Detailed Rationale

CRISIL Ratings has revised its rating watch on the long-term bank facilities and non convertible debentures of Vedanta Ltd (Vedanta; part of the Vedanta group) to 'Rating Watch with Positive Implications' from 'Rating Watch with Developing Implications'. Furthermore, CRISIL Ratings has removed its rating on the short-term bank facilities and commercial paper programme from ‘Rating Watch with Developing Implications’ and reaffirmed the rating at ‘CRISIL A1+‘. CRISIL Ratings has withdrawn its rating on commercial paper of Rs 7500 crore at the company’s request, as there is no outstanding against the rated amount. The rating action is in line with CRISIL Ratings withdrawal policy on debt instruments.

 

The revision from developing watch to positive watch considers three main factors. First, improved earnings outlook supported by expectations of favourable prices and cost reduction through various initiatives, especially in the aluminium and zinc businesses. Second, improving capital structure with reduction in consolidated gross debt levels (including repayment of high-cost borrowings) through fundraising activities such as qualified institutional placement (QIP) and offer for sale (OFS) by Vedanta as well as stake sale by the parent, Vedanta Resources Ltd (VRL; rated ‘B-‘ by S&P). This is in line with the promoter’s stated commitment towards deleveraging over the medium term. Third, improving the financial flexibility by increasing operating cash accrual and reducing debt obligation, especially at VRL.

 

CRISIL Ratings has also taken note of admission of the proposed demerger of Vedanta businesses into separate listed companies to the National Company Law Tribunal (NCLT), increasing the likelihood of successful completion of the demerger. The successful completion of demerger of businesses into separate listed companies could further enhance financial flexibility for Vedanta group.

 

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 factor in expectation of material increase in consolidated operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]) of Vedanta in fiscal 2025 to more than Rs 45,000-47,000 crore (was Rs 36,455 crore in fiscal 2024). It 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. The increase in EBITDA will support 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. The likely increase in EBITDA, along with expected reduction in debt (net debt reducing to less than Rs 1.1 lakh crore in fiscal 2025 and continued decline in debt thereafter) should support reduction in consolidated net leverage to sustainably below the rating threshold of 2.5 times.

 

While VRL’s external debt obligation for fiscal 2025 (principal repayments of USD 585 million) and 2026 (repayment of ~ USD 820 million) have reduced after the liability management exercise in January 2024, debt obligation at the operating entities level remains high at USD 1.8-2.0 billion in the first nine months of fiscal 2025 and full fiscal 2026 each. Hence, the increase in EBITDA as well as more-than-expected dividend distribution, impacting liquidity at Vedanta, will be monitorable.

 

CRISIL Ratings understands that any open refinancing risk at VRL or operating entity level will be closed well ahead of timelines, which is likely to be before 3-6 months of respective maturities. This is also reflected in the recent initiation of part refinancing of January 2027 and FY2028 bond maturities of VRL with expected reduction in cost of borrowing.

 

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 ahead, with ongoing fundraising plans by the company. The expected reduction in cost of borrowing along with continued fundraising in a timely manner will be 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, aluminium and oil and gas businesses, and improving capital structure. These strengths are partially offset by high debt repayment, large 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-/Stable/CRISIL A1+'); Talwandi Sabo Power Ltd (‘CRISIL AA- (CE)/Watch Positive/CRISIL A1+ (CE)’) and ESL Steels Ltd (‘CRISIL AA-/Watch Positive/CRISIL A1+’).

 

CRISIL Ratings has included debt of VRL which is estimated at $5.1 billion, excluding outstanding intercompany loans (ICL) of $417 million or Rs 43,160 crore as on August 1, 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 Rs 45,000-47,000 crore in fiscal 2025 (was around 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 8-10% 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 the margin profile and EBITDA levels going forward. During the first quarter of fiscal 2025, Vedanta reported EBITDA of Rs 10,200 crore against EBITDA of Rs 9,000 crore in the fourth quarter of fiscal 2024 which is expected to reach average quarterly EBITDA rate of Rs 12,000 crore or more during the remaining nine 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.

 

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 USD 1.9 billion by the group during April-August 2024. This will support reduction in debt levels at VRL (already reduced to USD 5.1 billion as of June 2024 from USD 5.7 billion in March 2024 and USD 9.1 billion in March 2022) as well as at the operating company levels. CRISIL Ratings expects consolidated net debt to reduce to 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 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. 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. Going forward, 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 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, 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 USD 700-800 per tonne. Ebitda per tonne had already increased to $915 in the first quarter of fiscal 2025, up from $598 in the fourth quarter of fiscal 2024 ($494 in fiscal 2024, up from $322 for full 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 [KTPA] 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:

Continued, although lower, refinancing risk at VRL

While the liability management exercise has extended most of the debt maturities at VRL, the company still has sizeable external debt maturities ($585 million during the remaining nine months of fiscal 2025 and $ 820 million during fiscal 2026). Along with annual interest expense of around USD 650 million (at current cost and debt levels of VRL), this results in VRL’s dependence on part-refinancing or higher dividend payout by Vedanta, as brand and management fees and expected base dividend outflow will be lower than annual debt obligation for VRL (principal plus interest). However, large dividend payouts over the past 2-3 years have resulted in significant reduction in cash balances at Vedanta, limiting flexibility for higher dividend, without leveraging. Thus, despite reduction in debt obligation, VRL’s dependence on refinancing or inorganic methods such as stake-sale continues for debt reduction, which will be a key monitorable.

 

That said, CRISIL Ratings expects dividend outflow by Vedanta to VRL to reduce going forward, as interest expense is likely to reduce to below USD 600 million in fiscal 2026, with continued debt reduction as well as expected refinancing of April 2026 bond maturities with lower cost of borrowings. 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 some comfort and flexibility to VRL.

 

High leverage due to large debt (including VRL); though expected to improve in fiscal 2025 and thereafter

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 with expected increase in operating profitability, consolidated net leverage is likely to improve to sustainably to below 2.5 times in fiscal 2025 and thereafter, with net debt expected to reduce to below Rs 1.1 lakh crore. In the first half of fiscal 2025, net leverage (on TTM EBITDA) is estimated to be 2.7 times with net debt at Rs 1.12-1.15 lakh crore.

 

Also, repayment of high-cost borrowings is expected to result in reduced interest expense which will aid improvement in cash accrual and, in turn, support improvement in other debt coverage metrics, going forward. 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.

 

While the company has been incurring capex over the past fiscals (Rs 16,000 crore in fiscal 2023, ~ Rs 11,000 crore in fiscal 2024, and expected at more than Rs 20,000 crore in fiscals 2025 and 2026 each), it is likely to be funded by a mix of debt and internal accrual. 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. 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 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, has reduced the 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 15,200 crore for the remaining nine months of fiscal 2025, and ~ Rs 18,680 crore for fiscal 2026. Estimated cash balance of ~Rs 25,000 crore (net of ICL to VRL, but including proceeds from QIP) as on August 1, 2024, unutilised bank limit (around Rs 6,500 crore as on July 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 moderate going forward, as VRL’s debt obligation reduces with reducing debt and expected refinancing at lower rate of interest, VRL will still have some dependency on refinancing its debt obligation in fiscal 2026 and thereafter. 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 (of 3-6 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 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 to above Rs. 45,000-47,000 crore 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 gross and 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 ramp up in 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 56.3% 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

 

Key Financial Indicators*

Particulars	Unit	FY24	FY23
Operating income	Rs crore	145131	148,790
Profit after tax (PAT)	Rs crore	7539	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 quarter ending fiscal 2025, the company reported operating income of Rs 35,239 crore and profit after tax (PAT) of Rs 5,095 crore (Rs 33,342 crore and Rs 3,308 crore in the first quarter of fiscal 2024).

Any other information: Not Applicable