Detailed Rationale

Crisil Ratings has continued its ratings on the proposed bank facilities of Sesa Mining Corporation Limited (SMCL) on ‘Rating Watch with Developing Implications’, a wholly owned subsidiary of Sesa Resources Ltd (SRL; 100% held by Vedanta Ltd [Vedanta]).

 

The continuation of rating watch is in line with the continuation of rating watch for the bank facilities and debt instruments of the parent company, Vedanta Ltd (Vedanta). The parent’s ratings are on watch as reorganisation-cum-demerger exercise is still underway (approval from shareholders and lenders for the demerger scheme was received on 18th February, 2025) and will need requisite approvals including the NCLT (National Company Law Tribunal) and other requisite approvals. Crisil Ratings understands that final demerger process could take a few more months for completion.

 

The ratings of the parent continue to factor in the expected improvement in the consolidated operating profitability (earnings before interest, tax, depreciation and amortisation [Ebitda]), along with improved capital structure with reduction in debt and leverage to below rating thresholds. Furthermore, the rating factors the improvement in the overall credit profile of Vedanta with better financial flexibility by increasing operating cash accrual and reducing debt, especially at Vedanta Resources Ltd (VRL; rated ‘B+/Stable‘ by S&P Global Ratings).

 

SMCL is engaged in the logistics business for the Vedanta group’s iron ore business in Goa and port business in Visakhapatnam. Further, it is expected to undertake trading business for the group’s iron ore production in Goa (mining license currently held by Vedanta) from this fiscal.
 

The ratings of SMCL factor in the strong support from the ultimate parent, Vedanta, given the high business linkages of SMCL with Vedanta. SMCL’s businesses are expected to be driven by Vedanta’s businesses. Also, the parent has provided strong financial support to SMCL over the past several years. SMCL currently has no external debt as operations are supported by its operating earnings as well as intercompany loans (ICLs) from Vedanta (directly or indirectly through SRL).

 

The ratings also factor in the expected improvement in the business risk profile of SMCL, with a likely increase in scale of operations as the company commences iron ore trading business from this fiscal, which will boost its operating earnings. That said, CRIISL Ratings will monitor the expected ramp up of sales and operating profitability of SMCL going forward and will remain a key monitorable.

 

The rating strengths are partially offset by the limited scale of existing operations and the average financial risk profile of SMCL. Also, the company will be susceptible to price volatility in the iron ore trading business, essentially a commodity business.

Analytical Approach

Crisil Ratings has evaluated the standalone business and financial risk profiles of SMCL.

 

Crisil Ratings has applied its parent notch up framework to factor in support from the ultimate parent, Vedanta, basis the strong operational, financial and managerial linkages of SMCL with Vedanta.

 

Crisil Ratings understands that while SRL is the immediate holding company of SMCL, support will likely come from Vedanta (directly or indirectly) and will extend the need-based support to SMCL, as there are no operations in SRL as on date.

Key Rating Drivers & Detailed Description

Strengths:

• Support from the ultimate parent, Vedanta: SMCL is strategically important to the iron ore business of Vedanta. Vedanta, directly and indirectly, has provided support for the operations of SMCL in the past, as reflected in loans of Rs 259 crore as on March 31, 2024 (Rs 180 crore a year ago). Crisil Ratings understands that Vedanta will continue to provide such need-based support to SMCL over the medium term as well.

 

Crisil Ratings understands that post the ongoing demerger of Vedanta, the iron and steel vertical will be transferred to Vedanta Iron and Steel Company. As per the management articulation, the current support philosophy will continue and the new entity will continue providing need-based support to SMCL.

 

• Significant ramp-up of operations from iron ore trading, as well as healthy cash accrual from the logistics business: The business profile of SMCL remained comfortable during fiscal 2024, reflected in revenue of Rs 205 crore and Ebitda of Rs 124 crore (Rs 179 crore and Rs 93 crore, respectively, during fiscal 2023). Revenue from the past two years is entirely from the logistics business. Further, during the first quarter of this fiscal, the company reported revenue of Rs 47 crore and Ebitda of Rs 22 crore, solely from the logistics business.

 

However, the company is undertaking the iron ore trading business, which is expected to gain traction from the second half of fiscal 2025 and will result in significant scale up of operations. SMCL will procure ore of grade 54-58% from Vedanta, which owns the mining license of the mines in Goa, and will export the same, mainly to China, through the spot auction market.

 

Crisil ratings expects that SMCL will clock revenue of Rs 1,200-1,500 crore in fiscal 2025, with net cash accrual of Rs 50-90 crore. Crisil Ratings also understands that the company is bidding for additional mining licenses and any development on that front could lead to further scaling up of operations. That said, lower-than-expected ramp up of operations along with developments on future bids will remain monitorable.

 

Weaknesses:

• Limited track record of iron ore trading operations and inherent risk of price volatility, being a commodity business: The company has entered the iron ore trading business just this fiscal and hence has limited track record. Further, to provide end-to-end solutions to customers, SMCL is acquiring the river fleet of Vedanta for Rs 156 crore, which is expected to be funded through loans from Vedanta/SRL.

 

SMCL is also bidding for additional mining licenses, which could potentially lead to further scaling up of operations. Crisil Ratings will continue to monitor all these development and ramp-up of operations in a sustainable manner will remain monitorable.

 

The business is susceptible to the inherent risk of price volatility as demand for iron ore fines is linked with the steel industry, which depends on construction and infrastructure activities and remains sensitive to economic cycles. Furthermore, the steel industry is susceptible to volatility in global steel prices. Moderation in demand and prices could impact profitability. This, along with increased inventory risk, will remain monitorable.

 

• Average financial risk profile: While the company has no external debt as on date, the operational requirements have been met through loans from the ultimate parent, Vedanta (directly or indirectly through SRL). Due to the low equity nature of these loans, Crisil Ratings is treating them as debt. The interest on these loans is being accrued due to SMCL’s limited operating cash flow, and is expected to be paid once the operations scale up on a sustainable basis.

 

Adjusted gearing was moderately high on account of low networth in the past. However, adjusted gearing improved to 2.3 times as on March 31, 2024 (from 11.0 times a year ago), led by increase in the networth due to better earnings.

 

Debt requirement is expected to increase on account of the new trading business. Consequently, Crisil Ratings expects the adjusted gearing to increase above 3.0 times and interest coverage ratio to moderate to less than 3.0 times (from 5.7 times in fiscal 2024 and 5.8 times in fiscal 2023) over the medium term.

Liquidity: Strong

SMCL had cash and equivalents of Rs 11.7 crore as on August 31, 2024 (Rs 38 crore as on March 31, 2024). While the company is in the process of availing a working capital limit from banks, its liquidity is aided by nil external debt and likely support from Vedanta in a full and timely manner.

Rating sensitivity factors

Upward factors

• Improvement in the credit risk profile of the ultimate parent resulting in a rating upgrade by 1 or more notches.
• Sustainable and substantial improvement in financial and operating performance on the back of healthy ramp-up of operations.

 

Downward factors

• Weakening of the credit risk profile of the parent resulting in a rating downgrade of 1 or more notches.
• Change in the ownership and support philosophy of Vedanta towards SMCL.

About the Company

SMCL is a wholly owned subsidiary of SRL, which is 100% held by Vedanta. SMCL, along with SRL, had mining leases in Goa, which were suspended post the Supreme Court order in 2018, cancelling mining leases of all miners in Goa. Subsequently, the ban was lifted in fiscal 2024 and Vedanta won the bid for mining license in Bicholim, Goa (previously held by SRL). Consequently, from fiscal 2025, SMCL is engaging in trading of iron ore fines (54-58% grade), majorly exporting to China.

 

Further, in Goa, SMCL is engaged in the logistics business as it possesses the necessary logistics infrastructure such as passing way, jetties, beneficiation plants and so on. Furthermore, it provides logistics stevedoring, which includes cargo handling activities, railway-oriented activities and allied services at the Visakhapatnam port (in Andhra Pradesh) through Maritime Ventures Pvt Ltd, which got recently merged with SMCL.

Key Financial Indicators

As on/for the period ended March 31		2024	2023
Operating income^	Rs crore	205	179
Profit after tax (PAT)^	Rs crore	99	101
PAT margin	%	48.1	56.4
Adjusted debt*/adjusted networth	Times	2.3	11.0
Interest coverage	Times	5.7	5.8

*Includes loans from the parent of Rs 259 crore in fiscal 2024 (Rs 180 crore in fiscal 2023)

^represents income from logistics business

Any other information: Not Applicable