Vizag General Cargo Berth Private Limited

Bank guarantee rating migrated to 'CRISIL AA (CE) /Negative'; Term loan rating Reaffirmed

 

Rating action

Total Bank Loan Facilities Rated	Rs.395 Crore
Long Term Rating	CRISIL AA (CE) /Negative (Reaffirmed)
Long Term Rating	CRISIL AA (CE) /Negative (Rating migrated from ‘CRISIL A+/Negative’)

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 migrated its rating on the bank guarantee of Vizag General Cargo Berth Private Limited (VGCB) to ‘CRISIL AA (CE) /Negative’ from ‘CRISIL A+/Negative’ and reaffirmed its 'CRISIL AA (CE) /Negative rating on the term loan. The rating is based on the strength of the corporate guarantee received from the parent, Vedanta Ltd (Vedanta; rated 'CRISIL AA/Negative/CRISIL A1+').

 

The ratings on the bank guarantee have been migrated owing to the corporate guarantee provided by VGCB being in line with the new regulatory guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities.

 

On the bank guarantee, CRISIL Ratings had assessed the guarantee on the as legally enforceable, irrevocable and unconditional, covering the entire amount and tenure of the rated facility and given it due consideration while assigning the rating with the suffix CE. Based on the new regulatory guidance, the existing guarantee can be considered as a valid credit enhancing support structure for assigning ratings with the suffix CE because it is in adherence to the 12-point criteria of RBI.

 

For more details on the revised approach, refer to the CRISIL Ratings criteria document, Criteria for rating instruments backed by guarantees.

 

For the guaranteed term loans, the rating is being reaffirmed as RBI has permitted the previous approach of factoring the guarantee, till the residual tenure of the term loan.

 

The rating on VGCB continues to reflect the unconditional and irrevocable guarantee extended by Vedanta to its bank facilities. The rating also factors in a payment mechanism to ensure timely servicing of the rated bank facilities. The rating, thus, reflects the credit strength of the guarantor, Vedanta Ltd

Analytical approach

CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The ‘CE’ suffix reflects the payment structure that is designed to ensure full and time-bound payment to lenders.

Key rating drivers & detailed description

Strength:

• Unconditional and irrevocable corporate guarantee and payment mechanism: Vedanta has provided an unconditional and irrevocable guarantee to the bank guarantee of VGCB, which covers the entire principal and interest obligations. Vedanta has provided an undertaking that it will make the necessary payments, irrespective of the bank/s invoking the guarantee.

 

Weaknesses:

• Weak standalone financial risk profile and operating performance over the past years; expected to improve over the current base going ahead: Subdued operating performance is reflected in minimal or negative cash accrual and sub-optimal return on capital employed (RoCE) over the past five years (the ratio was negative in fiscal 2018 and less than 5% in since fiscal 2019). Continued losses over the years have eroded tangible networth, which turned negative during fiscal 2022. Furthermore, the company had outstanding debt of Rs 423 crore for the fiscal year ending March 2022.This results in a weak standalone financial risk profile with reliance on parent support for meeting debt obligations.

 

The cargo volume handled by VGCB has been constrained over the past few years (capacity utilisation of 50-60% during the past five fiscals) due to paucity of railway rakes in the region VGCB operates in, and competition from other minor ports in the region. This has led to modest operating profitability. However, driven by growth in coal imports, volume handled by VGCB witnessed improvement last fiscal, with capacity utilization increasing to 54% in FY2023 from 43% in FY2021. This improved Ebitda (earnings before interest, taxes, depreciation and amortisation) to around Rs 46 crore in fiscal 2022 from Rs 39 crore in FY2021, though remaining moderately low. The EBITDA again fell down to Rs 32 Crores in FY2023, but this was owing to stressful market conditions leading to drop in exports.

 

The operating performance remains steady with capacity utilization of 54% and Ebitda of Rs. 32 crore during the fiscal year 2023. Going forward, expectation of healthy demand of imported coal in the country, and expansion in scope of agreement with Visakhapatnam Port Trust (VPT),entered in fiscal 2022, to handle non-coal commodities is expected to support robust utilization rates for VGCB over the medium, and shall be a key monitorable. Moreover, financial risk profile will continue to derive support from being a subsidiary of Vedanta.

 

• Sensitive to guarantor's rating and non-adherence to payment mechanism: The rating primarily reflects the credit strength of the guarantor. Hence, any adverse movement in the rating on the guarantor may result in a rating action on this facility. Also, non-adherence to payment mechanism will be a credit weakness.

Liquidity: Strong

VGCB depends on the strong liquidity of Vedanta to cover any shortfall in meeting debt obligation. The rated instrument has adequate liquidity as the guarantee structure (unconditional and irrevocable guarantee by Vedanta) ensures timely debt repayment.

Outlook: Negative

The outlook is based on the rating outlook of CRISIL Ratings on the debt instruments and bank facilities of Vedanta.

Rating sensitivity factors

Upward factors

• Change in the credit risk profile of the parent, resulting in an upgrade in rating by one notch
• Substantial improvement in financial and operating performance on back of healthy ramp-up

 

Downward factors

• Weakening of the credit risk profile of the guarantor, resulting in a downgrade in rating by one notch
• Change in the ownership and support philosophy of Vedanta towards VGCB

Adequacy of credit enhancement structure

For the term loans, the rating is being reaffirmed as RBI has permitted the previous approach of factoring the credit enhancement based on the existing corporate guarantee till the residual tenure of the loan.

 

To assess Vedanta, CRISIL Ratings has combined the business and financial risk profiles of Vedanta and its subsidiaries, including VGCB. CRISIL Ratings believes the instruments will have a high degree of safety regarding timely meeting of financial obligation.

Unsupported ratings: CRISIL A+

CRISIL Ratings has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of VGCB. It has also factored in the support that VGCB is likely to receive from its parent, Vedanta. This is because VGCB and Vedanta have high business and operational linkages.

About the company

VGCB was incorporated in April 2010. The Visakhapatnam Port Trust awarded VGCB a 30-year concession (including 2 years for construction) for mechanising and modernising the coal berth at the outer harbour of the port, on a build-design-finance-operate-and-transfer basis. The capacity of the project is 10.18 million tonne per annum and cost is estimated at Rs 622 crore. Key customers include Steel Authority of India Ltd, Jindal Steel and Power Ltd (‘CRISIL A+/Positive/CRISIL A1+’), Adani, and Vedanta (aluminium business).

 

About the guarantor

Vedanta is a diversified metals, mining, power, and oil and gas company. London-based Vedanta Resources Ltd holds 68.11% stake in the company. The operations of Vedanta include copper, iron ore, aluminium assets at Jharsuguda and Lanjigarh in Odisha, and power (2,400 megawatt [MW] and 1,215 MW captive power plants for the aluminium business). The company also has aluminium operations through its subsidiary, Bharat Aluminium Company Ltd. Moreover, a part of the power business (1,980 MW) is conducted through wholly owned subsidiary, Talwandi Sabo Power Ltd. The oil and gas business has now been merged with Vedanta, and the group operates the zinc business through Hindustan Zinc Ltd and Zinc International in South Africa and Namibia. In June 2018, Vedanta, through its wholly owned subsidiary, Vedanta Star Ltd (VSL), acquired 90% stake in ESL Steel Ltd (ESL, current operational capacity of 1.5 MTPA) for Rs 5,320 crore. However, effective from March 25, 2020, VSL has been merged with ESL and Vedanta now directly holds 95.5% share in ESL.

Key financial indicators

Particulars	Unit	2023^	2022
Revenue	Rs crore	176	164
Profit after tax (PAT)	Rs crore	-27	-23
PAT margin	%	-15.3	-14.2
Adjusted debt/adjusted networth	Times	-	-36.7
Interest coverage	Times	-	1.0

^Based on provisional financials

List of covenants

The material covenants of the term loan are as follows:

• Corporate guarantor, Vedanta Ltd, to maintain total outside liabilities to tangible networth ratio of 3:1 on standalone basis.

 

The material covenants of the bank guarantees are as follows:

• Minimum security cover of 1.0 time at any point of time

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon r ate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Bank Guarantee *	NA	NA	NA	20	NA	CRISIL AA (CE) /Negative
NA	Term Loan*	25-Mar-22	7.8%	25-Mar-30	375	NA	CRISIL AA (CE) /Negative

* Guaranteed by Vedanta Ltd