Worth a readIndia's hunger for Aussie coalSupratim...

Worth a read


India's hunger for Aussie coalSupratim Adhikari

Published 7:03 AM, 30 Dec 2010

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Hungry Chinese and Indian buyers continue to drive the commodities boom but while Chinese companies have been on the public radar their Indian peers have so far been conspicuous by their absence. However, that trend may be at an end: Indian companies are now coming to the party with big money acquisitions in the coal sector and 2011 could well be the year of India Inc.

Coal, primarily thermal coal, is the commodity of choice for India as its substantial domestic coal reserves fail to keep pace with the rising demands of its power and steel sectors. India is expected to nearly triple its coal imports as it plans to increase power generation capacity, mainly through coal fired plants. As a result Indian companies are turning their gaze to foreign shores and Lanco Groups $750 million deal to buy parts of mining tycoon Ric Stowes Griffin Coal empire sends a strong signal.

Lancos move is the latest in a series of large investments by Indian companies into Aussie coal and comes on the heels of the massive $3 billion deal inked between Adani Group and Linc Energy in August.

Apart from Lanco and Adani, there is talk in M&A circles that coal miner Riversdale Mining also has a distinct Indian flavour with Indias Tata Steel, a major shareholder in Riversdale, expected to play a key role in Rio Tintos bid for the miner. There are also murmurs that a heavyweight coalition made up of Coal India, Rashtriya Ispat Nigam Ltd (RINL), power producer NTPC, iron ore miner NMDC and the Steel Authority of India (SAIL) could possibly put forward a rival offer for Riversdale. The five public sector companies which make up the consortium (International Coal Ventures Ltd or ICVL), may not have the individual financial muscle to take on Rio Tinto but as a combination have the capacity to give the mining giant a run for its money.

So could this be the long-awaited arrival of India Inc on Australian shores? Citi analyst David Haddad thinks it might be as after years of speculation the Indian companies seem a lot more serious this time around and are not afraid to spend big.

The Indians have looked at these assets over many years but investment really hasnt come in any sort of size or flow until very recently.

Haddad adds that the deal between Adani Group and Linc highlights that Indian suitors are probably taking a long term view and are willing to invest more time and capital to get the associated infrastructure up and running.

Lanco may be relatively unknown in Australia but with a market capitalisation of about $US3 billion, the Indian conglomerate is involved in a number of sectors including construction, power, infrastructure, property development and renewable energy. In fact the last five years have been a remarkable period for a company that was once just another small fry in the Indian power industry.

Lanco, run by one of Indias richest men L Madhusudhan Rao, has made no secret of the fact that the play for Griffin Coal is fundamentally about securing supply to large reserves of coal to feed its power plants. The fact that Lanco is happy to pour in another $750 million to expand production at Griffin and upgrade the existing infrastructure only highlights just how serious Indian companies are about fuel security.

Rao, ranked number 29 in Forbes Asias list of Indias richest with a family fortune of $US2.3 billion, is following in the footsteps of another Indian tycoon, Gautam Adani. Adani runs Indias largest importer of thermal coal, Adani Group, which paid Linc $500 million cash for its coal assets in the Galilee basin plus another $2.4 billion in projected royalty payments over 20 years. He started his career as a diamond broker in 80s, is the 7th richest person in India with a personal fortune of $US4.8 billion and is another who is punting that Indias rising demand for coal is a business opportunity too good to miss.

In addition to Lanco and Adani Group, Indian diversified conglomerate Aditya Birla Group also has a presence in Australia through the companys aluminium and copper powerhouse, Hindalco. Hindalco is the majority owner of ASX-listed Aditya Birla Minerals Co (ABMC) which owns the Nifty copper mines in Western Australia and Queensland. The conglomerates focus has so far been on expanding its aluminium and copper business but the company re-entered the Indian power sector in July and that may whet its appetite for Australian coal.

Another Indian conglomerate to keep an eye on is the Essar Group run by billionaire brothers Shashi and Ravi Ruia. With annual revenues of around $US15 billion Essar is a major steel producer and its power unit, Essar Energy, is India's second largest power generation company in the private sector. Essar has been actively picking up coal assets in the US, Indonesia and was involved in the tussle for Perth-based coal minnow Rocklands Richfield last year.

While theres plenty of Indian appetite for coal assets, Citis Haddad doesnt think it will translate into hunger for gold and iron ore given that India has quite large reserves of iron ore and has traditionally exported a lot of that to China. The view is backed up by the head of metals and mining at UBS Australian unit, Campbell Stewart, who says that Indian companies are likely to stick to the coal sector given its importance in the overall Indian energy equation.

However, Stewart is a little more circumspect with regards to where the next big play is going to come from given that new deposits are getting harder to find and are located further away from rail and port infrastructure. Much of the activity at the moment is driven by cashed-up tycoons like Rao and Adani, and Stewart says the next wave of activity will depend on whether Indian public sector heavyweights like Coal India and SAIL show their hand.

Coal India is the world's largest coal producer and recently raised $3.5 billion in India's largest initial public offering. The company is currently in negotiations with Peabody Energy on a multi-billion dollar deal that could potentially see it gain control of coal mines in Australia and the US. It has also been tentatively linked with Whitehaven Coal, which has begun the formal process of hunting for potential bidders. Coal India is currently sitting on $8 billion war chest and given the burgeoning Indian demand for coal it could play a big part in the next wave of M&A activity in local coal sector.

M&A activity in coal this year has been characterised by the entry of strategic investors whether a utility or a steel maker which are willing to buy into early stage projects backed by large resources. Tata Steels holdings in Riversdale is an example of this sort of dealmaking and given Indias growing demand the likes of Cockatoo Coal, Resource Generation and Bandanna Energy could well be on India Incs hit list in 2011.