By Mahaveer Jain

India Ratings and Research (Ind-Ra) has rated Vedanta Limited’s additional commercial paper (CP) as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CP

-

-

7-365 days

INR20

IND A1+

Assigned

The CP proceeds will be used for meeting working capital requirements and fulfilling general corporate purposes.

KEY RATING DRIVERS

Strong Volume Ramp-Up across Segments: The rating reflects the continued volume ramp-up at Vedanta in FY19, particularly in the aluminium and zinc divisions. The volume ramp-up in aluminium will be supported by the commissioning of new pots at Plant 2 in Jharsuguda, while zinc volumes will be supported by increased mining along with debottlenecking of the smelting capacity. Cumulatively, Vedanta would incur a capex of USD1.1 billion-1.2 billion in FY19 to achieve the required volume growth. However, the iron ore business has been impacted with the ban of mining in state of Goa starting mid-March 2018. 

Strong, Diversified Business Profile: Vedanta has a significant presence across 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 a strong performance in other businesses. Also, treatment and refining margins in the copper business declined in FY18 and are likely to remain subdued in FY19, in line with the global benchmarks, thus impacting the segment’s profitability. 

Cost Leadership: Vedanta’s Indian zinc operations (held through Hindustan Zinc Limited (HZL)) are integrated and the cost of production (CoP) is in the first quartile of the cost curve, with strong mining assets and a long reserve life. Though Vedanta is benefitting from the current output prices, it also saw an increase in input costs notably in the zinc and aluminium businesses. Ind-Ra expects input cost pressure to ease in FY19, as pots in the aluminium segment come on-stream and coal availability improves. However, the company largely depends on external purchase of bauxite and alumina which results in a higher CoP. The recent announcement of long-term bauxite policy by Odisha is a positive.

Additionally, Ind-Ra expects CoP in HZL to decline in FY19, 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 both at Vedanta Resources PLC (VRPLC) and at the standalone levels, thus easing the repayment pressure over the next 12-15 months. Vedanta has debt maturities of USD1 billion and USD0.95 billion in FY19 and FY20, respectively, while VRPLC has proforma debt maturities of USD0.9 billion and USD0.4 billion in FY19 and FY20 , respectively, after accounting for tied-up funds. Ind-Ra while arriving at the rating considered the net debt at both Vedanta and VRPLC. 

Commodity Prices Strengthen:
 The prices of the key commodities (aluminium and zinc) have strengthened through FY18. 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 in 2HFY18. FY19 EBITDA would be supported by higher volumes and a lower CoP even if the prices were to soften. 

Net Leverage Level to Decline; Highly Leveraged Parent
: Ind-Ra expects the consolidated net leverage levels, inclusive of VRPLC debt, 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 positive free cash flows at the consolidated 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 leakages 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

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


COMPANY PROFILE

Vedanta is a diversified natural resources player, with a significant presence in zinc, oil and gas, copper, aluminium, iron ore, and power. Vedanta’s 9MFY18 revenue and EBITDA was INR653 billion and INR173 billion, respectively.

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)

Current Rating

31 October 2017

20 December 2016

31 March 2016

Issuer rating

Long term

-

IND AA/Positive

IND AA/Positive

IND AA/Negative

IND AA/Negative

Non-convertible debentures* (NCDs)

Long term

INR57

IND AA/Positive

IND AA/Positive

IND AA/Negative

IND AA/Negative

Term loan

Long term

INR46.20

IND AA/Positive

IND AA/Positive

IND AA/Negative

IND AA/Negative

Project finance facility

Long term

INR5

IND AA/Positive

IND AA/Positive

IND AA/Negative

IND AA/Negative

CP

Short term

INR150

IND A1+

IND A1+

-

-

*Details in annexure

ANNEXURE

Instrument Type

ISIN

Date of Issue

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs#

INE268A07103

25 October 2012

9.40

25 October 2022

INR5

WD

NCDs#

INE268A07111

27 November 2012

9.40

27 November 2022

INR5

WD

NCDs#

INE268A07129

6 December 2012

9.24

6 December 2022

INR5

WD

NCDs#

INE268A07137

20 December 2012

9.24

20 December 2022

INR5

WD

NCDs

INE268A07145

5 April 2013

9.10

5 April 2023

INR25

IND AA/Positive

NCDs

INE268A07152

4 July 2013

9.17

4 July 2023

INR7.5

IND AA/Positive

NCDs

INE268A07160

5 July 2013

9.17

5 July 2023

INR4.5

IND AA/Positive

NCDs^

-

-

-

-

INR20

IND AA/Positive

#withdrawn due to paid in full
^unutilised


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, 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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Mahaveer Jain

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001768

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121