By Vivek Jain

India Ratings and Research (Ind-Ra) has undertaken the following rating action on Vedanta Limited’s (Vedanta) commercial paper (CP) programme:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CP

-

-

7-365 days

INR130

IND A1+

Assigned

The CP proceeds will be used to fund any working capital requirements and meet general corporate purposes.

KEY RATING DRIVERS

Net Leverage Moderate: Vedanta saw an improvement in credit metrics due to cost efficiencies, improved commodity prices and higher volumes. In FY17, Vedanta’s consolidated net leverage (adjusted consolidated net debt/EBITDA), inclusive of its parent’s (Vedanta Resources Plc (VR)) debt, declined to 3x in FY17 from 4x in FY16. At FYE17, Vedanta’s gross debt, including VR’s debt, was USD19.5 billion (FY16: USD17.2 billion) while cash was USD9.7 billion (USD7.9 billion). Ind-Ra expects the consolidated net leverage levels to decline further in FY18 on a recovery in commodity prices and volume ramp-up underway at key business segments.

Diversified Business Profile: Vedanta has a robust and diversified business profile, with significant presence in zinc, oil and gas, copper, aluminium, iron ore, and power. The rating factors in the low cost of operations in a majority of Vedanta’s businesses, especially oil and gas and zinc, which together contributed over 68% to consolidated EBITDA in FY17. Vedanta’s zinc operations, which are held through Hindustan Zinc Limited (HZL), are integrated and the cost of production is in the first quartile of the cost curve, with durable mining assets having a long reserve life.

Strong Volume Ramp-Up Across Segments: Vedanta is likely to witness a healthy volume ramp-up in FY18 and beyond, particularly in its aluminium, zinc and iron ore segments. The volume ramp-up in the aluminium segment will be supported by the starting of the additional pots in lines 3 and 5 at its smelter in Jharsuguda by 3QFY18 and that in the zinc segment will be supported by increased mined ore from the Sindesar Khurd mine.  Moreover, the iron ore business volume will see an increase in volume, given the likely increase in the state mining limit in Goa.

Meanwhile, Vedanta is undertaking a capex of USD250 million in the oil and gas business to increase volume in FY19. Cumulatively, VL would incur a capex of USD1.25 billion in FY18 to achieve the required volume growth.


Commodity Prices Strengthen: The prices of key commodities aluminium and zinc strengthened over the last two quarters. Rising prices, along with Vedanta’s low-cost operations and volume ramp-up, have ensured a healthy EBITDA. Ind-Ra expects Vedanta to register USD4.2 billion in EBITDA for FY18, driven by strong prices and healthy volume ramp-up beginning 3QFY18. FY19 EBITDA would be supported by volume ramp-up and lower cost of production, even if prices soften.

Linkages with Parent: VR’s holding in Vedanta reduced to 50.1% from 62.9% on the completion of Cairn India Limited’s merger with Vedanta. At end-1QFY18, VR had a debt of USD 5.9 billion. The parent largely depends on dividend income from Vedanta to service this debt. The refinancing exercise has been successfully completed at Vedanta and VR thus easing the repayment pressure over the next 15-18 months. However, VR would need refinancing after 15-18 months, given debt servicing at VR happens largely by way of dividends from Vedanta. After the refinancing activity, Vedanta has debt maturities of USD0.9 billion and USD1.1 billion in FY18 and FY19, respectively, while VR has debt maturities of nil and USD0.8 billion in FY18 and FY19, respectively.

Structural Subordination to Cash Access: In March 2017, HZL declared a dividend of INR140 billion, INR75 billion of which was received by Vedanta and about INR33 billion was received by VR. Thus, debt servicing at VR needs material cash upstreaming and leads to leakages, which can impact the leverage levels. Cash accessibility from cash-rich subsidiaries Cairn India and HZL was challenging owing to Vedanta being a minority shareholder in the companies and significant leakages as upstreaming happened through dividends. After the Cairn India merger, however, Cairn India’s cash would be accessible to Vedanta for deleveraging either Vedanta or VR, though upstreaming of cash to VR would still lead to a 50% leakage. HZL had a cash balance of INR322 billion and a debt of INR79 billion at FYE17. Net debt increased to USD10.7 billion in 1QFY18 from USD9.9 billion in FY17, as Vedanta made dividend payments during the period.


RATING SENSITIVITIES

Negative: The short-term rating is unlikely to change, given the cushion available in the Long-term rating.


COMPANY PROFILE

VL is a diversified natural resources player, with a significant presence in zinc, oil and gas, copper, aluminium, iron ore, and power.

FINANCIAL SUMMARY

Parameters

FY17

FY16

Revenue (INR billion)

762

680

EBITDA(INR billion)

214

152

EBITDA margin (%)

28.0

22.3

Interest coverage (x)

3.65

2.63

Source: Vedanta


RATING HISTORY


 

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

2 June 2017

20 December 2016

31 March 2016

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Negative

IND AA/Negative

Non-convertible debentures (NCDs)*

Long-term

INR57

IND AA/Stable

IND AA/Stable

IND AA/Negative

IND AA/Negative

Term loan

Long-term

INR46.20

IND AA/Stable

IND AA/Stable

IND AA/Negative

IND AA/Negative

Project finance facility

Long-term

INR5

IND AA/Stable

IND AA/Stable

IND AA/Negative

IND AA/Negative

CP

Short-term

INR130

IND A1+

-

-

-


* The details of the NCDs are given in annexure.

ANNEXURE

Instrument Type

Date of Issue

Coupon (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs

25 October 2012

9.40

25 October 2022

INR5

IND AA/Stable

NCDs

27 November 2012

9.40

27 November 2022

INR5

IND AA/Stable

NCDs

6 December 2012

9.24

6 December 2022

INR5

IND AA/Stable

NCDs

20 December 2012

9.24

20 December 2022

INR5

IND AA/Stable

NCDs

5 April 2013

9.10

5 April 2023

INR25

IND AA/Stable

NCDs

4 July 2013

9.17

4 July 2023

INR7.5

IND AA/Stable

NCDs

5 July 2013

9.17

5 July 2023

INR4.5

IND AA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

Ind-Ra is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Vivek Jain

    Director
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567249

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121