| Vedanta Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA / Negative / CRISIL A1+ '; rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/Negative/CRISIL A1+’ ratings on bank facilities and debt instruments of Vedanta Limited (Vedanta).
On March 28, 2023, CRISIL Ratings has revised its outlook to ‘Negative’ from ‘Stable’ due to possibility of higher-than-expected financial leverage and lower financial flexibility with reducing ratio of cash surplus to 1-year maturities for fiscals 2023 and 2024. This is due to increased cash outflow from Vedanta, in the form of dividends, towards large maturing debt obligations at its parent company viz. Vedanta Resources Ltd (VRL; rated 'B-/Stable' by S&P Global Ratings). This is owing to increased refinancing risk at VRL and moderating operating profitability (Ebitda [earnings before interest, tax, depreciation, and amortisation]) of Vedanta.
VRL has annual debt maturities of around $3 billion each in fiscals 2024 and 2025 with high near-term maturities of ~ USD 1.7 billion in the first quarter of fiscal 2024. CRISIL Ratings understands that the company is in discussion with lenders for refinancing upcoming maturities of first quarter of fiscal 2024 and as part of its plan company has signed a term-sheet to refinance $1 billion of debt backed by cashflows of subsidiary, Zinc International Ltd. That said, the progress on the refinancing plans have been slower than expected, thereby resulting in increased dividend payout by Vedanta and reduced cash & cash equivalents during the fiscal. Including the recent dividend announced by Hindustan Zinc Ltd (HZL, Vedanta’s subsidiary; 'CRISIL AAA/Stable/CRISIL A1+’), dividend payout by Vedanta for fiscal 2023 will be more than Rs 40,000 crore (highest ever, including dividend payout by HZL to its minority shareholders). This is expected to result in cash balance of less than Rs 20,000 crore for March 2023 against more than Rs 30,000 crore in March 2022.
In case of any further delay in the expected refinancing plan, dependence on dividend payouts by Vedanta will increase; Vedanta currently has cash balances only to cover for VRL’s maturities for the first half of fiscal 2024, and hence will be a key rating sensitivity factor.
While maturities of the first quarter of fiscal 2024 should be paid off, CRISIL Ratings understand that VRL will look to part refinance and part repay the maturities beyond the first half of fiscal 2024 as well. However timely closure (at least 3-6 months before) of a credible refinancing/repayment plan for maturities of the second half of fiscal 2024 and thereafter, will be a key monitorable as VRL faces significant refinancing risk till fiscal 2025.
Vedanta’s consolidated operating profitability for fiscal 2023 has witnessed moderation due to higher-than-expected cost of production in key businesses such as aluminium and zinc, along with lowering of commodity prices from historical levels of last fiscal. Consolidated Ebitda is likely to drop this fiscal to ~ Rs 35,000 crore from earlier expectation of ~ Rs 38,000-40,000 crore (around Rs 45,000 crore in fiscal 2022). This along with reduced cash balance is likely to result in consolidated net leverage increasing to more than 3 times in fiscal 2023.
That said, operating profitability has remained robust and significantly higher than pre-pandemic levels. Further, consolidated Ebitda is expected to increase to more than Rs 40,000-42,000 crore from fiscal 2024, driven by healthy commodity prices that are expected to remain stable around current levels, robust operating rates across key businesses, increased volume growth in aluminium business supported by commissioning of new capacity during fiscal 2024 along with expected reduction in cost of production for aluminium business on the back of alumina refinery expansion and commissioning of captive coal mines.
The ratings continue to reflect the expectation that increased operating profitability should support planned capital expenditure (capex), dividend outlay to support part debt repayment for VRL, and is expected to result in net leverage reducing to below 2.6-2.7 times in fiscal 2024 and sustainably below 2.5 times thereafter while improving liquidity from current levels, in the base case.
However, slower-than-expected ramp up in Ebitda or delayed/lower-than-expected refinancing by VRL resulting in higher-than-expected dividend outlay during fiscal 2024, could further reduce cash balance as well as net leverage sustaining above 2.6-2.7 times. This will be a key rating sensitivity factor.
CRISIL Ratings noted the management’s focus on deleveraging, articulated through the capital allocation policy and other public interactions—including the intent to reduce the debt of VRL by around USD 4 billion by fiscal 2025. VRL has already witnessed debt reduction of ~ USD 2 billion in fiscal 2023. Thus, expected reduction in consolidated gross and net debt (including the debt at VRL) should support financial flexibility of Vedanta and VRL over the medium term and will be a key monitorable. Further updates on actions taken by the promoters to enhance the corporate structure and the consequent impact on leverage will bear watching.
The ratings also consider the strong business risk profile of Vedanta, driven by its diversified presence across commodities, cost-efficient operations in the domestic zinc and oil and gas businesses, improving profitability in the aluminium business and large scale of operations. These strengths are partially offset by high debt, large capex and dividend and susceptibility to volatility in commodity prices and regulatory risk. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Vedanta and its subsidiaries, collectively known as the Vedanta group, as they have operational and financial linkages. Key subsidiaries include HZL; the group's zinc business in Namibia and South Africa (termed Zinc International); Bharat Aluminium Company Ltd (Balco; 'CRISIL A1+’); Talwandi Sabo Power Ltd (‘CRISIL AA (CE)/Negative/CRISIL A1+ (CE)’); and ESL Steels Ltd (‘CRISIL AA/Negative/CRISIL A1+’).
CRISIL Ratings has included the debt of VRL (estimated at around USD 7.4 billion [excluding outstanding ICL of USD 450 million] or around Rs 61,000 crore as on February 28, 2023) while calculating the adjusted debt. This is because despite no legal recourse of VRL’s debt holders to Vedanta, this debt needs to be serviced using the dividend outflow from Vedanta or refinanced, based on the implicit strength of the investments held by VRL, primarily Vedanta.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths
The Vedanta group is present in various businesses spanning zinc, lead, silver, aluminium, oil and gas, iron ore, power and steel. The group is among the largest producers in all these segments and, thus, commands a strong market position in India. A well-diversified business risk profile cushions it from commodity-specific cyclicality and risks.
The domestic zinc, lead and silver businesses are supported by low cost of production, large reserve and continued resource addition. Profitability in the oil and gas business is aided by low operating cost and a business model that ensures recovery of capex. Cash flow in this business will be driven by capex-led improvement in volume over the medium term.
The Delhi High Court, through its order dated March 26, 2021, had ruled in favour of the government in the dispute over additional 10% profit from petroleum demanded by the government under the profit-sharing contract (PSC) extension policy for the Rajasthan block. This led to increased cash outflow toward profit sharing at 60% with Government of India. While the court order shall result in reduced profit margin for the oil and gas business, profitability should still remain healthy. Notably, the government was providing only short-term extensions for continuity of operations in the Rajasthan block. However, the government has extended the PSC contract for the Rajasthan block during fiscal 2023, for 10 years, effective post May 2020. This shall remove the element of uncertainty towards continuity of operations for the Rajasthan block. Furthermore, additional claim of dues related to disallowed cost, raised by the Directorate General of Hydrocarbons, is under arbitration.
Improved linkage coal sourcing (over 70% in fiscals 2021 and 2022 from 45% in fiscal 2018) reduced coal prices, while lower cost of imported alumina improved cost efficiency for the aluminium business (Ebitda of over USD 525 per tonne during fiscal 2021 against less than USD 150 per tonne in fiscal 2020). With improved production rates, continued cost efficiency and strong aluminium realisation, Ebitda per tonne for the aluminium business of Vedanta further increased to over USD 1,000 in fiscal 2022.
However, in the first nine months of fiscal 2023, increased power cost due to lower materialisation of linkage coal and higher coal cost in the market (power cost increasing to around $1000/tonne in the first nine months, compared with around $700/tonne in fiscal 2022) led to increased cost of production (CoP) to more than $2,400/tonne as compared to average CoP of $1,858/tonne in fiscal 2022. This, along with lower aluminium realisations, resulted in reduced Ebitda margin for the aluminium business with Ebitda per tonne declining to around USD 280 per tonne during the first nine months of fiscal 2023 from more than USD 1,000 in fiscal 2022.
However, with gradual improvement in domestic coal availability (linkage coal materialisation is understood to have improved to more than 90% post second quarter of the fiscal), and operationalisation of captive coal mines at Jamkhani coal mine, Radhikapur (west) coal block and Kuraloi (A) north coal block in Odisha during fiscals 2023 and 2024, and the focus on increasing local bauxite and alumina sourcing is expected to enhance cost efficiency over the medium term. Moreover, Vedanta has emerged as the highest bidder for Ghorgharpalli and its Dip Extension Coal Block in Sundargarh, Odisha, which will improve coal security for the aluminium business. This, along with ongoing expansion in the refinery capacity to 5 million tonne per annum (MTPA) from 2 MTPA, should enhance operating efficiency next fiscal onwards. Any material delay in structural improvement in operational integration of the aluminium business resulting in lower-than-expected improvement growth in the profitability of the business segment will remain a key monitorable.
Increased mined metal capacity of 1.2 MTPA in domestic zinc, along with ramp-up of Gamsberg’s operations in Zinc International, will support the ramp up in volume. Furthermore, expected addition of new wells and surface facilities during fiscals 2023 and 2024 should increase volume for the oil and gas business over the medium term. Further, Vedanta is undertaking brownfield expansion of its aluminium smelter capacity by 414 kilo tonne per annum (under Balco). Expansion of aluminium refining capacities to 5 MTPA from the existing 2 MTPA is expected to be completed by fiscal 2024. This would further support volume growth over the medium term. Healthy volume growth is likely to make the overall business risk profile more resilient.
Weaknesses
Continued assistance through dividend payout to the parent, VRL, to support the latter’s debt has resulted in significant cash outflow to minority shareholders. Though Vedanta has undertaken significant annual capex (about Rs 13,500 crore and Rs 9,000 crore in fiscals 2022 and 2021, respectively) more than proportionate boost in profitability improved net leverage to 2.2 times as on March 31, 2022 (3.1 times a year ago). Capex (including sustenance capex) increased to around Rs 12,200 crore in the first nine months of fiscal 2023 and is expected to remain significant over the medium term (Rs 15,000-20,000 crore in fiscals 2023 and 2024, towards growth capex in the aluminium, zinc and oil and gas businesses. This along with moderation in operating profitability and higher-than-expected dividend payout will increase leverage this fiscal. However net leverage may drop below 2.7 times next fiscal and to below 2.5 times over the medium term, with expected improvement in profitability and continued focus on deleveraging. However, profitability remains susceptible to volatility in the prices of metals and oil and gas. Any material acquisition or higher-than-expected cash outflow to support VRL will remain a key monitorable.
As per the capital allocation policy of Vedanta and as articulated by the management, potential strategic growth acquisition of Bharat Petroleum Corporation Ltd, if it happens, and proposed entry in the semi-conductor and display production business (recently formed joint venture between the Vedanta group and Foxconn) will not be done through Vedanta or its parent and will not be linked with the balance sheets of Vedanta or its parent entities. However, further developments on this front remain a monitorable.
The businesses are vulnerable to regulatory risk. The copper smelting plant at Thoothukkudi in Tamil Nadu has been shut since May 2018 following a directive from the Tamil Nadu Pollution Control Board. Suspension of the iron ore mining operations in Goa currently, and in Karnataka in the past, have adversely impacted the iron ore business. Furthermore, the March 2021 order of the Delhi High Court on PSC extension, ruling against the company, will reduce the profit margin for the oil and gas business. |
Liquidity: Adequate Liquidity of Vedanta remains healthy Cash accrual, projected at around Rs 28,000 crore (pre-dividend payout) in fiscal 2023 and more than Rs 30,000 crore (pre-dividend payout) in fiscal 2024, comfortably covered Vedanta’s term debt obligation of 4,800 crore for the second half of fiscal 2023 and is also expected to cover Rs 10,800 crore for full fiscal 2024. Cash balance was Rs 23,474 crore (net of inter-company loans to VRL) as on December 31, 2022. However, a part of the cash is held by HZL, which is accessed through dividends and thus results in outflow towards minority shareholders. However, post the dividend payouts during the fourth quarter of fiscal 2023, including the recent dividend announcement by HZL, the cash balance is expected to reduce to less than Rs 20,000 crore in March 2023. That said, flexibility towards capex and significant unutilised bank limit (around Rs 11,000 crore as on December 31, 2022) supports Vedanta’s liquidity. Vedanta may also look to refinance a significant portion of its principal debt obligation in fiscals 2023 and 2024, based on its strong banking relationship and refinancing track record.
Liquidity for parent, VRL witnessing moderation The parent, VRL, has an annual interest expense of around Rs 5,500 crore (around USD 650-700 million) towards its outstanding debt, which is mainly serviced through dividends received from Vedanta and partly through management and brand fee received from Vedanta. Debt repayments of the parent in fiscal 2023 were serviced through a mix of refinancing and dividend received from Vedanta. That said, VRL, has near-to medium-term refinancing risk with scheduled debt repayment of ~USD 3.0 billion in fiscals 2024 and 2025 (including upcoming bond maturity of USD 900 million in April and May 2023). With reducing cash balance at Vedanta, the ratio of cash surplus to 1-year maturities of VRL is reducing, thereby constraining the financial flexibility of VRL. However, VRL is expected to refinance/part repay the same in a timely manner. Debt reduction at VRL will be supported by mix of dividend payouts by Vedanta and strong banking relationships and track record of refinancing by VRL. However, any delay in expected timelines for refinancing or repayment for VRL’s debt will be a key rating sensitivity factor.
Environment, social, and governance (ESG) profile Vedanta has a dominant position in the metals and mining sector and has diversified its business risk profile with presence across multiple commodities such as zinc, aluminium, oil and gas, and iron ore. However, for the ESG assessment, CRISIL Ratings has evaluated Vedanta’s top-three business segments (zinc, aluminium and oil and gas) which, on a combined basis, contribute more than 85% to the consolidated operating profit.
The ESG profile supports the already strong credit risk profile of Vedanta. The metal and mining sector has a significant impact on the environment owing to high greenhouse gas (GHG) emissions, waste generation and water consumption. This is because of the energy-intensive manufacturing process and its high dependence on natural resources such as coal. The sector also has a significant social impact because of its large workforce across its operations and value chain partners, and also as its operations affect the local community and involve health hazards.
Key ESG highlights
There is growing importance of ESG among investors and lenders. The commitment of Vedanta to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowing in its overall debt and access to both domestic and foreign capital markets (mainly by VRL). |
Outlook Negative Vedanta’s profitability, leverage and financial flexibility could be materially impacted by slower-than-expected improvement in operational cost efficiencies, subdued volume growth in operational entities along with delayed/lower-than-expected refinancing by VRL. |
Rating Sensitivity factors Upward factors Rating outlook can be revised to ‘Stable’ in case of:
Downward factors Rating can be downgraded in case of:
|
About the Company VRL holds 69.7% stake in Vedanta and has diversified operations across metals, mining, power, and oil and gas segments.
|
Key Financial Indicators
Note: These reflect CRISIL Ratings-adjusted consolidated financials |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^ Fund-based limit is completely interchangeable with non-fund-based limit #Non-fund-based limit of Rs 2000 crore is interchangeable with fund-based limit *Capex letter of credit limit is interchangeable with operational non-fund-based limit % Yet to be placed |
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Criteria Details
|