January 20, 2015

Mumbai

CRISIL revises rating outlook to 'Negative' for Sesa Sterlite, Balco, Talwandi Sabo and Vizag General Cargo; reaffirms ratings on all Vedanta group companies

CRISIL has revised its rating outlook on the debt instruments and bank facilities of Sesa Sterlite Ltd (Sesa Sterlite) to ‘Negative’ from ‘Stable’ while reaffirming the ratings at ‘CRISIL AA+/CRISIL A1+’.

The outlook on the debt instruments and bank facilities of the Vedanta group entities that are guaranteed by Sesa Sterlite-Talwandi Sabo Power Ltd (TSPL) and Vizag General Cargo Berth Pvt Ltd (VGCBPL)-have also been revised to ‘Negative’ from ‘Stable’. CRISIL has also revised its rating outlook on the debt instruments and bank facilities of Bharat Aluminium Company Ltd (Balco) to ‘Negative’ from ‘Stable’ while reaffirming its ratings at ‘CRISIL AA-/CRISIL A1+’.

The ratings on Hindustan Zinc Ltd (HZL) and Malco Energy Ltd (Malco Energy) have been reaffirmed at ‘CRISIL AAA/Stable/CRISIL A1+’ and ‘CRISIL AA-/Stable/CRISIL A1+’, respectively. The rating on Sesa Resources Ltd has also been reaffirmed at ‘CRISIL A1+’.

The outlook revision reflects CRISIL’s belief that Sesa Sterlite’s consolidated cash flows are likely to be lower than earlier expectations driven by a combination of lower oil prices, delayed ramping up of aluminium smelting and power capacities, and lower volumes from the iron ore business. Consequently, Sesa Sterlite’s net debt (includes around USD4.8 billion of Vedanta Resources Plc's [Vedanta Resources; rated 'BB/Watch Neg' by Standard & Poor's] debt) to earnings before interest, tax, depreciation, and amortisation (EBITDA) is likely to deteriorate to around 2.5 times in 2014-15 (refers to financial year, April 1 to March 31) and may take longer than expected to correct. This is contrary to CRISIL’s earlier expectations that net debt/EBIDTA will witness improvement to less than 2 times in 2014-15 from 2.3 times in 2013-14. Moderation in the cash flows from the oil and gas, iron ore, and aluminium businesses may be partially offset by the higher volumes and prices in the zinc business, coupled with the healthy conversion margins in the copper business. In addition, CRISIL believes that Sesa Sterlite’s consolidated net debt may not increase substantially owing to completion of a major proportion of capital expenditure (capex) in the aluminium and power businesses.

The ratings on Sesa Sterlite continue to reflect its diversified business risk profile; its cost leadership in the zinc and oil and gas segments; and its healthy financial risk profile. In the iron ore, copper, and zinc businesses, it is among the largest and lowest cost producers commanding a strong market position. CRISIL also continues to factor in the financial flexibility that Sesa Sterlite derives from the high market value of its investments in the subsidiaries – Cairn India and HZL. However, structural subordination arising from fragmented shareholding and separation of debt from the cash flows and liquidity constrain the company’s financial risk profile.

The rating on Sesa Sterlite may be downgraded if the consolidated cash flows do not lead to significant improvement in the company’s net debt/EBIDTA. Conversely, the outlook on Sesa Sterlite may be revised to ‘Stable’ if the consolidated cash flows are according to CRISIL expectations leading to substantial improvement in net debt/EBIDTA, or if the company reduces its debt significantly.

The outlook revision on Balco, TSPL, and VGCBPL reflects a similar change in the outlook of the parent-Sesa Sterlite. The outlook revision on Balco also factors in the likelihood that commissioning of Balco’s power and smelting capacities will take longer than expected and that Balco’s cost of production of aluminium will remain high over the medium term.

The ratings on HZL and Malco Energy have been reaffirmed as they are expected to continue to have a strong financial risk profile with minimal debt. The rating on Sesa Resources Ltd continues to reflect the strong operational and financial linkages with its parent Sesa Sterlite.

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Sesa Sterlite, Cairn India, HZL, zinc business in Namibia, South Africa, and Ireland (termed as Zinc International), Balco, and Copper Mines of Tasmania Pty Ltd (CMT). This is because these entities are Sesa Sterlite's subsidiaries, operate under a common management team, and have operational and financial linkages. As part of the analytical approach for Sesa Sterlite, CRISIL has also included Vedanta Resources’ debt of around USD4.8 billion (excluding ICD of USD2.7 billion extended to Sesa Sterlite’s 100 per cent subsidiary Twin Star Mauritius Holdings Ltd) as on September 30, 2014, in the capital structure analysis of Sesa Sterlite as a significant portion of this debt could be serviced from the cash flows of Sesa Sterlite.

About the Group
The Vedanta group is majority-owned by Vedanta Resources, a metal, mining, power, and oil-and-gas company, listed on the London Stock Exchange. Vedanta Resources held 64.3 per cent stake in Sesa Sterlite as on December 31, 2014. The Vedanta group's copper, iron ore, and power divisions (2400-megawatt [MW] and 1215-MW captive power plants for the aluminium business), and its aluminium assets in Jharsuguda (Odisha) reside in Sesa Sterlite. The group also carries out its aluminium operations through Balco. A part of the power business (1980 MW) is also conducted through its wholly owned subsidiary, TSPL. The group operates its oil and gas business through Cairn India and the zinc business in India through HZL. The Vedanta group also has copper mines in Australia held by CMT; copper business comprises mining and smelting operations in Zambia, and zinc assets in South Africa, Namibia, and Ireland.

A complete list of the rating actions is provided in the table below: