August 06, 2015

Mumbai

CRISIL downgrades ratings on Vedanta, Balco, Talwandi Sabo, Vizag General Cargo; reaffirms ratings on HZL, Sesa Resources, Malco Energy

CRISIL has downgraded its rating on the long-term debt instruments and bank facilities of Vedanta Ltd (Vedanta) to ‘CRISIL AA/Stable’ from ‘CRISIL AA+/Negative’, while reaffirming its rating on the company’s short-term bank facilities and debt instruments at ‘CRISIL A1+’. The ratings on the long-term debt instruments and bank facilities of the Vedanta group entities that are guaranteed by Vedanta-Talwandi Sabo Power Ltd (TSPL) and Vizag General Cargo Berth Pvt Ltd (VGCBPL)-have also been downgraded to ‘CRISIL AA(SO)/Stable’ from ‘CRISIL AA+(SO)/Negative’; the short-term ratings for TSPL have been reaffirmed at ‘CRISIL A1+(SO). Furthermore, CRISIL has downgraded its ratings on the debt instruments and bank facilities of Bharat Aluminium Company Ltd (Balco) to ‘CRISIL A+/Stable/CRISIL A1’ from ‘CRISIL AA-/Negative/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 (Sesa Resources) has been reaffirmed at ‘CRISIL A1+’.

The rating downgrade reflects CRISIL’s belief that Vedanta’s consolidated earnings before interest, tax, depreciation, and amortisation (EBITDA) will be lower than earlier expected mainly because of weak commodity prices, slower ramp up of the company’s aluminium smelting and power capacities, and lower volumes from the iron ore business. Consequently, Vedanta’s net debt (includes around USD5.1 billion debt of Vedanta Resources Plc [Vedanta Resources; rated 'BB-/Negative' by Standard & Poor's]) to EBITDA is likely to significantly exceed CRISIL’s earlier expectations of 2.5 times and will now take longer than expected to correct in the backdrop of weak commodity prices. However, moderation in cash flows from the oil and gas, iron ore, and aluminium businesses will be partially offset by higher volumes and prices in the zinc business, healthy conversion margins in the copper business, and cost rationalisation initiatives to mitigate the impact of weak commodity prices. CRISIL believes that Vedanta’s consolidated net debt may not increase substantially because of completion of a major proportion of capital expenditure (capex) in the aluminium and power businesses.

The ratings on Vedanta 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 Vedanta derives from the high market value of its investments in the subsidiaries – Cairn India Ltd (Cairn India) and HZL.

The downgrade in the ratings on Balco, TSPL, and VGCBPL reflects the change in the rating of the parent-Vedanta. The downgrade in Balco’s ratings also factors in the likelihood that commissioning of the company’s power and smelting capacities will take longer than expected and that its cost of production of aluminium will remain high over the medium term.

The ratings on HZL and Malco Energy have been reaffirmed based on their expected continued strong financial risk profile with minimal debt. The rating on Sesa Resources continues to reflect the strong operational and financial linkages with parent Vedanta.

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Vedanta; Cairn India; HZL; the group’s zinc business in Namibia, South Africa, and Ireland (termed as Zinc International); Balco; and Copper Mines of Tasmania Pty Ltd (CMT). This is because the entities are Vedanta's subsidiaries, operate under a common management team, and have operational and financial linkages. CRISIL has included Vedanta Resources’ debt of around USD5.1 billion (excluding inter-company deposit of USD2.7 billion extended to Vedanta’s 100 per cent subsidiary Twin Star Mauritius Holdings Ltd) as on June 30, 2015, in the capital structure analysis of Vedanta.

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 62.9 per cent stake in Vedanta as on June 30, 2015. The 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 and Lanjigarh (Odisha) are in Vedanta. The group has aluminium operations through Balco. A part of the power business (1980 MW) is conducted through wholly owned subsidiary TSPL. The group operates its oil and gas business through Cairn India and zinc business in India through HZL. The group 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: