Detailed Rationale

CRISIL Ratings has continued its ratings on the bank facilities and debt instruments of Vedanta Ltd (Vedanta; part of the Vedanta group) on ‘Rating Watch with Developing Implications’. CRISIL Ratings has also assigned its ‘CRISIL AA-/Watch Developing’ rating to the Rs.1000 crore non-convertible debentures.

 

CRISIL Ratings has withdrawn its rating on Rs 800 crore of Non-convertible debentures on its full redemption. The withdrawal is in line with CRISIL Rating’s withdrawal policy (See Annexure 'Details of rating withdrawn' for details).

 

The ratings continue to factor in the healthy operating performance of Vedanta during the first nine months of fiscal 2024, reduced dependence on large dividend payouts over the medium term due to lower maturities at the parent, Vedanta Resources Ltd (VRL; post the liability management exercise) and the expectations of CRISIL Ratings of improvement in liquidity and financial flexibility of Vedanta in the near term.

 

That said, despite reduction, VRL’s annual debt maturities and interest obligation remain meaningful for fiscals 2025 and 2026 and will require refinancing. This is because the expected dividend payout through operating cash accrual and brand and management fees by Vedanta may fall short against VRL’s annual debt obligation. However, more-than-expected dividend distribution, impacting liquidity at Vedanta, will remain a key rating sensitivity factor.

 

The developing watch continues to factor in the corporate announcement by Vedanta that it will demerge its aluminium, oil and gas, power, base metal (zinc international and copper business) and iron and steel businesses into separate standalone listed entities. However, the deal will need requisite approvals, including from shareholders and lenders, and could take 3-4 quarters for completion. Also, clarity on allocation of assets and liabilities across entities under the proposed structure, along with group/parent support philosophy for each entity, is yet to emerge. This will be critical for evaluating the credit profiles of the entities, including Vedanta, under the proposed structure and for resolution of the rating watch. Higher-than-expected allocation of the debt at resulting demerged entities leading to higher leverage than corresponding rating thresholds may result in a rating action. Based on the current understanding, CRISIL Ratings expects likely rating action to be not more than a notch. That said, CRISIL Ratings will continue to monitor developments regarding the proposed organisational restructuring.

 

The ratings also factor in expected improvement in financial flexibility of Vedanta due to the reduced refinancing risk at VRL after it successfully completed the liability management exercise earlier this quarter. CRISIL Ratings understands that Vedanta is in the process of raising funds with reduced cost of borrowing, which had increased recently. Lower-than-expected reduction in the cost of borrowing for any incremental fundraising by the company will be a key rating sensitivity factor.

 

The ratings continue to factor in the expectation that Vedanta’s consolidated operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]) for fiscal 2024 is expected to be around Rs 34,500 crore[1] (~Rs 35,250 crore in fiscal 2023). This will be supported by reduced cost pressure and healthy operating rates across key business segments, along with recent gains from the arbitration award in the oil and gas business, despite commodity prices remaining modest and slower-than-expected progress on the planned capital expenditure (capex) in the aluminium business.

 

Vedanta’s consolidated operating profitability in fiscal 2025 is expected to be above Rs 35,000 crore. This is on account of the expected increase in backward integration and volume in the aluminium business after commissioning of ongoing capex, robust operating rates across key businesses, and continued efficiency gains. Timely completion of the ongoing capex and ramp-up of new capacities and the consequent improvement in operating profitability will be a key monitorable.

 

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 and oil and gas businesses, and improving profitability in the aluminium business. These strengths are partially offset by high debt level, large capex and dividend payouts, and susceptibility to volatility in commodity prices and regulatory risk.

[1] It does not include brand and management fees paid to VRL

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-/CRISIL A1+/Watch Developing’); Talwandi Sabo Power Ltd (‘CRISIL AA- (CE)/CRISIL A1+ (CE)/Watch Developing’); and ESL Steels Ltd (‘CRISIL AA-/CRISIL A1+/Watch Developing’).

 

CRISIL Ratings has included debt of VRL (estimated around $5.7 billion [excluding outstanding intercompany loans [ICL] of $450 million) or Rs 47,500 crore as on September 30, 2023, to calculate the adjusted debt. This is because despite no legal recourse of VRL’s debtholders 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

• 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 from 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. Cash flow will be driven by capex-led growth in volume over the medium term.

 

Vedanta has recently won an arbitration award pertaining to the disallowed exploration costs claim, raised by the Directorate General of Hydrocarbons. CRISIL Ratings understands that this has resulted in higher profit-sharing with the Government of India. The management believes that this could be recovered over the next 4-5 quarters and thus support cash accrual.

 

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

Ebitda per tonne in the aluminium business rose nearly 42%, to $459 in the first nine-months of fiscal 2024, from $322 for the full fiscal 2023. This was mainly driven by a 35% drop in power cost, led by improved materialisation of linkage coal and fall in coal prices. On the contrary, cost of alumina was volatile due to lower domestic bauxite mix and maintenance shutdown of the refinery during the second quarter. CRISIL Ratings understands that the domestic bauxite mix will increase over the next three quarters and materialisation of linkage coal will improve over the medium term, along with sustenance of lower coal prices. Ebitda per tonne will likely improve to $500-550 for the current fiscal.

 

Vedanta is undertaking capex for backward integration of its aluminium business. As part of the capex, the alumina refinery capacity will be enhanced to 5 million tonne per annum (MTPA) in a phased manner over the next two quarters, from the existing 2 MTPA. The group also plans to develop captive coal mines with combined capacity of 34 MTPA and bauxite mine with a capacity of 6 MTPA. Bulk of this capex is to be implemented during the first half of fiscal 2025. Operationalisation of captive coal blocks at Kurloi north and Radhikapur (west) in the second quarter of the next fiscal in Odisha and focus on increasing local bauxite and alumina sourcing should enhance cost efficiency over the medium term. The coal block at Ghogharpalli in Odisha is likely to be commissioned during the first quarter of fiscal 2026, which will improve coal security for the aluminium business. This, along with the ongoing expansion in refinery capacity, should enhance operating efficiency with full effect from fiscal 2025 onwards. Any material delay in structural improvement in the operational integration of the aluminium business, resulting in lower-than-expected growth in profitability, will remain a key monitorable.

 

• 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 [KTPA] in Balco), and also increasing its level of integration by expanding its refinery and increasing the share of value-added products. All these projects are expected to be commissioned in a phased manner over the next 3-4 quarters. 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 and iron ore business to support deleveraging, CRISIL Ratings understands that no binding sale agreement has been executed, which will be monitorable.

 

Weaknesses

• Continued refinancing risk at VRL and reduced liquidity at Vedanta, limiting flexibility of surplus dividend

While the liability management exercise has extended most of the debt maturities at VRL, the company still has significant external debt maturities ($900 million per annum) over the next two fiscals. Hence, its dependence on refinancing or higher dividend payout by Vedanta continue to remain high. However, large dividend payouts during fiscal 2023 have resulted in significant reduction in cash balances at Vedanta. This has increased VRL’s dependence on timely refinancing of upcoming debt maturities. Based on discussions with the management, CRISIL Ratings understands that the deleveraging through inorganic route of asset monetisation is still underway. Furthermore, the management has articulated that normal dividend distribution along with payment of brand fees should be sufficient to address majority of the debt maturities at VRL during fiscal 2025. VRL’s demonstrated ability to raise funds by stake sale during the current fiscal with its existing shareholding in Vedanta being significantly higher than 50% (currently at ~62%), and the group’s track record of successful refinancing, provide some comfort and flexibility to VRL. However, timely refinancing or repayment of debt maturities will be a key monitorable.

 

High leverage due to large debt (including VRL); though expected to improve over the medium term

Vedanta has had continued 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. This, along with moderation in operating profitability in the current and last fiscals, resulted in net leverage weakening to 3.4 times as of March 2024 and March 2023, from 2.2 times in March 2022. That said, consolidated net leverage may improve over the medium term, with expected improvement in profitability, reduced dividend outflow and continued focus on deleveraging will remain monitorable.

 

While the company has been incurring capex over the past fiscals (Rs 16,000 crore in fiscal 2023 and expected at Rs 15,000-20,000 crore in fiscals 2024 and 2025), it is likely to be funded by a mix of debt and equity. Also, prudent capital allocation has backed increase in annual Ebitda against the levels seen before the Covid 19 pandemic. 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 has also noted the management’s continued focus on deleveraging, including the intent to bring debt at VRL under $5 billion over the medium term. Debt at VRL has already reduced by nearly $3 billion since March 2022, resulting in outstanding external debt of $5.7 billion (excluding outstanding ICL of $450 million) as on September 30, 2023. Thus, expected reduction in consolidated gross and net debt (including debt at VRL) should support financial flexibility of both Vedanta and VRL over the medium term, and will be a key monitorable. Any change or delay along these expectations will be a key rating sensitivity factor.

 

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. Also, CRISIL Ratings understands that there is no major capex requirement for the Konkola Copper Mines Plc (KCM) business over the medium term. 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 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 profit sharing contract (PSC) extension, ruling against the company, will reduce the profit margin for the oil and gas business.

Liquidity: Strong

Cash accrual before dividend payout, projected at around Rs 25,000 crore in fiscal 2024 and Rs 26,000 - 28,000 crore in fiscal 2025, will comfortably cover Vedanta’s term debt obligation of Rs 7,000 crore for the last quarter of fiscal 2024 and Rs 11,600 crore for full fiscal 2025. Cash balance of Rs 12,734 crore (net of ICL to VRL) as on December 31, 2023, unutilised bank limit (around Rs 12,000 crore as of January 31, 2024), and flexibility regarding capex, support liquidity at Vedanta. The company is in the process to refinance a significant portion of its principal debt obligation in fiscals 2024 and 2025, based on its track record and strong banking relationships.

 

Liquidity for VRL witnessed moderation

The parent has annual interest expense of Rs 6,700-7,000 crore ($800-850 million) towards its outstanding debt, and services it mainly through dividend received from Vedanta and partly through management and brand fees, also from the latter. While VRL has refinanced most of its near-term debt maturities ($3.2 billion) through the liability management exercise, it still has significant debt maturities ($900 million per annum) over the next two fiscals. It is expected to refinance or partly repay it in a timely manner. Any delay in expected timelines for required refinancing (of 3-6 months in advance) or future debt servicing will be 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 also 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 20% reduction in GHG emissions intensity by 2025, from the 2012 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 30.6% of total water consumed in fiscal 2022. It has set a target to achieve net water positivity by 2030. The company recycled 98% of its high-volume, low-toxicity waste in fiscal 2022 (94% in fiscal 2021), and targets zero net waste by 2025.
• The loss time injury frequency rate for Vedanta was 0.42 in fiscal 2023 against 0.46 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 8.01% and the company aims to increase the share of women employees to 20% by 2030.
• The governance structure is characterised 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

• Significant increase in Ebitda owing to ramp-up in volume and continued cost efficiency across businesses, and improving business resilience, on sustained basis
• Structural and sustained improvement in aluminium profitability, with total cost of production of aluminium structurally reducing to below $1,800 per tonne, resulting in Ebitda per tonne higher than $700-800 on sustained basis
• Sustained deleveraging with material reduction in consolidated net debt on continued basis, resulting in significantly higher-than-expected reduction in net debt to Ebitda ratio, from the current levels

 

Downward factors

• Lower-than-expected Ebitda because of higher-than-expected cost of production, slower ramp-up in volumes or lower realisation
• Delay in meaningful correction in financial leverage with net debt to Ebitda ratio sustaining above 3.2 – 3.4 times
• Financial stress at VRL leading to reduced financial flexibility at Vedanta
• Any incremental investment or support to VRL or Volcan Investments Ltd resulting in leverage at Vedanta remaining higher than rating thresholds

About the Company

VRL holds 61.95% stake in Vedanta and has diversified operations across metals, mining, power, and oil and gas segments.

 

Capacities	Location
2.3 MTPA aluminium smelters in VDL and Balco	Jharsuguda, Odisha
2.0 MTPA alumina refinery	Lanjigarh, Odisha
1,980-megawatt independent power plant	Talwandi Sabo, Punjab
1.2 MTPA zinc/silver mines and 0.9 MTPA zinc smelters 5.6 MTPA zinc mines and 290 kilo tonne zinc smelters	Rajasthan South Africa, Namibia
1,194 million barrels of oil equivalent oil and gas reserves	Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Assam, Tamil Nadu and Tripura
1.5 MTPA long steel rolling in Electrosteel Steel (held 95.5%)	Bokaro, Jharkhand

 

During the first nine months of fiscal 2024, Vedanta reported revenue from operations of Rs 1,06,856 crore and profit after tax (PAT) of Rs 5,264 crore as compared with Rs 1,08,179 crore and Rs 11,374 crore for the corresponding period last year, respectively.

Key Financial Indicators*

Particulars	Unit	FY23	FY22
Operating income	Rs crore	148,790	131,192
Profit after tax (PAT)	Rs crore	14,503	23,710
PAT margin	%	9.7	18.1
Adjusted debt/adjusted net-worth	Times	2.92	1.59
Interest coverage	Times	6.1	9.45

*CRISIL Ratings adjusted numbers

Any other information: Not applicable