Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities and non convertible debentures of Vedanta Ltd (Vedanta; part of the Vedanta group) to ‘CRISIL AA’ from ‘CRISIL AA-’, while revising the watch to ‘Rating Watch with Developing Implications’ from ‘Rating Watch with Positive Implications’. Furthermore, CRISIL Ratings has reaffirmed its rating on the short-term bank facilities and commercial paper programme at ‘CRISIL A1+’.

 

The rating upgrade factors in the expected material improvement in the consolidated operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]) of Vedanta, along with improved capital structure with reduction in debt and leverage to below rating thresholds. Furthermore, overall credit profile has improved with better financial flexibility by increasing operating cash accrual and reducing debt, especially at Vedanta Resources Ltd (VRL; rated ‘B-/Positive‘ by S&P Global Ratings).

 

The company’s consolidated Ebitda is expected to increase to more than Rs 44,000-45,000 crore by the end of fiscal 2025 (Rs 36,455 crore in fiscal 2024). This will be supported by favourable prices (already improved from the levels seen in the first half of the current fiscal) and cost reduction through various initiatives, especially in the aluminium and zinc businesses. The Ebitda is expected to improve further in fiscal 2026, with expected completion of ongoing capital expenditure (capex) for capacity increase and operating efficiency improvement, especially in the aluminium business (to be commissioned by the end of fiscal 2025). The said increase in Ebitda will support the ongoing capex (expected to be ~Rs 20,000 crore each in fiscals 2025 and 2026) as well as scheduled debt repayment over the medium term.

 

CRISIL Ratings has also taken note of the promoter’s stated commitment towards continued debt reduction. This has also been reflected through various fundraising activities such as qualified institutional placement (QIP) and offer for sale (OFS) by Vedanta as well as stake sale by the parent, VRL, which has supported debt reduction this fiscal. Thereby, the expected increase in Ebitda, along with the reduction in debt (net debt reducing to less than Rs 1.15 lakh crore in fiscal 2025 and to less than Rs 1.1 lakh crore in fiscal 2026 and further lower thereafter) should support reduction in consolidated net leverage to below 2.6 times in fiscal 2025 (from 3.2 times in fiscal 2024) and to sustainably below 2.5 times in fiscal 2026 and thereafter.

 

The rating action also factors in material reduction in refinancing risk with reduced external debt at VRL (reduced to ~$4.9 billion in October 2024 from $6 billion as on March 2024) as well as lower annual maturities (to be less than $1 billion per annum) and reducing annual interest obligation. This has also been supported by recent bond refinancing activities by VRL (refinanced bonds of $2 billion post September 2024 with reduced rate of interest). The said reduction in interest cost and annual maturities of VRL will support material reduction in need for higher dividend , which is expected to be significantly lower from fiscal 2026 onwards. This, along with higher operating profitability, will aid Vedanta’s free operating cash flow (post dividend and capex) as well as liquidity to materially increase from next fiscal and will remain a key monitorable.

 

Furthermore, the ratings have factored in reduced cost of borrowing for Vedanta for incremental debt raised during the current fiscal from the levels seen in the second half of fiscal 2024, and is likely to witness further reduction, going forward, with the company’s ongoing fund-raising plans. The expected reduction in the cost of borrowing, along with continued fundraising by Vedanta in a timely manner, will be monitorable.

 

CRISIL Ratings has taken note of admission to the National Company Law Tribunal (NCLT) of the proposed demerger of Vedanta’s businesses into separate listed companies, thereby increasing the likelihood of successful completion of the demerger.

 

That said, the rating watch continues to factor in the impending demerger of Vedanta’s aluminium, oil and gas, power, base metal (zinc international and copper business) and iron and steel businesses into separate standalone listed entities. The deal is still in process and will need requisite approvals, including from shareholders and lenders, through the NCLT process and could take a few quarters for completion. Also, final clarity on allocation of assets and liabilities across entities under the proposed structure, along with the support philosophy for each entity by the group, is yet to emerge. This will be critical for evaluating the final credit profiles of the entities, including Vedanta, under the proposed structure and for resolution of the rating watch. However, based on the current understanding, CRISIL Ratings does not expect material dilution in the credit profile and liquidity of separate entities after the demerger, as majority of the debt is likely to be supported by higher cash generating businesses. That said, CRISIL Ratings will continue to monitor developments regarding the proposed organisational restructuring and final liability allocation.

 

The ratings continue to factor in the strong business risk profile of Vedanta, driven by its presence across commodities, cost-efficient operations in the domestic zinc, aluminium and oil and gas businesses, and improving capital structure. These strengths are partially offset by large debt repayment, substantial capex and dividend payouts, 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, considering their operational and financial linkages. Key subsidiaries include Hindustan Zinc Ltd (HZL, ‘CRISIL AAA/Stable/CRISIL A1+’); the group's zinc business in Namibia and South Africa (termed zinc international); Bharat Aluminium Company Ltd (Balco; 'CRISIL AA-/Positive/CRISIL A1+); Talwandi Sabo Power Ltd (‘CRISIL AA (CE)/Watch with Developing Implications/CRISIL A1+ (CE)’); and ESL Steels Ltd (‘CRISIL AA/Watch with Developing Implications/CRISIL A1+’).

 

CRISIL Ratings has included debt of VRL, which is estimated at $4.9 billion (excluding outstanding intercompany loans [ICL] of $417 million) or Rs 42,005 crore as on October 31, 2024, to calculate the adjusted debt. This is because despite no legal recourse of VRL’s debt holders to Vedanta, debt servicing by the parent will depend on the dividend outflow from Vedanta or refinancing, 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:

Expectation of strong increase in consolidated operating profitability

Vedanta’s consolidated operating profitability (Ebitda, excluding brand and management fees to VRL) is expected to increase to more than Rs 45,000 crore in fiscal 2025, (Rs 36,500 crore in fiscal 2024) mainly supported by volume growth in aluminium, zinc international and iron ore segments; improved cost efficiencies in zinc and aluminium; and healthy metal prices. While strong metal demand and increasing capacities will support volume growth, metal prices have also improved in the current fiscal, supported by improving global demand, especially from China. CRISIL Ratings expects average metal prices during the current fiscal, especially for zinc and aluminium, to be 15-17% higher than the average for fiscal 2024. Furthermore, the company has strong asset base along with prudent capital allocation. It is also undertaking growth and efficiency improvement capex in multiple segments, especially in aluminium and zinc. This will further support margin profile and Ebitda levels over the medium term. During the first half of fiscal 2025, Vedanta reported Ebitda of Rs 20,639 crore against Rs 18,809 crore in the first half of fiscal 2024, which is expected to reach average quarterly Ebitda rate of Rs 12,000 crore or more during the remaining six months of fiscal 2025 and thereafter. The expected increase in annual Ebitda will support increased cash accrual necessary to support ongoing capex and debt reduction. Given the volatile nature of commodity prices, sustenance of continued ramp up in Ebitda to expected annual levels will be a key rating sensitivity factor.

 

Significantly reduced refinancing risk at VRL

VRL has witnessed significant reduction in debt over the past two fiscals, to ~$4.9 billion as on October 30, 2024, from $9.2 billion as on March 2022. This has been supported by large dividend payout by Vedanta over the past 2-3 fiscals, as well as fund raise through stake sale by VRL in Vedanta. Furthermore, post-liability management exercise in January 2024, VRL witnessed elongation of the debt tenure. Also, VRL has undertaken timely refinancing during the current fiscal, wherein it has refinanced outstanding ~$2 billion bonds, with tenures of 5-7 years, along with reduced cost of borrowings. Thereby, VRL’s annual principal debt maturities are expected to be $800-900 million per annum from fiscal 2026 onwards (VRL’s principal debt obligation of ~$220 million in the second half of the current fiscal), and annual interest expense is expected to be $550-575 million per annum (at current cost), after April 2025. CRISIL Ratings expects the said annual interest expense and debt maturities, post Apil 2025, to be largely managed by annual brand and management fee and materially reduced annual dividend outflow by Vedanta. In case of any open refinancing risk at VRL, CRISIL Ratings expects it to be materially low and should be refinanced in a timely manner.

 

Furthermore, VRL’s demonstrated ability to raise funds by stake sale during the current fiscal, along with its existing shareholding in Vedanta being comfortably higher than 50% (currently at ~56%), and the group’s track record of successful refinancing provide comfort and flexibility towards VRL’s refinancing requirement. That said, timely closure (more than 6 months in advance) of any refinancing risk either at VRL or Vedanta will remain key monitorable.

 

Reducing debt levels to support deleveraging and improve financial flexibility 

The promoters and group management have been articulating about increased focus on deleveraging balance sheets at VRL as well as at operating levels. This commitment has been reflected in recent fundraising events such as QIP and OFS by Vedanta and stake sale by VRL, which have resulted in cumulative fundraising of $1.9 billion by the group during April-August 2024. This will support reduction in debt levels at VRL (already reduced to $4.9 billion as of October 2024 from $5.7 billion in March 2024 and $9.1 billion in March 2022) as well as at the operating company levels. CRISIL Ratings expects consolidated net debt to reduce below Rs 1.1 lakh crore as of March 2025, which had increased by more than Rs 20,000 crore during the past two fiscals to reach net debt of Rs 1.18 lakh crore as of March 2024. Net debt should continue to decline further after fiscal 2025 as well. Expected reduction in debt levels will be a key monitorable as, along with improved Ebitda levels, it is expected to sustainably reduce net leverage to below 2.5 times.

 

Diversified business risk profile

The Vedanta group operates across 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, thus commanding a strong position in the domestic market. A well-diversified business risk profile cushions the group against commodity-specific risks and cyclicality.

 

Low-cost position of key businesses

The domestic zinc, lead and silver businesses are supported by low cost of production, large reserves 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. Furthermore, the aluminium business has witnessed improvement in profitability since the last fiscal and is currently operating in the top quartile of global cost curves for primary aluminium producers. The cash flow will be driven by capex-led growth in volume as well as cost efficiencies over the medium term.

 

Higher integration to support profitability in the aluminium business over the medium term

The company is undertaking sizeable capex in the aluminium segment to increase the smelter capacity (from 2.4 million tonne per annum [MTPA] to 3 MTPA), higher share of value-added products (from 1.4 MTPA to 2.6 MTPA), and increased level of backward integration through alumina refinery expansion and commissioning of captive coal and bauxite mines. While smelter capacity expansion will increase the overall volume base, increase in value-added product share will support higher product premium over London Metal Exchange (LME) prices of aluminium, thereby supporting the margin. Furthermore, increasing integration levels will support sustained decline in cost of production, providing improved resilience to Ebitda per tonne in the aluminium segment to sustain above $700-800 per tonne. Ebitda per tonne had already increased to $871 in the first half of fiscal 2025, up from $598 in the fourth quarter of fiscal 2024 ($494 in fiscal 2024, up from $322 in fiscal 2023). This was mainly driven by higher aluminium LME, reduction in power cost due to improved materialisation of linkage coal and fall in coal prices as well as benefits of increase in alumina refinery capacity to 3.5 MTPA from 2 MTPA (plan to expand refinery capacity to 5 MTPA).

 

However, the capex has already witnessed multiple time overruns and is currently expected to be completed over the next 3-4 quarters. Timely commissioning of the ongoing capex without any further time and cost overruns will be monitorable to support sustained profitability increase in the aluminium segment.

 

Strong volume growth expected with capital allocation towards the zinc, aluminium and iron ore businesses

Increased mined metal capacity in domestic zinc, along with ramp-up of Gamsberg’s (South Africa) operations in zinc international, will support the scale-up in volume. Furthermore, Vedanta is undertaking brownfield expansion of its aluminium smelter capacity (by 414 kilo tonne per annum in Balco) and increasing its level of integration by expanding its refinery, commissioning of captive coal mines and increasing the share of value-added products. All these projects are expected to be commissioned in a phased manner by fiscal 2026. In addition, CRISIL Ratings understands that the company will be increasing its iron ore capacities (domestic as well as overseas) over the next 1-2 years, which would further support volume growth. While the company is looking to divest its steel business to support deleveraging, CRISIL Ratings understands that no binding sale agreement has been executed, which will be monitorable.

 

Weaknesses:

High outstanding debt (including VRL); though expected to improve fiscal 2025 onwards

Vedanta has had high debt levels over the past few fiscals on account of large debt of its parent. Furthermore, continued assistance through dividend payout to the parent to support the latter’s debt servicing has resulted in significant cash outflow to minority shareholders as well as increase in debt at operating company levels. This has resulted in net leverage remaining high at 3.2 times as of March 2024 and 3.4 times in March 2023. That said, with the recent fundraising by the group through stake sale by VRL, and QIP and OFS by Vedanta, along deleveraging at VRL and with increase in operating profitability, consolidated net leverage reduced to ~ 2.7 times (on trailing twelve months Ebitda) as of September 2024 and will improve to sustainably to below 2.5-2.6 times in fiscal 2025 and thereafter, with net debt expected to reduce to below Rs 1.10-1.14 lakh crore.

 

Also, repayment of high-cost borrowings is expected to result in reduced interest expense which, along with expected material reduction in annual dividend outflow (as VRL’s debt servicing requirements reduce from fiscal 2026), will improve operating cash accrual and, in turn, support reduction in net leverage to sustainably below 2.5 times as well as improvement in other debt coverage metrics from fiscal 2026 and thereafter. Thus, expected reduction in consolidated gross and net debt (including debt at VRL) should support the financial flexibility of both Vedanta and VRL over the medium term, and will be monitorable. Any change or delay in these expectations will be a key rating sensitivity factor.

 

Sizeable planned annual capital outlay, however likely to peak by next fiscal

The company has been incurring sizeable capex over the past fiscals (Rs 16,000 crore in fiscal 2023, ~ Rs 11,000 crore in fiscal 2024, and expected at Rs 19,000-20,000 crore in fiscals 2025 and 2026 each), it is likely to be funded through a mix of debt and internal accrual. The said capex is mainly towards capacity expansion as well as efficiency and product mix improvement across multiple businesses. Once completed, the same is expected to materially improve the operating earnings base from next fiscal, especially with expected commissioning of smelter and refinery capacities in the aluminium business by the end of fiscal 2025. That said, profitability remains susceptible to volatility in the prices of metals and oil and gas. Any further delay in ramp-up of annual Ebitda against expectations, material acquisition or higher-than-expected cash outflow to support VRL will remain monitorable.

 

CRISIL Ratings also understands that the proposed capex for the semi-conductor and display production businesses (after calling off the joint venture with Foxconn) will now be executed under Vedanta. However, the management has articulated that the project is at a nascent stage and there will be no immediate capital outlay towards it. Progress in the semiconductor business will depend on identification of a new technology partner and various regulatory approvals, including the production-linked incentive scheme, which are monitorable. CRISIL Ratings understands that there is no major capex requirement for the Konkola Copper Mines Plc (KCM) business over the medium term and the same is not to be undertaken at Vedanta level. Further developments in this regard will remain monitorable.

 

Susceptibility to changes in regulations

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 and Karnataka in the past have adversely impacted the iron ore business. Furthermore, the March 2021 order of the Delhi High Court on profit sharing contract (PSC) extension, ruling against the company, has reduced profit margin for the oil and gas business.

 

Vedanta is also exposed to the recent ruling by the Supreme Court of India in August 2024, wherein the court upheld the state government’s right to tax mineral rights and mineral bearing lands on the retrospective basis, from April 2005. However, payments will be spread over 12 years, starting from April 1, 2026. Additionally, interest and penalties on demands for the period before July 25, 2024, will be waived. CRISIL Ratings understands from the management discussion that the current contingent liabilities for Vedanta and its subsidiaries, basis the demands raised so far, is limited and not material. However, the states are yet to come out with their final decision on imposition of such retrospective tax. CRISIL Ratings will monitor the developments on this matter and will assess the final implication as and when final clarity emerges.

Liquidity: Strong

Cash accrual before dividend payout, projected at or above Rs 30,000 crore in fiscal 2025 and more than Rs 32,000 crore in fiscal 2026, will comfortably cover Vedanta’s term debt obligation of ~Rs 12,580 crore for the remaining six months of fiscal 2025, and ~Rs 17,407 crore for fiscal 2026. Cash balance of Rs 21,727 crore (net of ICL to VRL, but including proceeds from QIP) as on September 30, 2024, unutilised bank limit (around Rs 10,900 crore as on October 31, 2024), and flexibility regarding capex, support liquidity at Vedanta. The company is in the process of refinancing a significant portion of its principal debt obligation in fiscals 2025 and 2026, based on its track record and strong banking relationships.

 

The parent continues to depend on Vedanta for its debt servicing, including annual interest expense of Rs 5,000-5,300 crore ($600-650 million) towards its outstanding debt, as VRL does not have any operations. VRL services it mainly through dividend received from Vedanta and partly through management and brand fees. While dividend outflow from Vedanta is expected to materially reduce over the medium term, CRISIL Ratings expects brand and management fee and routine dividends to cover majority of the debt obligation of VRL from the next fiscal, as VRL’s debt obligation reduces with reducing debt and refinancing at lower rate of interest, leaving limited risk of refinancing. However, CRISIL Ratings expects VRL to refinance it in a timely manner as the financial flexibility of the company has improved with improved earnings outlook for operating companies. Any delay in expected timelines for required refinancing (more than 6 months in advance) or future debt servicing 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 90% to the consolidated operating profit.

 

The ESG profile supports the existing 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 as its operations affect the local community and involve health hazards.

 

Key highlights

• Vedanta aims to become carbon neutral by 2050 or sooner – it envisages 25% reduction in GHG emissions intensity by 2030, from the 2021 baseline, and 25% reduction in its absolute carbon emission intensity by 2030. Vedanta has reduced GHG emissions by 57% from fiscal 2021 baseline.
• The company has been improving its water recycling rate and recycled 30% of total water consumed in fiscal 2024. It has set a target to achieve net water positivity by 2030. The company recycled 92% of its high-volume, low-toxicity waste in fiscal 2024 (162% in fiscal 2023), and targets zero net waste by 2025.
• The loss time injury frequency rate for Vedanta was 0.41 in fiscal 2024 against 0.42 in the previous fiscal for the permanent employees of the business. The company had more fatalities in the past year as compared to earlier. However, the company targets zero harm and fatalities going forward.
• Gender diversity is 20.0%, a target the company has achieved 6 years ahead of schedule (aim to increase the share of women employees to 20% by 2030)
• The governance structure is characterized by 50% of the board comprising independent directors (none with tenure exceeding 10 years), split in chairman and CEO positions, dedicated investor grievance redressal mechanism and healthy disclosures.
• Few regulatory issues, mainly related to environmental concerns, have led to suspension of some businesses (copper business in Tamil Nadu and iron ore mining in Goa due to state-wide ban on mining in Goa) in the past few years. These events have also had social impact due to job losses. These matters are sub judice.

 

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).

Rating Sensitivity Factors

Upward factors

• Significantly higher than expected increase in Ebitda owing to ramp-up in volume and continued cost efficiency across businesses and improving business resilience on sustained basis
• Sustained deleveraging with material reduction in consolidated gross and net debt on a continued basis, resulting in significantly higher-than-expected reduction in net debt to Ebitda ratio
• Structural improvement in profitability of aluminium business, through lower cost of production resulting in Ebitda per tonne improving materially over $900 on a sustained basis

 

Downward factors

• Lower-than-expected ramp up in Ebitda because of higher-than-expected cost of production, slower ramp-up in volumes or lower realisation
• Reduction in aluminium profitability, with total cost of production of aluminium structurally increasing significantly on a sustained basis
• Lower-than-expected reduction in gross and net debt with net debt to Ebitda ratio sustaining above 2.5 times
• Higher-than-expected dividend outflow or any incremental investment or acquisition by VRL or support to VRL or Volcan Investments Ltd, resulting in lower-than-expected free cash flow or leverage at Vedanta remaining higher than rating thresholds

Key Financial Indicators*

Particulars	Unit	FY24	FY23
Operating income	Rs crore	145,131	148,790
Profit after tax (PAT)	Rs crore	7,539	14,503
PAT margin	%	5.2	9.7
Adjusted debt/adjusted networth	Times	3.39	2.92
Interest coverage	Times	4.14	6.1

*CRISIL Ratings-adjusted numbers

For the first half of fiscal 2025, the company reported operating income of Rs 72,410 crore and PAT of Rs 10,698 crore (Rs 71,888 crore and Rs 2,393 crore, respectively, in the first half of fiscal 2024).

Any other information: Not Applicable