| Vedanta Limited | ||||||||
| 'CRISIL AA- / Stable' assigned to non-convertible debentures | ||||||||
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| 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 assigned its ‘CRISIL AA-/Stable’ rating to non-convertible debentures (NCDs) of Vedanta Ltd (Vedanta; part of the Vedanta group) aggregating Rs 2,500 crore, while reaffirming its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities and other debt instruments.
The ratings reflect Vedanta’s healthy and improving operating performance, supported by stable volume across business segments and increased commodity prices. The reaffirmation also factors in timely refinancing of debt that is maturing in fiscal 2022 in the parent company, Vedanta Resources Ltd (VRL; rated 'B-/Stable' by S&P Global Ratings), in line with expectation.
Sustained production volume across businesses, improved efficiency in the aluminium business aided by lower input costs, and strong recovery in commodity prices have supported continued improvement in Vedanta’s operating profitability during fiscal 2021. CRISIL Ratings estimates Vedanta’s earnings before interest, tax, depreciation and amortisation (Ebitda) to increase to above Rs 27,000 crore in fiscal 2021.
Furthermore, with expected volume growth across businesses, sustained cost efficiencies and healthy commodity prices, Vedanta’s Ebitda is expected to improve to more than Rs 35,000 crore in fiscal 2022. However, the improvement in outlook for earnings is accompanied by increased debt at VRL that was incurred to purchase additional stake in Vedanta.
In December 2020, Vedanta’s promoters increased their stake in the company by 4.98% to 55.1%, supported by additional debt of USD 400 million. This was followed by additional 10.07% stake increase in Vedanta for an additional debt of around USD 1,200 million, through recently concluded voluntary open offer in April 2021. While this will reduce dividend payout to minority shareholders, improve the group’s financial flexibility, and be a positive for Vedanta over the medium to long term, it will also increase leverage. The group’s net financial leverage (ratio of adjusted net debt to Ebitda) is estimated to be 3.1 times as on March 31, 2021, which may gradually improve to below 2.7 times in fiscal 2022, supported by increase in Ebitda, although consolidated gross debt would remain elevated.
Expected improvement in Vedanta’s operating profitability could result in positive free cash flow (net of increased growth in capital expenditure [capex]) to support reduction in Vedanta’s outstanding consolidated gross debt over the medium term. However, further increase in debt at VRL towards any strategic initiative will be a key monitorable. A material reduction in gross debt, improving Vedanta’s resilience to volatility in commodity prices, would be crucial to improve the credit profile.
The ratings continue to reflect Vedanta’s strong business risk profile, driven by diversified presence across commodities, cost-efficient operations in the domestic zinc and oil and gas businesses, improved profitability in the aluminium business and large scale of operations. These strengths are partially offset by high leverage, large capex and dividend, and susceptibility to volatility in commodity prices and regulatory risks.
India is currently experiencing an intense second wave of the Covid-19 pandemic. As company’s production consists of essential commodities (zinc, oil & gas, and steel) or fall under continuous process industries (aluminium), CRISIL Ratings does not expect any material impact on the company’s production. However, this along with any impact on supply chain shall remain a key monitorable.
CRISIL Ratings has withdrawn its rating on NCDs aggregating Rs 2,600 crore (see annexure 'Details of Rating Withdrawn' for details) on receipt of independent confirmation of their redemption. Furthermore, CRISIL Ratings has withdrawn its ratings on short-term debt of Rs 500 crore on receipt of confirmation from the bank. CRISIL Ratings has also withdrawn its rating on proposed long-term bank loan facility of Rs 649.87 crore on receiving confirmation from the company, as the same was unutilised. The ratings are withdrawn in line with CRISIL Ratings’ rating withdrawal policy. |
Analytical Approach For arriving 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 also included the debt of VRL (USD 7.0 billion or around Rs 52,000 crore as on December 31, 2020) while calculating 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 - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Diversified business risk profile Vedanta’s businesses span zinc, lead, silver, aluminium, oil and gas, iron ore, power and steel. The group is among the largest producers in all these segments, commanding 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. Earnings in the zinc business benefited in the current fiscal from higher share of silver production, along with improved silver realisation. Profitability in the oil and gas business is aided by low operating cost and a business model that ensures capex recovery. Cash flow in this business will benefit from capex-led improvement in volume over the medium term.
The Delhi High Court, through its order dated March 26, 2021, has ruled in the 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 has resulted in increased cash outflow of around USD 37 million for first nine months of fiscal 2021 for the company. While the court order shall result in reduced profit margin for Vedanta’s oil and gas business, the profit margin is expected to remain healthy. Notably, the government has been providing only short-term extensions for continuity of operations for the Rajasthan block. Furthermore, additional claim of dues related to disallowed costs, raised by the Directorate General of Hydrocarbons (DGH), is under arbitration. While CRISIL Ratings understands from the company that the final PSC is expected to be approved soon by the government, with effect from May 15, 2020, it would be a key monitorable.
Strong volume growth expected, over the medium term, with capital allocation towards value-accretive zinc 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 should support improvement in volumes for the zinc business. Furthermore, expected addition of new wells and surface facilities during the first half of fiscal 2022 should result in increase in volumes for the oil and gas business. Strong volume growth, over the medium term, should make the overall business risk profile more resilient.
Improved operating profitability in the aluminium business Improved linkage coal sourcing (increased from 45% in fiscal 2018 to over 70% since the fourth quarter of fiscal 2020), reduced coal prices, and lower imported alumina cost, have led to improved cost efficiency for the aluminium business (Ebitda of more than USD 425 per tonne during the first nine months of fiscal 2021, with reported Ebitda of USD 565 per tonne in the third quarter of fiscal 2021). Furthermore, cost efficiencies should further improve, over the medium term, owing to increased share of captive and linkage coal supported by access to Jamkhani coal mine and Radhikapur (west) coal block in Odisha, and focus on increasing the share of local bauxite and alumina sourcing. Recent announcement of refinery capacity expansion to 5 mtpa (from current capacity of 2 mtpa), should also support the operating efficiencies of the business.
Weaknesses Large dividend payout to support increasing debt at VRL along with significant capex, resulting in high leverage Continued assistance through dividend payout to the parent, VRL, to support the latter’s debt has been resulting in significant cash leakage to minority shareholders. This, along with significant annual capex (Rs 13,000-14,000 crore is expected in fiscal 2022, against about Rs 6,000 crore and Rs 9,000 crore in fiscals 2021 and 2020, respectively) resulted in high net leverage of 3.8 times as on March 31, 2020, and is estimated to remain elevated at 3.1 times by end of fiscal 2021. Expected improvement in profitability is expected to support reduction in net leverage over the medium term. However, profitability is susceptible to volatility in prices of metals and oil and gas and thereby, any large capex, acquisition or higher-than-expected cash outflow to support VRL remains a key monitorable.
Exposure to changes in regulations The businesses are vulnerable to regulatory risks. Since May 2018, the copper smelting plant at Thoothukkudi, Tamil Nadu, has been closed 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 had an adverse impact on the iron ore business. Furthermore, the recent 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 27,055 crore (net of inter-company loans to VRL) as on December 31, 2020. 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 significant, unutilised bank limit (around Rs 11,000 crore as on December 31, 2020).
Term debt obligation is expected to be around Rs 14,300 crore in fiscal 2022, against cash accrual (pre-dividend) of more than Rs 27,000 crore during the fiscal. In addition, flexibility towards capex also supports liquidity. Vedanta may also look to refinance a significant portion of its principal debt obligation in fiscal 2022 as well, based on its strong refinancing track record.
The company’s parent, VRL, has annual interest expense of around Rs 4,800 crore (around USD 650 million) towards outstanding debt, which will be mainly serviced through dividends received from Vedanta and around one-fifth through management and brand fees. VRL’s debt maturities for fiscal 2022 have been refinanced in a timely manner, through improved refinancing ability on account of increased stake in Vedanta and expected improvement in its operating profitability. |
Outlook Stable Vedanta’s credit risk profile should remain stable, supported by low cost of production across key businesses, improved realisations and expected volume growth. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Group VRL holds 65.1% stake in Vedanta and has diversified operations across metals, mining, power, and oil and gas.
During the first nine months of fiscal 2021, Vedanta reported revenue, Ebitda and PAT of Rs 59,815 crore, Rs 18,234 crore and Rs 7,403 crore, respectively, against Rs 64,692 crore, Rs 16,216 crore and Rs 7,338 crore in the corresponding period of the previous fiscal.
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Key Financial Indicators
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 |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
**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 withdrawn
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Annexure – List of entities consolidated
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**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
$ Foreign currency non-resident (FCNR) loans
Criteria Details
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