By Vivek Jain

India Ratings and Research (Ind-Ra) has revised Vedanta Limited’s Outlook to Positive from Stable while affirming the Long-Term Issuer Rating at ‘IND AA’. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-convertible debentures* (NCDs)

-

-

-

INR57

IND AA/Positive

Rating Affirmed; Outlook Revised to Positive from Stable

Project finance facilities

-

-

-

INR5

IND AA/Positive

Rating Affirmed; Outlook Revised to Positive from Stable

Term loans

-

-

December 2030

INR46.20

IND AA/Positive

Rating Affirmed; Outlook Revised to Positive from Stable

Commercial paper

-

-

7 to 365 days

INR130

IND A1+

Affirmed

* Details of the NCDs are provided in Annexure. The rated NCDs have put and call options.
 

KEY RATING DRIVERS

Strong Volume Ramp-Up across Segments: The Positive Outlook reflects the beginning of the volume ramp-up at Vedanta in FY18 particularly in aluminium and zinc, which is likely to continue. The volume ramp-up in aluminium will be supported by the restart of pots at Plant 1 and commissioning of new pots at Plant 2 in Jharsuguda by 3QFY17, while zinc volumes will be supported by increased mining along with debottlenecking of smelting capacity. The iron ore business volume could also see an increase, given the likely increase in the goa state’s mining limits.  Cumulatively, Vedanta would incur capex of USD1.1 billion-1.2 billion in FY18 with USD250 million in the oil and gas business in FY19 to achieve the required volume growth.

Strong, Diversified Business Profile
: Vedanta has a strong and diversified business profile with a significant presence in multiple business segments including zinc, oil & gas, copper, aluminium, iron ore, and power. The company has low operating costs in a majority of businesses, especially in its oil & gas and Indian zinc operations which together contributed over 63% to its consolidated EBITDA in FY17 (FY16: 66%). The diversification has helped Vedanta’s business, as underperformance in some businesses has been offset by strong performance in other businesses. The company has been trying to source bauxite to ensure complete backward integration as it depends on external purchase of alumina which results in a higher cost of production (CoP). Also, treatment and refining margins in the copper business declined in FY17 and are likely to remain subdued in FY18 in line with the global benchmarks, thus impacting the segments profitability.

Cost Leadership:
Vedanta’s Indian zinc operations (held through Hindustan Zinc Limited (HZL)) are integrated and the CoP is in the first quartile of the cost curve, with strong mining assets with a long reserve life. Though Vedanta is benefitting from the current output prices, it also saw an increase in input costs with notable ones being in the zinc business and the aluminium business. The Indian zinc business CoP increased to USD973/t in 1QFY18 (4QFY17: USD794/t, FY17: USD830/t) driven by lower volumes and a lower proportion of open cast mining. The aluminium segment’s CoP also increased in 1QFY18 to USD1727/t (4QFY17: USD1,492/t, FY17: USD1,463/t) as the prices of key inputs (alumina, coal, coke, tar) increased in addition to the pot realignment expenses incurred during 1QFY18. Ind-Ra expects input cost pressure to ease in 2HFY18 as pots in the aluminium segment come on-stream and coal availability improves. Additionally, CoP in the HZL is expected to decline in 2HFY18 as volume ramps up and the cost efficiency measures being put in place by HZL begin to show results, though the CoP would be higher than in the last year. Consequently, Vedanta shall remain in a structurally lower cost curve whose benefits will be visible over the medium term.

Successful Liability Management:
The company has successfully refinanced the debt at Vedanta Resources PLC (VRPLC) and at the standalone level, thus easing the repayment pressure over the next 12-15 months. Vedanta has debt maturities of USD0.7 billion and USD1.1 billion in FY18 and FY19, respectively, while VRPLC has proforma debt maturities of nil and USD0.8 billion in FY18 and FY19 after accounting for tied-up funds. Though Vedanta’s gross debt declined to USD12.2 billion as of 1QFY18 (4QFY17: USD13.2 billion including preference shares), its net debt increased to USD4.7 billion (USD3.4 billion including preference shares) as the cash balances declined to USD7.5 billion (USD9.8 billion) post the dividend pay-out from HZL and Vedanta in 1QFY18. Of the USD12.2 billion in gross debt, USD3.5 billion is the commercial paper outstanding. The debt at VRPLC declined to USD5.97 billion as of 1QFY18 (4QFY17: USD6.29 billion) post receipt of USD500 million in dividends from Vedanta during 1QFY18. Ind-Ra while arriving at the ratings considers the net debt at both Vedanta and VRPLC.

Commodity Prices Strengthen:
The prices of the key commodities (aluminium and zinc) have strengthened over the last two quarters. The rising prices coupled with Vedanta’s low-cost operations (excluding alumina) and volume ramp-up have ensured healthy EBITDA generation. Ind-Ra expects Vedanta to achieve EBITDA of USD4.2 billion in FY18, driven by both strong pricing and healthy volume ramp-up beginning 3QFY18. FY19 EBITDA would be supported by the higher volumes and lower CoP even if the prices were to soften.

Net Leverage Level to Decline; Highly Leveraged Parent:
Consolidated net leverage (adjusted consolidated net debt/EBITDA), inclusive of VRPLC debt, declined to 3x in FY17 (FY16: 4x), driven by an improvement in the EBITDA to USD3.3 billion (USD2.3 billion). Ind-Ra expects the consolidated net leverage levels to decline below 2.5x in FY18, driven by the improvement in EBITDA and a decline in net debt levels. This is because Vedanta is likely to generate USD1 billion-1.2 billion in free cash flow at the consolidated level after adjusting for dividend distribution in FY18 at HZL and at the standalone level. 

Vedanta’s parent is highly leveraged and hence depends on dividend income from the former and its operating subsidiary HZL to service its debt, which results in material cash leakage due to the presence of minority shareholders and dividend distribution taxes. A continued high level of dividends against Ind-Ra’s expectations could result in higher-than-expected leverage levels.


RATING SENSITIVITIES

Positive:  Strong EBITDA performance driven by the company’s ability to ramp-up volumes and reduce CoP leading to consolidated net leverage reducing below 2.5x on a sustained basis would result in a rating upgrade. 

Negative:
  consolidated net leverage sustained above 2.5x arising from lower-than-expected EBITDA and/or higher-than-expected capex and/or large debt-led acquisition and inability of the company to ease the repayment profile would result in Outlook being revised back to Stable.


COMPANY PROFILE

Vedanta is a diversified natural resources player. It posted revenue of INR762 billion in FY17 (FY16: INR680 billion) and EBITDA of INR214 billion (INR152 billion) at the consolidated level. 

FINANCIAL SUMMARY (Consolidated)

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)

Current Rating

9 October 2017

20 December 2016

31 March 2016

Issuer rating

Long term

-

IND AA/Positive

IND AA/Stable

IND AA/Negative

IND AA/Negative

NCDs

Long term

INR57

IND AA/Positive

IND AA/Stable

IND AA/Negative

IND AA/Negative

Term loan

Long term

INR46.20

IND AA/Positive

IND AA/Stable

IND AA/Negative

IND AA/Negative

Project finance facility

Long term

INR5

IND AA/Positive

IND AA/Stable

IND AA/Negative

IND AA/Negative

Commercial paper

Short term

INR130

IND A1+

IND A1+

-

-

ANNEXURE

Instrument Type

Date of Issue

Coupon Rate

(%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs

25 October 2012

9.40

25 October 2022

INR5

IND AA/Positive

NCDs

27 November 2012

9.40

27 November 2022

INR5

IND AA/Positive

NCDs

6 December 2012

9.24

6 December 2022

INR5

IND AA/Positive

NCDs

20 December 2012

9.24

20 December 2022

INR5

IND AA/Positive

NCDs

5 April 2013

9.10

5 April 2023

INR25

IND AA/Positive

NCDs

4 July 2013

9.17

4 July 2023

INR7.5

IND AA/Positive

NCDs

5 July 2013

9.17

5 July 2023

INR4.5

IND AA/Positive


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://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.

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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