Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities and debt instruments of Vedanta Ltd (Vedanta; part of the Vedanta group) to ‘CRISIL AA’ from ‘CRISIL AA-‘, and has revised the outlook to ‘Stable’ from ‘Positive’. The short-term rating on bank facilities and commercial paper has been reaffirmed at ‘CRISIL A1+’

 

The rating action factors in stronger-than-expected operating profitability (earnings before interest, tax, depreciation and amortisation {EBITDA}), driven by elevated commodity prices during fiscal 2022, volume growth across businesses, and sustained cost efficiency, especially in the aluminium business. While commodity prices are likely to moderate in fiscal 2023, from current spot levels, prices are expected to remain healthy. EBITDA is thus, likely to be higher than expected, at over Rs 44,000 crore in fiscal 2022 (vis-à-vis around Rs 27,500 crore in fiscal 2021), and over Rs 40,000 crore in fiscal 2023, and aid improvement in free cash flow and return on capital employed over the medium term. Further, the management is expected to utilise the cash accruals to reduce the outstanding consolidated debt, and improve resilience to a decline in commodity prices.

 

Strong improvement in operating accrual and expected reduction in outstanding consolidated gross and net debt, should help net leverage drop to 2.2-2.3 times as on March 31, 2022, and to sustain below 2.5 times thereafter (net leverage was 3.1 times as on March 31, 2021).

 

Promoters have been looking to improve the corporate structure by increasing their shareholding in Vedanta Ltd. Between December 2020 and December 2021, they have increased their stake in Vedanta to 69.7% from 50.1%, through additional debt of nearly USD 2.4 billion. While this has helped reduce dividend payout to minority shareholders and enhanced the overall financial flexibility, it has also increased the consolidated debt. CRISIL Ratings believes that improved profitability of Vedanta in fiscal 2022, could help cut down debt at Vedanta Resources Ltd (VRL; rated 'B-/Stable' by S&P Global Ratings) from levels of December 2021, and thus support consolidated deleveraging. While promoter stake has increased by around 19.5% since December 2020 resulting in enhanced corporate structure for Vedanta, CRISIL Ratings understands that Vedanta’s promoters may explore further improvement in the corporate structure of the group. That said, given the focus of the management on deleveraging, articulated through the recent capital allocation policy, consolidated gross and net debt (including VRL’s debt) is expected to reduce in fiscal 2023. Further updates on actions taken by promoters to enhance the corporate structure and the consequent impact on leverage will be a key rating sensitivity factor.

 

Dividends from Vedanta will continue to help VRL meet its interest obligations, and the debt obligation in fiscal 2022, will be met through a mix of refinancing and dividends. That said, VRL faces near to medium term refinancing risk with scheduled debt repayments of USD 2.4 billion in fiscal 2023 (including upcoming bond maturity of USD 1,000 million in July 2022) and ~ USD 2.5 billion in fiscal 2024,. However, CRISIL Ratings believes VRL is expected to refinance/part repay the same in a timely manner. This should be supported by improved operating profitability and increased holding of the promoter in Vedanta. However, any delay in timely refinancing of debt at VRL will be a key monitorable.

 

Also, on November 17, 2021, Vedanta had announced setting up a committee to review the corporate structure and evaluate possible alternatives, including demerger(s), spin-off(s) and strategic partnerships, so as to unlock value and simplify the existing set-up. However, on February 8, 2022, the company announced that it will continue with the existing structure only.

 

As per the capital allocation policy of Vedanta, and as articulated by the management, potential strategic growth acquisition of BPCL, if happens, will not done through Vedanta or its parent, and will not be linked with balance-sheets of Vedanta or its parent entities. However, further developments on this front will remain a monitorable.

 

The ratings continue to reflect 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, improved profitability in the aluminium business and the large scale of operations. These strengths are partially offset by high debt, large capital expenditure (capex) and dividend, and susceptibility to volatility in commodity prices and regulatory risk.

 

CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) aggregating Rs 900 crore (see annexure 'Details of Rating Withdrawn' for details) on receipt of an independent confirmation of their redemption. The ratings are withdrawn in line with the withdrawal policy of CRISIL Ratings.

Analytical Approach

To arrive at the ratings, 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 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 A1+’); Talwandi Sabo Power Ltd (TSPL; ‘CRISIL AA (CE)/Stable/CRISIL A1+ (CE)’) and ESL Steels Ltd (ESL; ‘CRISIL AA/Stable/CRISIL A1+’). Refer to the annexure for the consolidated list of entities.

 

CRISIL Ratings has included the debt of VRL (estimated at around USD 9.4 billion or around Rs 70,000 crore as on December 31, 2021), 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:

• Diversified business risk profile:

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 profile cushions it from commodity-specific cyclicality and risks.

 

• 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. Cash flow in this business will be driven by from 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 petroleum demanded by the government under profit sharing contract (PSC) extension policy for the Rajasthan block. This had resulted in increased cash outflow of around USD 60 million for fiscal 2021 for Vedanta. While the court order shall result in reduced profit margin for the oil and gas business, profitability should still remain healthy. Notably, the government has been providing only short-term extensions for continuity of operations in the Rajasthan block. Furthermore, additional claim of dues related to disallowed cost, raised by the Directorate General of Hydrocarbons (DGH), is under arbitration. While CRISIL Ratings understands from the company that the government is likely to approve the final PSC in the near term (with effect from May 15, 2020), it would be a key monitorable.

 

• Strong operating profitability in the aluminium business:

Improved linkage coal sourcing (over 70% in fiscal 2021, from 45% in fiscal 2018,), reduced coal prices, and lower cost of imported alumina, had 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, Vedanta reported EBITDA per tonne of more than USD 950 during the first nine months of fiscal 2022. Increased share of captive and linkage coal, supported by access to the Jamkhani coal mine, Radhikapur (west) coal block and Kuraloi (A) north coal block in Odisha, and focus on increasing share of local bauxite and alumina sourcing, should further enhance cost efficiency over the medium term. The ongoing refinery capacity expansion (announced on February 4, 2021) to 5 mtpa (from current capacity of 2 mtpa), should also enhance operating efficiency.

 

• Strong volume growth expected over the medium term, with capital allocation towards value-accretive zinc, aluminium and oil and gas businesses:

Increased mined metal capacity of 1.2 million tonne per annum (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 fiscal 2023, may lead to higher volume in the oil and gas business going ahead. Strong volume growth over the medium term, is likely to make the overall business risk profile more resilient. Vedanta is undertaking brownfield expansion of its aluminium smelter capacity by 414 KTPA (under subsidiary Balco). Expansion of aluminium refining capacities to 5 MTPA from existing 2 MTPA, is expected to be completed by fiscal 2024. This would further support volume growth over the medium term.

 

Weaknesses:

•  Large dividend payout to support increasing debt at VRL, along with significant capex, resulting in high leverage over the past years; expected to improve going ahead:

Continued assistance through dividend payout to the parent, VRL, to support the latter’s debt, has been resulting in significant cash outflow to minority shareholders. This, along with sizeable annual capex (about Rs 6,000 crore and Rs 9,000 crore in fiscals 2021 and 2020, respectively) and high consolidated net debt (including VRL) led to elevated net leverage of 3.1 times as on March 31, 2021 (3.8 times a year ago). While net debt at Vedanta has reduced by more than Rs 7,500 crore in the last four quarters, the debt at VRL has increased, due to stake increase in Vedanta. Capex is expected to increase over the medium term (Rs 12,000-15,000 crore in fiscals 2022 and 2023) mainly towards growth capex in aluminium and oil & gas businesses. Improved profitability is likely to support the capex, along with reduction in consolidated debt as well as net leverage to sustainably below 2.5 times over the medium term. However, the profitability margin remains susceptible to volatility in prices of metals and oil and gas. Any material acquisition or higher-than-expected cash outflow to support VRL will remain a key monitorable.

 

• Exposure to changes in regulations:

The businesses are vulnerable to regulatory risk. Since May 2018, the copper smelting plant at Thoothukkudi, Tamil Nadu, has been shut down, following a directive from the Tamil Nadu Pollution Control Board. Suspension of 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 result in reduced profit margin for the oil and gas business.

Liquidity: Strong

The company had cash balance of Rs 25,207 crore (net of inter-company loans to VRL) as on December 31, 2021. However, a part of the cash is held by HZL, which is accessed through dividends, and thus, results in outflow towards minority shareholders. Liquidity is also supported by a significant, unutilised bank limit (around Rs 10,000 crore as on December 31, 2021).

 

Expected cash accrual of over Rs 9,000 crore in last quarter of fiscal 2022 and Rs 30,000 crore in full fiscal 2023, should comfortably cover the term debt obligations of around Rs 1,850 crore in the last quarter of fiscal 2022 and more than Rs 9,800 crore in fiscal 2023. In addition, flexibility towards capex also supports liquidity. Vedanta may also look to refinance a significant portion of its principal debt obligation in fiscal 2023 as well, based on its strong refinancing track record.

 

The parent, VRL has an annual interest expense of around Rs 5,000 crore (around USD 650-700 million) towards its outstanding debt, which will be mainly serviced through dividends received from Vedanta. VRL’s debt repayments in fiscal 2022 will be serviced through mix of refinancing and dividend received from Vedanta. That said, VRL has near to medium term refinancing risk with scheduled debt repayments of USD 2.4 billion in fiscal 2023 (including upcoming bond maturity of USD 1.0 billion in July 2022) and around USD 2.5 billion in fiscal 2024,. However, VRL is expected to refinance/part repay the same in a timely manner, and bond repayment scheduled in July 2022 is expected to be refinanced/part paid atleast a quarter in advance. The same will be supported by increased access to cash accrual of Vedanta Ltd, post the increase in shareholding to 69.7% and successful refinancing track record of VRL.

 

Environment, Social, and Governance (ESG) profile

Vedanta has a dominant position in the metals and mining sector, and has diversified its business profile with presence across multiple commodities such as zinc, aluminium, oil & gas, iron ore, etc.  However, for the ESG assessment, CRISIL Ratings has evaluated Vedanta’s top three business segments, namely zinc, aluminium and oil & gas, which on a combined basis, contribute more than 85% of consolidated operating profit.

 

CRISIL Ratings believes that Vedanta’s ESG profile supports its already strong credit risk profile. 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, as key inputs. The sector also has a significant social impact because of its large workforce across its operations and value chain partners, and also due to its nature of operations affecting local community and health hazards involved.

 

Key ESG highlights:

• Vedanta aims to become carbon neutral by 2050 or sooner, whereby it envisages to reduce the GHG emissions intensity by 20% by 2025, from the 2012 baseline. It also aims to reduce its absolute carbon emission intensity by 25% by 2030. Vedanta had reduced its GHG emissions intensity to 61.96 million TCo2e/INR million in fiscal 2021 from 71.36 TCo2e/INR million in fiscal 2020.
• Vedanta has been improving its water recycling rate to 30.71% in fiscal 2021, from 24.25% in fiscal 2019, and has set a target to achieve net water positivity by 2030. The company has also recycled around 94% of its high volume low toxicity waste in fiscal 2021 (88% in fiscal 2020), and targets zero net waste by 2025.
• Its loss time injury frequency rate (LTIFR) of 0.56 is among the lowest in the sector, and has improved from 0.67 in fiscal 2020. The company targets to achieve zero harm and fatalities.
• Gender diversity is at 11.2% currently and the company aims to improve it by increasing the share of women employees to 20% by 2030.
• The governance structure is characterised by 50% of the board comprising independent directors (none of them having tenure exceeding ten 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 few businesses (copper business in Tamil Nadu and iron ore mining in Goa due to state-wide ban on mining in Goa) over the past few years. These events have also had social impact mainly due to job losses. However, the matters related to closure of said businesses are currently subjudice.

 

There is growing importance of ESG among investors and lenders. Vedanta’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets (mainly by parent, VRL).

Outlook: Stable

Vedanta’s credit risk profile should continue to benefit from strong commodity prices, low cost of production across key businesses, and expected volume growth, resulting in high operating profitability. Expected increase in profitability and utilisation of free cash flow towards debt reduction should support deleveraging and sustained improvement in financial profile.

Rating Sensitivity factors

Upward factors:

• Higher-than-expected EBITDA on account of ramp-up in volume with continued cost efficiency across businesses, and improving business resilience
• Sustained deleveraging with material reduction in consolidated net debt, resulting in sustenance of net debt to EBITDA ratio below 1.8 times

 

Downward factors:

• Significantly lower-than-expected EBITDA because of high cost of production, slower volume ramp-up or lower realisation
• Delay in meaningful correction in financial leverage with net debt to EBITDA ratio sustaining above 2.5-2.7 times
• Sustained negative free cash flow (post capex) or any incremental investments or support to VRL or Volcan Investments Ltd

Key Financial Indicators

Particulars	Unit	2021	2020
Operating income	Rs crore	89,135	87,269
Profit after tax (PAT)	Rs crore	15,032	(4,744)*
PAT margin	%	16.9	(5.4)
Adjusted debt / adjusted networth	Times	1.54	1.67
Interest coverage	Times	5.73	4.53

Note: These reflect CRISIL Ratings-adjusted consolidated financials

*Includes non-cash exceptional expense on account of impairment of assets in fiscal 2020

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
INE205A07170	Debentures	09-Dec-19	9.20%	09-Dec-22	750	Simple	CRISIL AA/Stable
INE205A07196	Debentures	25-Feb-20	9.20%	25-Feb-30	2000	Simple	CRISIL AA/Stable
INE205A07188	Debentures	30-Jan-20	8.75%	30-Jun-22	1270	Simple	CRISIL AA/Stable
INE205A07204	Debentures	17-Feb-21	7.50%	17-Mar-22	500	Simple	CRISIL AA/Stable
INE205A07212	Debentures	31-Dec-21	7.68%	31-Dec-24	1000	Simple	CRISIL AA/Stable
NA	Debentures%	NA	NA	NA	6500	Simple	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	7000	Simple	CRISIL A1+
NA	Fund-based facilities**	NA	NA	NA	6655	Not applicable	CRISIL AA/Stable
NA	Non-fund-based limit*	NA	NA	NA	13610		CRISIL A1+
NA	Non-fund-based limit##	NA	NA	NA	500		CRISIL AA/Stable
NA	Term loan	21-Apr-14	NA	31-Mar-31	381.8		CRISIL AA/Stable
NA	Term loan	25-Jul-14	NA	30-Sep-22	1064.2		CRISIL AA/Stable
NA	Term loan	25-Jul-14	NA	30-Sep-25	904.4		CRISIL AA/Stable
NA	Term loan	21-Apr-14	NA	30-Jun-31	400.9		CRISIL AA/Stable
NA	Term loan	03-Aug-18	NA	31-Mar-28	2671.9		CRISIL AA/Stable
NA	Term loan	27-Jul-18	NA	30-Sep-24	264		CRISIL AA/Stable
NA	Term loan	14-Aug-18	NA	14-Nov-23	600		CRISIL AA/Stable
NA	Term loan	30-Nov-19	NA	31-Mar-25	398.6		CRISIL AA/Stable
NA	Term loan	30-Sep-18	NA	30-Dec-28	420.2		CRISIL AA/Stable
NA	Foreign currency  term loan$	30-Sep-19	NA	30-Nov-22	380		CRISIL AA/Stable
NA	Foreign currency  term loan$	04-Mar-20	NA	31-Mar-23	398		CRISIL AA/Stable
NA	Term loan	12-Mar-20	NA	30-Jun-25	218.7		CRISIL AA/Stable
NA	Term loan	31-Oct-20	NA	31-Jan-25	116.5		CRISIL AA/Stable
NA	Term loan	26-Aug-21	NA	30-Sep-26	1965		CRISIL AA/Stable
NA	Term loan	30-Aug-21	NA	30-Sep-26	490		CRISIL AA/Stable
NA	Term loan	15-Sep-21	NA	30-Sep-26	490		CRISIL AA/Stable
NA	Term Loan	28-Sep-21	NA	30-Sep-26	1144.3		CRISIL AA/Stable
NA	Term loan	28-Dec-21	NA	30-Sep-27	7920		CRISIL AA/Stable
NA	Term loan	13-Dec-21	NA	30-Sep-26	300		CRISIL AA/Stable
NA	Term loan	14-Dec-21	NA	30-Sep-26	750		CRISIL AA/Stable
NA	Term loan	31-Dec-21	NA	30-Sep-27	1000		CRISIL AA/Stable
NA	Proposed long-term bank loan facility	NA	NA	NA	2888		CRISIL AA/Stable

**Fund-based limit completely interchangeable with non-fund-based limit

* Non-fund-based limit of Rs 2,000 crore interchangeable with fund-based limit

## Capex LC limit, interchangeable with operational non-fund based limits

% Yet to be placed

$ Foreign currency non-resident (FCNR) loans

 

Annexure- Details of instruments to be withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned
INE205A07162	Debentures	9-Dec-19	8.90%	9-Dec-21	900	Simple	Withdrawn