CRISIL has reaffirmed its 'CRISIL AA/Negative/CRISIL A1+' ratings on the non-convertible debentures (NCDs), commercial paper programme and bank facilities of Vedanta Limited (Vedanta; part of the Vedanta group).

CRISIL has withdrawn the rating on commercial paper of Rs 10,000 crore as per the company's request as it has repaid the outstanding amount. Additionally, CRISIL has withdrawn its proposed rating on NCDs of Rs 500 crore on receiving confirmation from the company, as the same was unutilised. The ratings are withdrawn in line with CRISIL's rating withdrawal policy (see Annexure 'Details of Rating Withdrawn' for details).

Reaffirmation of the ratings reflect expectation of sustained operating profitability (earnings before interest, tax, depreciation, and amortisation [EBITDA]) in fiscal 2021 despite the weaker outlook for commodity prices. This is mainly led by expected improvement in earnings in the aluminium segment, aided by lower alumina cost and increased coal and bauxite linkages, and volume growth in the zinc and oil and gas businesses.

The lockdown on account of Covid-19 has had a limited impact on its operations as it produces essential commodities (zinc, oil and gas, and steel) or falls under continuous process industries (aluminium). Also, increase in exports offset the decline in domestic demand during the lockdown, supported by its low-cost position in key businesses. However, disruption in the supply chain and decrease in sales volume on account of the prolonged global pandemic will be key monitorables.

The company is expected to undertake cash preservation measures such as reduced capital expenditure (capex) and limited dividend payout in fiscal 2021 (only to cover interest payments of the parent, Vedanta Resources Ltd [VRL; formerly Vedanta Resources PLC; rated 'B-/Stable' by S&P Global Ratings]), which shall support liquidity. Additionally, to preserve liquidity, Vedanta has availed moratorium on its term debt obligation as per Reserve Bank of India's guidelines after approval from respective banks. Leverage (adjusted net debt to EBITDA) was elevated at more than 3.8 times as on March 31, 2020, on account of moderated operating profitability in fiscal 2020, because of lower commodity prices. Profitability was also impacted on account of the nationwide lockdown during the second half of March 2020, along with lower-than-estimated recoverable capex in the oil and gas business. However, leverage is expected to reduce sustainably to below 2.8 times, over the medium term, in the base case.

The negative outlook reflects the risk of lower-than-expected volume or significantly lower commodity prices, especially of brent crude, zinc, and aluminium, being sustained in fiscal 2021 on account of the pandemic. Operating profitability in fiscal 2021 could therefore be lower than expected, resulting in net leverage sustaining at above 2.8 times.

The negative outlook also reflects the risk of weakening of Vedanta's financial risk profile following the completion of VRL's proposed debt-funded privatisation of Vedanta. At the current offer price of Rs 87.25 per share, the consideration would be Rs 16,173 crore to purchase the 49.86% shareholding of minority investors. While the deal will simplify the corporate structure, improve the group's financial flexibility, and could be a positive for Vedanta over the medium term, it will also increase leverage. Progress on the deal by VRL, at the discovered price based on the reverse book building process, along with details of the funding will be key monitorables. 

Despite higher refinancing risks because of the weakening macro environment and heightened risk aversion in the capital market, VRL is likely to refinance its maturing debt well in advance. Delay in refinancing and higher-than-expected dividend by Vedanta will be key monitorables.

The ratings continue to reflect Vedanta's strong business risk profile, driven by diversified presence across commodities, cost-efficient operations in domestic zinc and oil and gas businesses, and large scale of operations. These strengths are partially offset by the high, albeit reducing, leverage, coupled with large capex, and susceptibility to volatility in commodity prices and regulatory risks.

For arriving at the ratings, CRISIL 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)/Negative/CRISIL A1+(CE)') and Electrosteel Steels Ltd (ESL; 'CRISIL AA/Negative/CRISIL A1+'). Refer to the annexure for the list of entities consolidated.
 
CRISIL has also included the debt of VRL (around USD 7.15 billion or around Rs 53,000 crore as on March 31, 2020) while calculating adjusted debt. This is because despite no legal recourse of VRL's debt holders to Vedanta, this debt can be serviced using the dividend outflow from Vedanta or refinanced based on the implicit strength of the assets held by VRL.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Strengths
* Diversified business risk profile: Businesses span across 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 risk profile shields 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 capex recovery. Cash flow in this business will benefit from capex-led improvement in volume over the medium term. The government's approval on the production-sharing contract policy for oil and gas fields for a period of 10 years has also cleared uncertainties surrounding this business.

. Strong volume growth expected, over the medium term, with capital allocation towards value - accretive zinc and oil and gas businesses: Production in the zinc and oil and gas businesses have improved, albeit slower than expected. Over 75% of capex in the past 4 years was towards the low-cost and value-accretive zinc (EBITDA of more than USD 1,400 per tonne in Zinc India) and oil and gas businesses (healthy internal rate of return of more than 20% even with crude prices at USD 40 per barrel). Strong volume growth over the medium term should make the overall business risk profile more resilient.

Weaknesses
* Large capex and dividend, resulting in high leverage: Capex of around Rs 8,000 crore (reduced from Rs 10,000 crore) is expected in fiscals 2021-22, largely towards the oil and gas, zinc, and aluminium businesses. Continued assistance through dividend payout to the parent, VRL, to support the latter's debt has led to significant cash leakage to minority shareholders and dividend distribution tax. Elevated net leverage, more than 3.8 times as on March 31, 2020, should reduce to less than 2.8 times, over the medium term, in the base case because of improved profitability. Additionally, profitability is susceptible to volatility in prices of metals and oil and gas, although the risk is mitigated by diversified businesses and improving cost efficiency. The company needs to deleverage and maintain steady positive, free cash flow, post capex and dividends. Any large capex, acquisition, or higher-than-expected dividend will further delay the reduction in financial leverage and may negatively impact the credit risk profile.

* Lack of healthy and stable profitability in the aluminium business, having significant capital employed, although expected to improve: The aluminium business has been lacking consistent cost efficiency despite significant capital employed. Lack of integrated operations, with 25% domestic bauxite linkage and 50% owned alumina production, has impacted profitability (EBITDA declined from USD 319 per tonne in fiscal 2017 to USD 179 per tonne in fiscal 2019, and turned negative in the second quarter of fiscal 2020). However, improving linkage coal sourcing, reducing coal prices, and lower imported alumina cost have led to improved cost efficiency for the aluminium business during recent times (EBITDA of USD 340 per tonne in fourth quarter of fiscal 2020). Furthermore, cost of production should further reduce over the medium term, because of the following factors - bauxite linkage is expected to increase to 50%, refinery capacity expansion to 4 million tonnes per annum (MTPA, increase by 100%) over the next two fiscals, recent win of the Jamkhani coal mine in Odisha, and the Supreme Court's judgement allowing Vedanta to bid for National Aluminium Company Ltd's surplus alumina. The ability to deleverage is highly dependent on the successful ramp-up of EBITDA in the aluminium business and will be 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. The company had to postpone expansion of its Lanjigarh refinery in Odisha, as environmental approval from the Ministry of Environment & Forests was delayed and received only in the fourth quarter of fiscal 2016.

Cash balance was Rs 37,914 crore and unutilised bank limit was around Rs 5,300 crore, as on March 31, 2020. The cash balance includes cash at Cairn India Holdings Ltd, which is fully accessible to Vedanta. However, part of the cash is held by HZL, which is usually accessed through dividends, and thus results in outflow towards minority shareholders.
 
Term debt obligation is expected at Rs 9,100 crore (Rs 6,400 crore at standalone level and Rs 2,700 crore at subsidiaries) in fiscal 2021, against cash accrual (pre-dividend) of Rs 18,000 crore. Flexibility towards capex and dividend payout also support liquidity.
 
CRISIL expects that Vedanta will refinance a significant portion of its principal debt obligation in fiscal 2021, based on its strong refinancing track record and banking relationships. Moreover, the management is focused on increasing average debt maturities, as reflected in the sharp reduction in its outstanding commercial paper borrowings, reducing by more than 55% during fiscal 2020, and expected long-term debt tie-up over the medium term.
 
VRL has annual interest expense of around Rs 3,700 crore (around USD 500 million) towards outstanding debt, which will be partly serviced through dividends received from Vedanta and partly (around one-third) through management and brand fees. While VRL had refinanced its bond maturities for fiscal 2021 in April 2019, it faces refinancing risk in the near term, mainly towards short-term debt obligation of more than Rs 5,000 crore (USD 680 million) due in the first quarter of fiscal 2021. However, the refinancing risk is mitigated by strong banking relationships and track record of refinancing.

CRISIL believes Vedanta's profitability and leverage could be impacted by slower-than-expected recovery in commodity prices and subdued volume growth. Delisting of Vedanta could also lead to higher-than-expected leverage.

Rating Sensitivity Factors
Upward Factors
* Structural and sustained improvement in aluminium profitability, with EBITDA above USD 400 per tonne
* Ramp-up in volume with continued cost efficiency across businesses, improving business resilience
* Sustained deleveraging, with net debt to EBITDA ratio sustaining below 2.8 times

Downward Factors
* 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 the net debt to EBITDA ratio sustaining above 2.8 times
* Sustained negative, free cash flow (post capex) or any incremental investments or support to VRL or Volcan Investments Ltd.

Vedanta's operations are diversified across metals, mining, power, and oil and gas. VRL, which is based in London, holds 50.1% stake in Vedanta. The group has copper, iron ore, and aluminium assets at Jharsuguda and Lanjigarh, both in Odisha, and power divisions (2,400 MW and 1,215 MW captive power plants for the aluminium business). The company also holds aluminium assets through its subsidiary, Balco. Also, a part of the power business (1,980 MW) is conducted through its wholly owned subsidiary TSPL. The oil and gas business has been merged with Vedanta, and the group operates the zinc business through HZL and Zinc International in South Africa and Namibia. Vedanta had, through its wholly owned subsidiary, Cairn India Holdings Ltd, acquired slightly over 51% stake in the glass substrate manufacturer, AvanStrate Inc in December 2017. In June 2018, Vedanta, through its wholly-owned subsidiary, Vedanta Star Ltd (VSL), acquired 90% stake in ESL (current operational capacity of 1.5 MTPA) for a total consideration of Rs 5,320 crore. However, as on March 25, 2020, VSL has been merged with ESL and Vedanta will now directly hold 95.5% stake in ESL.

Any other information: Not applicable