Vedanta is either truly on the expansion path or it is selling copper and zinc for gold and silver

As the old saying goes: It is not all gold and silver that shines. Vedanta Resources might look like a shining opportunity for investors, but to test whether it is for real, Vedanta needs to be judged by the execution of its stated expansion plans.

Many doubts have been raised by the investment community about the motives behind the Vedanta Resources IPO. The whole IPO process from timing, choice of banks, deal structure, management changes, targeted investors (hedge funds), information material and distribution has given this IPO an air of too much polish and too little substance. For the moment it is no more then a construct to attract investors with the following arguments: - rapid growth of Indian economy - substantial growth in the metals business due to strong demand from China - seasoned, big name, management in the person of the just appointed non-executive chairman Brian Gilbertson - Many expansion plans The hedge funds believe that the wider investment community will go for this construct and will start buying Vedanta after the IPO. They therefore, with the help of the banks, had a front row seat and have flocked to get a part of the IPO and made it a success. What to do now as an investor that was not included in the IPO? Given all of the above, it is imperative for investors as well as the Vedanta management to focus on the very substance of this IPO. While the growth areas and recently appointed big name management is all nice to have in the backdrop, the real test is whether Vedanta can successfully implement the expansion plans. Let's have a look these plans. (Source: The Hindu Business Line) “The investment programme envisages expansion of the Sterlite-controlled Balco aluminium smelter, Orissa alumina refinery and Hindustan Zinc Ltd. On the expansion programme of the company, Mr Agarwal said in the copper business, the expansion plans, which are expected to be wrapped up by December 2003, included expanding the capacity of the Tuticorin smelter from 1.8 lakh tones per annum (tpa) to 3 lakh tpa of copper anode and commissioning of a 1.27-lakh tpa copper refinery in Tuticorin. In the aluminium segment, the company plans to invest in two Greenfield projects — a 2.5-lakh tpa aluminium smelter at the Korba complex and a one-million tpa alumina refinery in Orissa. The refinery is expected to enable the group to supply alumina to the new smelter at Korba, as also to access the export markets. In the zinc segment, the company's principal expansion plans for Hindustan Zinc include expanding the capacity of its Rampura Agucha mine from 2 million tpa to 3.3 million tpa, Rajpura Dariba and Zawar mines to 1 million tpa and 1.25 million tpa, respectively, and construction of a new zinc smelter at Chanderiya to increase zinc production capacity by 1.7 lakh tonnes. In addition, Mr Agarwal said Vedanta group was looking at prospects for acquiring copper mines in Zambia. He pointed out that Zambia had the best copper mines and we have been selected as the preferred group. "As and when we get an opportunity we will look at further acquisitions," he said.” This all looks nice on paper, but only if Vedanta can prove to its investors that it is indeed rapidly investing close to 100% of the proceeds of the IPO into the mentioned expansion initiatives and manages to get a good ROI in the short to mid-term it is worth the trust of investors. Given the nature of this business, it will be difficult to show real audited results within a year from now. Until then, if I were an investor, I would let the hedge funds sit on their shares and be nervous.