By Mahaveer Jain

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

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Term loans

-

-

December 2030

INR46.20

IND AA/ Stable

Affirmed; Outlook revised to Stable from Positive

Project finance facility

-

-

-

INR5

IND AA/ Stable

Affirmed; Outlook revised to Stable from Positive

Commercial paper

-

-

7 to 365 days

INR150

IND A1+

Affirmed

Non-convertible debentures*^

-

-

-

INR57

WD

Withdrawn

*Withdrawn on repayment

^Details in Annexure         

               

Analytical Approach: Ind-Ra continues to take a consolidated view of VL and its subsidiaries and consider the debt of the parent company, Vedanta Resources Plc. (VRPLC), while arriving at the ratings.

KEY RATING DRIVERS

Deleveraging Delayed: The revision in outlook reflects the delay in deleveraging in FY19 and FY20 (FY18:2.9x; FY17: 3.1x) as against Ind-Ra’s expectations, due to acquisition outflows and higher-than-expected dividend distribution. The agency had earlier expected VL to deleverage below 2.5x in FY19. While FY20 leverage levels are likely to decelerate, it may remain high in the band of 2.5-3.0x, primarily due to continued large dividend outflows. While arriving at the consolidated net debt, Ind-Ra has considered VL’s consolidated debt, including operational buyer’s credit, and VRPLC’s debt. 

Profitability to Improve: Ind-Ra expects VL’s EBITDA to grow to USD4.1 billion-USD4.2 billion in FY20 (FY19E: USD3.6 billion), driven by volume growth at oil, aluminium, zinc (international) and zinc (India), and cost savings at the aluminium division. Ind-Ra further expects the aluminium division’s cost of production (CoP) to ease in FY20, with a substantial improvement in local bauxite and linkage coal mix. Additionally, Ind-Ra expects CoP in zinc (India) to decline in FY20, as the volume ramps up. 

Volume Ramp-Up across Segments:
 VL’s volume growth is likely to be underpinned by higher production in the aluminium, oil and gas and zinc divisions. The volume growth in aluminium will be supported by the newly commissioned pots at line two in Jharsuguda, Odisha, while zinc volumes will be supported by the ramp-up of the Gamsberg operations in South Africa along with the possible debottlenecking of its smelting capacity in India. The agency expects the oil division’s volumes to increase by 15-20% yoy due to the addition of new wells in FY19.  However, the iron ore business has been impacted by the mining ban in Goa starting mid-March 2018. Meanwhile, the copper division’s operations remain suspended following a stay on the National Green Tribunal’s order that directed the state government to grant the company consent to operate. 

Strong Diversified Business Profile:
 VL has a significant presence across multiple business segments, including zinc, oil and gas, copper, aluminium, iron ore, and power. The company has low operating costs in most of its businesses, especially the oil and gas and zinc (India) operations, which together accounted for about two-thirds of its consolidated EBITDA in FY18. The diversification has bolstered VL’s business profile, as underperformance in some businesses has been offset by a strong performance in others. VL’s Indian zinc operations (held through Hindustan Zinc Limited) are integrated and the cost of production is in the first quartile of the cost curve, with strong mining assets and a long reserve life. 

Dependency on Refinancing: VL’s free cash flows at the consolidated level are likely to be low in FY20, given the dividend outflows and capex plans. The company has planned a capital expenditure of USD1.2 billion-1.8 billion in FY20. Also, VL and VRPLC have debt maturities of USD0.9 billion and USD0.4 billion, respectively, in FY20. The agency believes VL would require a substantial portion of these maturities to be refinanced. 

Additionally, VL’s parent company depends on dividend income from the former and its operating subsidiary,
Hindustan Zinc Limited, to service its debt, which results in material cash leakages due to the presence of minority shareholders and dividend distribution taxes. VL’s access to domestic and international capital markets and its bank relationships may enable the company to meet its near-term refinancing requirements. 

Financial Flexibility Constrained: VL’s recent transaction with the ultimate parent (Volcan Investments Limited, Volcan) has heightened the risk of the company undertaking similar transactions to support Volcan’s voting rights in Anglo American Plc. However, based on the interactions with the management, the agency has not assumed any additional support to Volcan that could impact its financial flexibility or balance sheet risk. 

Moreover, the agency has not built in any material cash outlay on inorganic acquisitions. Any liability that may arise out of the erstwhile Cairn India Limited’s tax dispute, which involves a claim of INR205 billion, will be treated as an event, and as such, the ratings will be reactive.


RATING SENSITIVITIES

Positive:   A strong EBITDA performance, driven by the company’s ability to ramp-up volumes and reduce CoP, with a substantial increase in raw material input linkages, leading to the consolidated net leverage remaining below 2.5x, all on a sustained basis, may lead to a positive rating action. 

Negative: The below events, individually or collectively, could lead to a negative rating action -

  •           Increased risk of further participation in related party financing transactions
  •           Inability of the company take appropriate and timely action to address the concerns related to the recently announced financing transaction with Volcan
  •           The consolidated net leverage exceeding 3.0x on a sustained basis
  •           Delays in easing the repayment profile




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 (Consolidated)

FY18

FY17

Revenue (INR billion)

918,660

722,250

Operating EBITDA (INR billion)

251,640

213,310

Operating EBITDA margin (%)

27.39

29.53

Op. EBITDA/net interest expense (x)

4.4

3.6

Adj. net debt/op. EBITDA (x)

2.9

3.2

Source: VL, Ind-Ra

 

 




 

 

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

History/Outlook

Rating Type

Rated Limits (billion)

Current Rating

15 March 2018

20 December 2016

31 March 2016

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Positive

IND AA/Negative

IND AA/Negative

NCDs

Long-term

INR57

WD

IND AA/Positive

IND AA/Negative

IND AA/Negative

Term loan

Long-term

INR46.2

IND AA/Stable

IND AA/Positive

IND AA/Negative

IND AA/Negative

Project finance facility

Long-term

INR5

IND AA/Stable

IND AA/Positive

IND AA/Negative

IND AA/Negative

CP

Short term

INR150

IND A1+

IND A1+

-

-

ANNEXURE

Instrument Type

ISIN

Date of Issue

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs#

-

-

-

-

INR20

WD

NCDs

INE268A07145

5 April 2013

9.10

5 April 2023

INR25

WD

NCDs

INE268A07152

4 July 2013

9.17

4 July 2023

INR7.5

WD

NCDs

INE268A07160

5 July 2013

9.17

5 July 2023

INR4.5

WD

#Unutilised


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instrument, 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.

ABOUT INDIA RATINGS AND RESEARCH

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 and project finance companies. 

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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