Venugopal Dhoot, the 64-year-old head of the $3 billion Videocon Industries Ltd, is eyeing a major transformation of his company.
With investments in oil and gas blocks in countries such as Brazil, Indonesia, Australia and East Timor, Dhoot aims to turn Videocon from a largely consumer durables-driven firm to a global oil and gas exploration and production company in the next three years.
“Over the past 20 years, Videocon has diversified into oil and gas, power and telecommunications, but it is still known as a consumer durables company, as consumer durables account for 90% of the company’s revenue. However, in the next three years this will be reversed,” said Dhoot, chairman, Videocon, in a 17 June interview.
He added that by 2018, oil revenue from Brazil and Indonesia will start coming in and could be in the region of Rs.10,000 crore each, making the company’s oil and gas business the biggest contributor to the top line.
Videocon diversified into the oil and gas business in 1994 when the company signed a production-sharing contract for the Ravva oil and gas offshore block, off Kakinada in Andhra Pradesh, India, as a 25% non-operating partner.
Currently Ravva is the company’s only operational oil and gas block and contributes all of its upstream revenue. Oil and Natural Gas Corp. Ltd (ONGC) and Vedanta Resources Plc’s Cairn India Ltd are the other partners in the block.
Besides Ravva, Videocon’s flagship global asset is in Brazil, where the company has an interest in four major blocks through a 50:50 joint venture company, IBV Brasil Petroleo Limitada, with India’s Bharat Petroleum Corp. Ltd holding the remaining stake.
Brazil’s national oil company, Petrobras SA, is the operator in three of the four blocks. Videocon also has assets in Indonesia and East Timor, and shale gas assets in Australia.
Dhoot said that while its assets in Indonesia are expected to come onstream by early 2018, those in Brazil will start pumping crude oil from late 2018 and both will be potentially big revenue churners for the company.
As of December 2014, when the company posted its 18-month financial statement, Videocon had a revenue of Rs.20,995.28 crore, out of which the consumer durables business contributed Rs.17,567.54 crore, or 83% of the overall top line. Its oil and gas business, its second biggest segment, contributed Rs.1,898.95 crore, or just over 9%. The remaining came from telecommunications and power.
“Oil, by nature of what we have discovered (in Brazil), is gigantic; it will dwarf everything. It is the largest asset on our books,” said Saurabh Dhoot, director, Videocon. He added that the company’s crude oil discovery in Brazil is four times the size of the Bombay High oil asset owned by state-owned ONGC.
Bombay High is the biggest oil asset in India and produces close to 200,000 barrels of oil per day.
Still, the road ahead could be tough for the company as the current macroeconomic environment in oil and gas and Videocon’s own burgeoning debt could throw a spanner in the wheels of Dhoot’s ambitious plans, said analysts and consultants.
“There is currently a lot of uncertainty regarding projects in Brazil on account of a series of internal challenges at Petrobras. Everything points to a dilution of time lines on developments as there is a lot of scrutiny on projects currently in development,” said Rahool Panandiker, director and partner, The Boston Consulting Group.
Besides, he said, at current oil and gas prices, the economics of various projects across the world are not attractive.
“With a debt of $106 billion, Petrobras is the most indebted oil and gas company in the world and plans to sell off at least $13 billion of assets over the next two years. This will also entail a shift in the company’s focus from developing the fields of the future and shore up production from existing assets, and this will hurt BPCL,” said an analyst with an international brokerage.
This has to be seen in the context of the fall in crude prices, which have corrected by 50% in the last fiscal, raising doubts on several upstream investments, he said.
While the external issues are a problem, Videocon itself is saddled with massive debt, which could play spoilsport for the company’s oil and gas plans.
“Brazil is still in an exploratory stage and will require huge amounts of money to be invested by the partners in the assets held by Petrobras. With a huge debt of Rs.40,000 crore, Videocon will find the going very tough to invest that amount in the next few years as there are no other means of increasing cash flows for the company,” said an analyst with a domestic brokerage who did not want to be named.
He also questioned the time lines of the start of production from Brazil and Indonesia. BPCL, which is Videocon’s equal partner in Brazil and Indonesia, has been indicating a delay in production and has never talked about any major progress in Brazil.
The debt doesn’t bother Dhoot, who believes the sale of its Mozambique asset provides the company’s books the required cushion to raise further money for building its oil and gas business further.
Videocon had a consolidated debt of Rs.40,000 crore at the time it announced its 18-month results. Of this, foreign bank loans to the company’s oil and gas subsidiaries from foreign banks accounted for Rs.21,000 crore. Loans from Indian banks were at Rs.19,000 crore.
Dhoot looks at the numbers differently: Rs.6,000 crore is parked in the banks from the sale of Mozambique asset; so, effectively, the Indian loan is Rs.13,000 crore, which has been further reduced by Rs.2,000 crore in the last six months, he explained.
In January 2013, the company sold a 10% interest in its promising gas field off Mozambique in the Rovuma Area-1 to ONGC and Oil India Ltd (OIL) for $2.475 billion.
This money has been kept with State Bank of India, said Dhoot, who plans to use it as his war chest in the coming years.
“We have an arrangement with State Bank of India to continue our limits. At the year-end, we have to utilize 90% of the limit. So you see there are loans, but on the other side there are deposits as well,” he said.
Manoj Alimchandani, an independent investment adviser and a prominent shareholder in many blue-chip companies, said it is not surprising that Videocon is aiming to be an oil and gas company. “If you look at the quality of its assets and the expected cash flows, Brazil could be a game changer for Videocon, but it will happen as early as three years,” he said.
Another analyst with a domestic brokerage said Videocon has monetized its Mozambique asset very well and that it will eventually look at monetizing Brazil also. Videocon’s debt is a major problem and investors have always complained that the company treats its international oil and gas assets as an investment rather than a major business segment.
“Oil is my main business. If at all required, I might divest the consumer durables division,” he said, pointing out that his company is moving on the same trajectory as Reliance Industries Ltd (RIL).
“What was RIL in 1996-97? A textile company. Now they are an oil and gas company,” he said.