has just raised the ante in the battle for Nalco. Both men hope to be the biggest aluminium producer in India, and control of the National Aluminium Company will be the key. At the moment Birla is clearly number one with Hindalco and Indal. Agarwal owns a controlling stake in Balco, which he bought over from the government two years ago and the much smaller Madras Aluminium Company. The only other big player is Nalco. Whoever wins Nalco when it is privatised, as it eventually will, becomes the Aluminium King of the country.

Size is important in this industry as in any other commodity business, since it helps drive down the cost of every kilo you produce. Since producers have little control over selling prices, which are decided on the worlds commodity exchanges, the lower your costs, the more money you make, so being large and global helps.

What Agarwal began last week was a process to take his companies global. Apart from Balco and Malco, he owns Sterlite Industries and Hindustan Zinc. His holdings in these companies are consolidated in Vedanta Resources. This is the company that Agarwal last week announced he would take public on the London Stock Exchange. Agarwal believes the Indian markets dont have the depth to give him the value that he thinks his companies deserve. The London Stock Exchange, where all his other international peers are listed, is where he thinks hell be able to realise their value.

His peers are companies in the $270 billion base metal business, companies that deal in copper, aluminium, zinc and lead. Its a business where 70 per cent is controlled by the six or seven companies. There are hundreds of others competing for the remaining 30 per cent of the pie.

Two years ago Agarwal told CNBC in an interview that he wanted to get into that elite list of six, seven or eight companies otherwise I will just be one in the ocean. Thats the vision I have got moving from Mumbai to London. London will also give him the money to achieve that dream of breaking into the elite league. Vedanta will give investors an opportunity to get into a Rs 10,000 crore group. Under accounting laws, the turnover of all his Indian companies can be shown in Vedantas books as it owns over 50 per cent in these companies. Agarwal thinks this will make his company important enough to get it a place on the UKs FTSE, thats the equivalent of the Sensex in Mumbai.

So why should Mr Birla be worried by all of this Well, companies comparable to Vedanta quote at between 15 and 20 times their earnings on the London Stock Exchange. With aluminium, zinc and copper prices just beginning to go up, this can only get better. In about six months, once Vedanta is listed, Agarwal will be able to leverage its value on the LSE to raise money to acquire mining companies around the world. This will be in addition to companies he already has in Australia, Mexico and Armenia.

So by the time Nalco comes up for sale, which will most likely only be after the elections sometime in 2005, Agarwal will come to the bidding table a far bigger player than he is today. And as he has proved in the past he brings a gamblers flamboyance to these deals. This time he will be a gambler with more than $700 million, over Rs 3,100 crore, in his pockets and the means to raise more.

So, even if Birla is able to wrest Nalco from Agarwal, it will be at a price far higher than he may have bargained for two years ago. In fact if Birla does get Nalco from Agarwal, it will make him more of an entrepreneur than we thought him to be. And while his bean pushers may not approve, being a bit of a gambler may possibly be the only way for Birla to forge world dominance.

The author is executive editor of CNBC-TV18. These are his personal views