* Vedanta completed overhaul of complex structure last week
* Streamlined structure cuts cost of servicing debt
* Spending to drop while free cash flow seen rising
* Weaker Indian rupee a boost as costs drop
By Clara Ferreira-Marques and Karen Rebelo
LONDON/BANGALORE, Sept 4 (Reuters) - The end of an 18-month overhaul of Vedanta's byzantine structure, which has left the resources group leaner and better able to cut debt, has raised questions over future ambitions and the temptation to use new-found flexibility for more deals.
As with Indian rivals like Hindalco, part of billionaire Kumar Mangalam Birla's business empire, and major miners like Rio Tinto, Vedanta is more conservative than it once was, analysts and industry advisers say, held back by a debt burden that survived the streamlining of its web of subsidiaries and cross shareholdings.
But the sometimes unpredictable mining and energy group, almost 65-percent owned by Anil Agarwal, an ambitious scrap dealer turned metals tycoon, is also buoyed by falling spending needs, rising cash flows and the impact of a weak Indian rupee.
In the past months alone it has circled potential acquisitions including Rio's Canadian iron ore unit IOC and considered coal targets, sources familiar with the matter say.
Such a big deal, however, would have undone efforts to cut debt and even breached agreements with lenders; Rio values its 59 percent IOC stake at up to $4 billion, according to sources familiar with the matter, not far below Vedanta's own London market value of $4.9 billion.
Agarwal has grown his group through acquisitions and told a newspaper this year that earnings would double in the next two to three years, which makes some nervous about his intentions.
"It's always our biggest fear. No one likes empire building, and they certainly have bid for assets which aren't viewed that favourably," said analyst Ben Davis at Liberum in London.
Davis said the fact Vedanta had walked away from potential deals including Rio's IOC was reassuring.
Yet the high price Rio seeks for IOC and the protracted bid process there makes it unclear whether Vedanta did indeed drop out or found its bid rejected.
"They have always wanted to be builders, and have been proactive - the challenge is financing," said one industry adviser who has worked with the group, referring to debt left behind after the acquisition of Cairn India in 2011.
The Cairn deal took many by surprise; not only did the almost $9 billion takeover exceed Vedanta's own value, it was one of the largest deals in the Indian energy sector from a company with no experience in oil. The bet was on India's dependence on oil imports, and it has, in the short term at least, helped cushion the blow to Vedanta of a ban on iron ore exports.
As a result of the deal, Vedanta's net debt at the end of March was $8.6 billion. It is also among the most cash-rich miners in the industry - it had a cash pile of $8 billion, second only to Anglo American - but most of it is in subsidiaries, so getting hold of it at group level would involve leakage to the taxman and to minority shareholders.
"My general impression is that the company is not going to be doing large acquisitions, but I have absolutely no confidence that there won't be some opportunity that comes up," analyst Tom Gidley-Kitchin at Charles Stanley said.
Though total production still ranks below industry giants, Vedanta is one of the world's largest producers of metals such as zinc. Its newly created Sesa Sterlite unit, which houses all subsidiaries except Zambian copper, is the world's 7th-largest diversified natural resources group.
With mining majors placing billions of assets up for sale as they come under pressure to cut back, Vedanta - ambitious, generating more cash than it spends - emerges as a suitor. An expected buyout of the Indian government's minority stake in cash-rich Hindustan Zinc would further ease access to cash.
The company this week, asked about acquisitions, said it was focused on cutting debt and investor returns, having increased its dividend every year but one since its 2003 listing.
Yet few analysts and advisers will bet against a deal - potentially in coal, copper, oil or even iron ore.
"They are seduced by the thought of being a major conglomerate in India," said the one-time adviser.
One boost has been the collapse of the Indian currency, which has shed almost a fifth of its value against the dollar in 2013, bringing down costs and boosting margins as the commodities it sells are priced in dollars. For every 10 percent drop in the rupee against the dollar, the company says it gains $204 million at the core profit level.
It also means increased pressure from the Indian government on local courts to accelerate a decision to revoke a painful ban on some Indian iron ore mining and exports. That would restore for Vedanta a key source of revenue, profit, and, ultimately, cash.
That matters because using London shares as currency could still be tough; though the gap with London-listed peers has narrowed, Vedanta remains arguably undervalued, due to a conglomerate structure and unease among investors over corporate governance and the majority stake held by Agarwal.
It is one of the few London-listed, FTSE 100 groups controlled by one shareholder - a perceived risk that any unpredictable acquisition would enhance.
Its forward enterprise value relative to core profit is only about a quarter of its sector peers.
In a further indication of the market's lack of faith, the valuation for the London-listed group is virtually the same as the value of its stake in Sesa Sterlite.
This means the market is allocating no value at all to its majority holding in Konkola Copper Mines, the Zambian subsidiary valued between $5 billion and $7 billion when Vedanta tried to list it in 2010. Analysts currently value KCM at half that due to lower copper prices and operating underperformance.