| Vedanta Limited | ||||||||||||||
| Ratings reaffirmed at 'CRISIL AA/Stable/CRISIL A1+'; rated amount enhanced for Bank Debt | ||||||||||||||
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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 reaffirmed its ratings on bank facilities and debt instruments of Vedanta Limited. at ‘CRISIL AA/Stable/CRISIL A1+’.
The rating reaffirmation factors in Vedanta’s strong operating profitability (earnings before interest, tax, depreciation and amortisation {Ebitda}), driven by elevated commodity prices during fiscal 2022, volume growth across businesses, and sustained cost efficiency, especially in the aluminium business. During fiscal 2022, Vedanta reported healthy Ebitda of around Rs 45,000 crore (vis-à-vis around Rs 27,500 crore in fiscal 2021), in line with the expectations of CRISIL Ratings. While commodity prices have witnessed moderation in the current fiscal, it continues to remain healthy and higher than pre-pandemic levels. The Ebitda is thus likely to be at around Rs 40,000 crore in fiscal 2023 and aid improvement in free cash flow and return on capital employed over the medium term. During first quarter of fiscal 2023, the company reported consolidated EBITDA of around Rs 10,200 crores, ~ 2% higher on y-o-y basis. The management is expected to utilise cash accrual to reduce the outstanding consolidated debt (incl. VRL’s debt) and strengthen resilience to decline in commodity prices.
Strong enhancement in operating accrual and expected reduction in outstanding consolidated gross and net debt improved net leverage to 2.2 times as on March 31, 2022, from 3.1 times as on March 31, 2021. The ratio should sustain below 2.5 times thereafter.
The promoters have been looking to improve the corporate structure by increasing their shareholding in Vedanta. Between December 2020 and December 2021, they increased their stake to 69.7% from 50.1% through additional debt of nearly USD 2.4 billion. While this has helped to reduce dividend payout to minority shareholders and enhanced the overall financial flexibility, it has also increased the consolidated debt. However, improved profitability in fiscal 2022 supported increased dividend during the fiscal. This helped to cut down debt at Vedanta Resources Ltd (VRL; rated 'B-/Stable' by S&P Global Ratings) to USD 8.9 billion on March 2022 from USD 9.4 billion as of December 2021, thereby supporting consolidated deleveraging. While promoter stake has increased by around 19.5% since December 2020 (resulting in enhanced corporate structure for Vedanta), CRISIL Ratings understands that the promoters of the company may explore further improvement in the corporate structure of the group. That said, CRISIL Ratings notes the management focus on deleveraging, articulated through the recent capital allocation policy and other public interactions, including the intent to reduce the debt of VRL by around USD 4 billion over the medium term, with principal debt reduction of at least USD 1 billion in fiscal 2023. Thus, consolidated gross and net debt (including VRL’s debt) is expected to reduce in fiscal 2023 and thereafter. Further updates on actions taken by the promoters to enhance the corporate structure and the consequent impact on leverage will be key rating sensitivity factors.
The debt obligation of VRL in fiscal 2022 was met through a mix of refinancing and dividends, whereas dividends from Vedanta will continue to help VRL meet its interest obligation. That said, VRL faces near to medium term refinancing risk with scheduled debt repayment of USD 2.7 billion in fiscal 2023 and ~ USD 2.9 billion in fiscal 2024. However, CRISIL Ratings believes VRL is expected to refinance/part repay the same in a timely manner. This should be supported by improved operating profitability of Vedanta and increased holding of the promoters in Vedanta. During YTD-fiscal 2023, Vedanta has announced dividend of more than Rs 18,900 crore, which will result in dividend proceeds of ~ USD 1.5 billion to VRL. Besides, during May-June 2022, VRL had raised USD 700 million from banks, which, along with dividends receipts, will support VRL’s scheduled debt repayments in first half of current fiscal. However, any delay in timely refinancing of debt at VRL, going ahead, will be a key monitorable.
As per the capital allocation policy of Vedanta and as articulated by the management, potential strategic growth acquisition of Bharat Petroleum Corporation Ltd. (BPCL), if it happens, will not be done through Vedanta or its parent and will not be linked with the balance sheets of Vedanta or its parent entities. However, further developments on this front will remain a monitorable.
The ratings continue to reflect the strong business risk profile of Vedanta, driven by its 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 debt, large capital expenditure (capex) and dividend, and susceptibility to volatility in commodity prices and regulatory risk.
CRISIL Ratings has withdrawn its rating on NCDs aggregating to Rs 1,270 crore (see annexure for details of rating withdrawn) on receipt of independent confirmation of their redemption, in line with the CRISIL Ratings withdrawal policy. |
Analytical Approach To arrive at its 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 (‘CRISIL AA (CE)/Stable/CRISIL A1+ (CE)’) and ESL Steels Ltd (‘CRISIL AA/Stable/CRISIL A1+’).
CRISIL Ratings has included the debt of VRL (estimated at around USD 8.9 billion or around Rs 67,500 crore as on March 31, 2022) while calculating the 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 - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The Vedanta group is present in 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 and thus commands a strong market position in India. A well-diversified business risk profile cushions it from commodity-specific cyclicality and risks.
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 in this business will be driven by capex-led improvement in volume over the medium term.
The Delhi High Court, through its order dated March 26, 2021, had ruled in favour of the government in the dispute over additional 10% profit petroleum demanded by the government under the profit-sharing contract (PSC) extension policy for the Rajasthan block. This had resulted in increased cash outflow of around USD 60 million in fiscal 2021 for Vedanta. While the court order shall result in reduced profit margin for the oil and gas business, profitability should still remain healthy. Notably, the government has been providing only short-term extensions for continuity of operations in the Rajasthan block. Furthermore, additional claim of dues related to disallowed cost, raised by the Directorate General of Hydrocarbons, is under arbitration. While CRISIL Ratings understands from the company that the government is likely to approve the final PSC in the near term (with effect from May 15, 2020), it would be a key monitorable.
Improved linkage coal sourcing (over 70% in fiscal 2021 from 45% in fiscal 2018), reduced coal prices, and lower cost of imported alumina had improved cost efficiency for the aluminium business (Ebitda of over USD 525 per tonne during fiscal 2021 against less than USD 150 per tonne in fiscal 2020). With improved production rates, continued cost efficiency and strong aluminium realisation, the Ebitda per tonne for the aluminium business of Vedanta further increased to more than USD 1,000 during fiscal 2022. However, in first quarter of fiscal 2023, increased power cost due to lower materialization of linkage coal and higher coal cost in the market (power cost increasing to around $1200/tonne in the quarter, as compared to around $800/tonne in Q4FY22) led to increased CoP to $2,653/tonne as compared to $2,182/tonne in Q4FY22 (avg. CoP was $1,858/tonne in fiscal 2022). This, along with lower aluminium realisations, resulted in reduced EBITDA margin for aluminium business in the first quarter of fiscal 2023. EBITDA per tonne declined to $527/tonne during first quarter of fiscal 2023 from $1185/tonne last quarter of fiscal 2022. However, with gradual improvement in domestic coal availability, and operationalization of captive coal mines at Jamkhani coal mine, Radhikapur (west) coal block and Kuraloi (A) north coal block in Odisha over the medium term,and focus on increasing share of local bauxite and alumina sourcing should enhance cost efficiency over the medium term. The ongoing refinery capacity expansion to 5 million tonne per annum (mtpa; from the current 2 mtpa) should also enhance operating efficiency.
Increased mined metal capacity of 1.2 mtpa in domestic zinc, along with ramp-up of Gamsberg’s operations in Zinc International, will support the ramp up in volume. Furthermore, expected addition of new wells and surface facilities during fiscal 2023 may lead to higher volume in the oil and gas business over the medium term. Strong volume growth is likely to make the overall business risk profile more resilient. Vedanta is undertaking brownfield expansion of its aluminium smelter capacity by 414 kilo tonne per annum (under Balco). Expansion of aluminium refining capacities to 6 mtpa from the existing 2 mtpa is expected to be completed by fiscal 2024. This would further support volume growth over the medium term.
Weaknesses:
Continued assistance through dividend payout to the parent, VRL, to support the latter’s debt has resulted in significant cash outflow to minority shareholders. This, along with sizeable annual capex (about Rs 6,000 crore and Rs 9,000 crore in fiscals 2021 and 2020, respectively) and high consolidated net debt (including VRL) led to elevated net leverage of 3.1 times as on March 31, 2021 (3.8 times in the previous fiscal). While net debt at Vedanta had reduced by more than Rs 14,000 crore in the last five quarters till March 2022, the debt at VRL has increased due to stake increase in Vedanta. Capex (incl. sustenance capex) increased to more than Rs 10,500 crore in fiscal 2022 and is expected to increase further over the medium term (Rs 13,000-19,000 crore in fiscals 2023 and 2024, largely towards growth capex in the aluminium, zinc and oil and gas businesses). However, healthy profitability is likely to support the capex which, along with reduction in consolidated debt, helped improve net leverage to 2.2 times as on March 2022 and is expected to support the leverage to sustain below 2.5 times over the medium term. However, profitability remains susceptible to volatility in the prices of metals and oil and gas. Any material acquisition or higher-than-expected cash outflow to support VRL will remain a key monitorable.
The businesses are vulnerable to regulatory risk. The copper smelting plant at Thoothukkudi, Tamil Nadu, has been shut since May 2018 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 adversely impacted the iron ore business. Furthermore, the March 2021 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 Cash balance was Rs 34,342 crore as on June 30, 2022. 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 a significant, unutilised bank limit (around Rs 11,200 crore as on June 30, 2022).
Expected cash accrual of over Rs 30,000 crore in full fiscal 2023 should comfortably cover term debt obligation of more than Rs 9,600 crore in fiscal 2023. In addition, flexibility towards capex supports liquidity. Vedanta may also look to refinance a significant portion of its principal debt obligation in fiscal 2023, based on its strong refinancing track record.
VRL has an annual interest expense of around Rs 5,000 crore (around USD 650 million) towards its outstanding debt, which will be mainly serviced through dividends received from Vedanta. The debt repayments of the parent in fiscal 2022 were serviced through a mix of refinancing and dividend received from Vedanta. That said, VRL faces near to medium term refinancing risk with scheduled debt repayment of USD 2.7 billion in fiscal 2023 and ~ USD 2.9 billion in fiscal 2024. However, CRISIL Ratings believes VRL is expected to refinance/part repay the same in a timely manner. This should be supported by improved operating profitability of Vedanta and increased holding of the promoters in Vedanta. During YTD-fiscal 2023, Vedanta has announced dividend of more than Rs 18,900 crore, which will result in dividend proceeds of ~ USD 1.5 billion to VRL. Besides, during May-June 2022, VRL had raised USD 700 million from banks, which, along dividends receipts, will support VRL’s scheduled debt repayments in first half of current fiscal.
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 85% to the consolidated operating profit.
The ESG profile supports the already strong 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 due to its nature of operations affecting local community and health hazards involved.
Key ESG highlights:
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 borrowings in its overall debt and access to both domestic and foreign capital markets (mainly by VRL). |
Outlook: Stable The credit risk profile should continue to benefit from strong commodity prices, low cost of production across key businesses, and expected volume growth resulting in high operating profitability. Likely increase in profitability and utilisation of free cash flow towards debt reduction should support deleveraging and sustained improvement in financial risk profile. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company VRL holds 69.7% stake in Vedanta and has diversified operations across metals, mining, power, and oil and gas.
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Key Financial Indicators
Note: These reflect CRISIL Ratings-adjusted consolidated financials |
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 limit % Yet to be placed $ Foreign currency non-resident (FCNR) loans
Annexure - Details of rating withdrawn
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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 limit
$ Foreign currency non-resident (FCNR) loans
Criteria Details
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