Detailed Rationale

CRISIL Ratings has continued its ratings on the bank facilities and debt instruments of Vedanta Limited (Vedanta; part of the Vedanta group) on ‘Rating Watch with Developing Implications’.

 

CRISIL Ratings has taken note of the recent announcement of the launch of the consent solicitation process for the liability management (LM) exercise by Vedanta’s parent, Vedanta Resources Ltd (VRL) as well as the downgrade by S&P Global Ratings on VRL’s rating to ‘CC/Credit Watch Negative’ (from ‘CCC/Credit Watch Negative’). The LM exercise is intended to extend the maturities of three U.S. dollar-denominated bonds of VRL maturing in January 2024 ($1 billion), August 2024 ($0.95 billion) and March 2025 ($1.2 billion). The exercise includes an upfront part payment to respective bondholders, for which the new credit facility of USD 1.25 billion has been tied up by VRL and CRISIL Ratings understand that the same is available for utilization once the consent exercise is successful.

 

The rating reaffirmation factors in high likelihood that VRL will successfully complete its LM exercise latest by January 04, 2024, as indicated by the management. If successful, the LM exercise will help in elongating the maturity profile of its liabilities and reduce the dependence on large dividend payouts from Vedanta over the medium term. Developments on the said front will remain a key monitorable.

 

However, in case the LM exercise is unsuccessful, it will materially increase the refinancing pressure for VRL over the next 1-1.5 years, including bonds maturing in January 2024, as there is limited progress on any alternate repayment plan. Thereby, unsuccessful LM exercise and absence of firmed-up alternate plan for repayment of VRL’s debt maturities (including January 2024 bond maturities) could result in a rating downgrade for Vedanta as it could further impact its financial flexibility as seen in recent increase in cost of borrowings for Vedanta amid the ongoing uncertainty around the refinancing plan by VRL.

 

While Vedanta’s management has indicated that the debt holders of VRL do not have any legal recourse to Vedanta or its operational cash flows, CRISIL Ratings has added the debt of VRL for calculating the adjusted debt for Vedanta. This is because key sources for VRL’s debt servicing are either the dividend outflow from Vedanta or refinancing based on the implicit strength of the investments held by VRL, primarily Vedanta. Hence, any delay in debt repayment by VRL could have a bearing on the financial flexibility of Vedanta, especially its access to capital markets, and will be a key rating sensitivity factor.

 

Further, the rating watch continues to factor the recent corporate announcement by Vedanta that it will demerge its aluminium, oil and gas, power, base metal (zinc international and copper business) and iron and steel businesses into separate standalone listed entities. The company’s management proposes to unlock value and simplify the corporate structure. However, the deal will need requisite approvals, including from shareholders and lenders, and could take 3-4 quarters for completion. Also, clarity on allocation of assets and liabilities across entities under the proposed structure, along with group/parent support philosophy for each entity, is yet to emerge. This will be critical for evaluating the credit profiles of the entities, including Vedanta, under the proposed structure and for resolution of the rating watch. CRISIL Ratings will continue to monitor developments on the proposed organizational restructuring and pending clarity on the said critical aspects.

 

On November 13, 2023, CRISIL Ratings had downgraded the ratings on Vedanta due to the increased likelihood of Vedanta’s consolidated financial leverage (ratio of net debt to EBITDA) for the current fiscal remaining higher than the rating thresholds of 2.7 times. This is because successful completion of the company’s plans to deleverage the balance-sheet through inorganic route of asset monetization is expected to be behind the earlier expected timelines for the fiscal. Further, the rating downgrade also factored the delay in refinancing the upcoming debt maturities of parent company, VRL beyond the expected timelines of October 2023. The delay in refinancing at VRL reduces the financial flexibility for Vedanta, which had already witnessed a reduction in liquidity since last fiscal.

 

The ratings continue to factor in the expectation that Vedanta’s consolidated operating profitability (EBITDA; earnings before interest, taxes, depreciation and amortisation) for fiscal 2024 is expected to be around Rs 35,000 crore[1] (~Rs 35,250 crore in fiscal 2023). This will be supported by continued benefit of reduced cost pressure and healthy operating rates across key business segments, along with recent gains from arbitration award in oil & gas business, despite commodity prices remaining modest and slower than expected progress on capex plans in aluminium business.

 

Vedanta’s consolidated operating profitability in fiscal 2025, is expected to benefit from increasing backward integration and volume in the aluminium business after commissioning of ongoing capex, robust operating rates across key businesses, and continued efficiency gains. Timely completion of the ongoing capex and ramp up of new capacities will be key monitorable.

 

The ratings continue to factor in 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, and improving profitability in the aluminium business. These strengths are partially offset by high debt level, large capex and dividend payouts, and susceptibility to volatility in commodity prices and regulatory risk.

[1]It does not include brand and management fees paid to VRL

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Vedanta and its subsidiaries, collectively known as the Vedanta group, considering their 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 AA-/CRISIL A1+/Rating Watch with Developing implications’); Talwandi Sabo Power Ltd (‘CRISIL AA- (CE)/CRISIL A1 (CE)/Rating Watch with Developing Implications’); and ESL Steels Ltd (‘CRISIL AA-/CRISIL A1+/Rating Watch with Developing Implications').

 

CRISIL Ratings has included debt of VRL (estimated around $5.7 billion [excluding outstanding intercompany loans (ICL) of $450 million] or Rs 47,500 crore as on September 30, 2023) to calculate the adjusted debt. This is because despite no legal recourse of VRL’s debtholders to Vedanta, debt servicing will depend on the dividend outflow from Vedanta or refinancing, 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:

Diversified business risk profile

The Vedanta group operates across 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, thus commanding a strong position in the domestic market. A well-diversified business risk profile cushions the group from commodity-specific risks and cyclicality.

 

Low-cost position of key businesses

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 will be driven by capex-led growth in volume over the medium term.

 

Vedanta has recently won an arbitration award pertaining to the disallowed exploration costs claim, raised by the Directorate General of Hydrocarbons. CRISIL Ratings understands that this has resulted in higher profit-sharing with the Government of India. The management believes that these costs could be recovered over the next 4-5 quarters and thus, support cash accrual.

 

Higher integration to support profitability in the aluminium business over the medium term

Ebitda per tonne for the aluminium business rose by nearly 23%, to $397 in the first half of fiscal 2024, from $322 for the full fiscal 2023. This was driven by a drop in power cost by around 34%, led by improved materialisation of linkage coal and fall in coal prices. On the contrary, cost of alumina was volatile due to a lower domestic bauxite mix and maintenance shutdown of the refinery. CRISIL Ratings understands that the domestic bauxite mix will increase over the next three quarters and materialisation of linkage coal will witness further improvement over the medium term, along with sustenance of lower coal prices. Ebitda per tonne is likely improve to $500-550 for the current fiscal.

 

Vedanta is undertaking a capex programme for backward integration of its aluminium business. As part of the capex, the alumina refinery capacity will be enhanced to 5 million tonnes per annum (MTPA) in a phased manner over the next three quarters, from the existing 2 MTPA. The group also plans to develop captive coal mines with combined capacity of 34 MTPA and bauxite mine with a capacity of 6 MTPA. Bulk of this capex is likely to be implemented over the next 3-4 quarters, but has been postponed by the management by one to two quarters recently. Operationalisation of captive coal blocks at Kurloi north and Radhikapur (west) (in the second quarter of the next fiscal) in Odisha and focus on increasing local bauxite and alumina sourcing should enhance cost efficiency over the medium term. The coal block at Ghogharpalli in Odisha is likely to be commissioned during the first quarter of fiscal 2026, which will improve coal security for the aluminium business. This, along with the ongoing expansion in refinery capacity, should enhance operating efficiency from the second half of fiscal 2024 and with full effect from fiscal 2025 onwards. Any material delay in structural improvement in operational integration of the aluminium business, resulting in lower-than-expected growth in profitability, will remain a key monitorable.

 

Strong volume growth expected with capital allocation towards the zinc, aluminium and iron ore businesses

Increased mined metal capacity in domestic zinc, along with ramp-up of Gamsberg’s (South Africa) operations in Zinc International, will support the scale-up in volume. Furthermore, Vedanta is undertaking a brownfield expansion of its aluminium smelter capacity (by 414 kilo tonne per annum [under Balco]), and also increasing its level of integration by expanding its refinery and increasing the share of value-added products. All these projects are expected to be commissioned in a phased manner over the next 3-4 quarters. In addition, CRISIL Ratings understands that the company will be increasing its iron ore capacities (domestic as well as overseas) over the next 1-2 years, which would further support volume growth.

 

Weaknesses:

Continued refinancing risk at VRL and reduced liquidity at Vedanta, limiting flexibility of surplus dividend

With significant near-term debt maturities at VRL over the next 18 months, its dependence on refinancing or higher dividend payout by Vedanta remains high. However, large dividend payouts during fiscal 2023 have resulted in significant reduction in cash balances at Vedanta. This has increased VRL’s dependence on timely refinancing of upcoming debt maturities. Based on discussions with the management, CRISIL Ratings understands that a consent solicitation process for the LM exercise by VRL is likely to get completed by January 04, 2024. Upon successful implementation of LM exercise, dependence of VRL on high annual dividend payout by Vedanta will also reduce and will support improvement in cash balances at Vedanta. VRL’s demonstrated ability to raise funds by stake sale during the current fiscal and its existing shareholding in Vedanta being significantly higher than 50% (currently at ~64%), and the group’s track record of successful refinancing provide some comfort and flexibility to VRL. However, completion of the proposed refinancing plan within expected timelines will be a key monitorable.

 

High leverage due to large debt (including VRL) and significant annual dividend payout; though expected to improve over the medium term

Vedanta has had continued high debt levels over the past few fiscals, on account of large debt of its parent. Furthermore, continued assistance via dividend payout to the parent to support the latter’s debt has resulted in significant cash outflow to minority shareholders. This, along with moderation in operating profitability in the last fiscal, resulted in net leverage weakening to 3.4 times as of March 2023, from 2.2 times in March 2022. Further, it is expected to remain higher than rating thresholds of 2.7 times in fiscal 2024 due to moderation in operating profitability. Consolidated net leverage may witness improvement over the medium term, with expected improvement in profitability, reduced dividend outflow after the proposed refinancing plan at VRL and continued focus on deleveraging and will be a key monitorable.

 

While the company has been incurring capex over the past fiscals (Rs 16,000 crore in fiscal 2023 and expected at Rs 15,000-20,000 crore in fiscals 2024 and 2025), its annual Ebitda has been adequate to support the same. Also, prudent capital allocation has backed increase in annual Ebitda against the levels seen during pre-Covid. That said, profitability remains susceptible to volatility in the prices of metals and oil and gas. Any further delay in ramp-up of annual Ebitda against expectations, material acquisition or higher-than-expected cash outflow to support VRL will remain a key monitorable.

 

CRISIL Ratings has also noted the management’s continued focus on deleveraging, including the intent to bring down debt at VRL under $5 billion over the medium term. Debt at VRL has already reduced by nearly $3 billion after March 2022, resulting in outstanding external debt of around $5.7 billion (excluding outstanding ICL of $450 million) as on September 30, 2023. Thus, expected reduction in consolidated gross and net debt (including debt at VRL) should support financial flexibility of both Vedanta and VRL over the medium term, and will be a key monitorable. Any change or delay along these expectations will be a key rating sensitivity factor.

 

CRISIL Ratings also understands that the proposed capex for the semi-conductor and display production businesses (after calling off the joint venture with Foxconn) will now be executed via Vedanta. However, the management has articulated that the said project is at a nascent stage and there will be no immediate capital outlay towards the same. Progress in the semiconductor business will depend on identification of a new technology partner and various regulatory approvals, including the production linked incentive scheme, which are monitorables. Also, CRISIL Ratings understands that there are no plans by Vedanta to acquire the Konkola Copper Mines plc (KCM) business of VRL over the medium term. Further developments in this regard will remain a monitorable.

 

Exposure to changes in regulations

The businesses are vulnerable to regulatory risk. The copper smelting plant at Thoothukkudi in Tamil Nadu has been shut since May 2018 following a directive from the Tamil Nadu Pollution Control Board. Suspension of the 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 profit sharing contract (PSC) extension, ruling against the company, will reduce the profit margin for the oil and gas business.

Liquidity: Strong

Liquidity of Vedanta remains healthy

Cash accrual, projected around Rs 25,000 crore (pre-dividend payout) in fiscal 2024 and around Rs 30,000 crore (pre-dividend payout) in fiscal 2025, will comfortably cover Vedanta’s term debt obligation of around Rs 10,000 crore for the second half of fiscal 2024 and Rs 11,600 crore for full fiscal 2025. Cash balance of Rs 16,702 crore (net of ICL to VRL) as on September 30, 2023, unutilised bank limit (around Rs 7,000 crore as on October 31, 2023), and flexibility towards capex, support liquidity at Vedanta. The company is also in the process to refinance a significant portion of its principal debt obligation in fiscals 2024 and 2025, based on its track record and strong banking relationships.

 

Liquidity for VRL witnessing moderation

The parent has an annual interest expense of around Rs 5,500 crore ($650-700 million) towards its outstanding debt, and services it mainly via dividends received from Vedanta and partly through management and brand fee, also received from the latter. Debt obligations of the parent during fiscal 2023 and the first quarter of fiscal 2024 were serviced through a mix of refinancing and dividend received from Vedanta. That said, VRL, faces near and medium-term refinancing risk, with scheduled debt repayment of around $4.5 billion till March 2025 (including upcoming bond maturity of $1 billion each, in January and August 2024). However, VRL is expected to refinance/part repay the same in a timely manner. Any delay in expected timelines for refinancing or repayment of debt will be a key rating sensitivity factor.

 

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 90% to the consolidated operating profit.

 

The ESG profile supports the existing 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 as its operations affect the local community and involve health hazards.

 

Key highlights

• Vedanta aims to become carbon neutral by 2050 or sooner – it envisages 20% reduction in GHG emissions intensity by 2025, from the 2012 baseline, and 25% reduction in its absolute carbon emission intensity by 2030. Vedanta has reduced GHG emissions by 57% from fiscal 2021 baseline.
• The company has been improving its water recycling rate and recycled 30.6% of total water consumed in fiscal 2022. It has set a target to achieve net water positivity by 2030. The company recycled 98% of its high-volume, low-toxicity waste in fiscal 2022 (94% in fiscal 2021), and targets zero net waste by 2025.
• The loss time injury frequency rate for Vedanta was 0.42 in fiscal 2023 against 0.46 in the previous fiscal for the permanent employees of the business. The company had more fatalities in the past year as compared to earlier. However, the company targets zero harm and fatalities going forward.
• Gender diversity is 8.01% and the company aims to increase the share of women employees to 20% by 2030.
• The governance structure is characterised by 50% of the board comprising independent directors (none with tenure exceeding 10 years), split in chairman and CEO positions, dedicated investor grievance redressal mechanism and healthy disclosures
• Few regulatory issues, mainly related to environmental concerns, have led to suspension of some businesses (copper business in Tamil Nadu and iron ore mining in Goa due to state-wide ban on mining in Goa) in the past few years. These events have also had social impact due to job losses. These matters are sub judice.

 

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 borrowing in its overall debt and access to both domestic and foreign capital markets (mainly by VRL).

Rating Sensitivity Factors

Upward factors

• Significant increase in Ebitda owing to ramp-up in volume and continued cost efficiency across businesses, and improving business resilience
• Structural and sustained improvement in aluminium profitability, with total cost of production of aluminium structurally reducing to below $1800 per tonne, resulting in Ebitda per tonne higher than $700-800 on a sustained basis
• Sustained deleveraging with material reduction in consolidated net debt on continued basis, resulting in significantly higher-than-expected reduction in net debt to Ebitda ratio, from the current levels

 

Downward factors

• Lower-than-expected EBITDA because of higher-than-expected cost of production, slower volume ramp-up, or lower realization
• Delay in successful completion of the announced LM exercise by VRL for its upcoming maturities, latest by January 04, 2024, resulting in increased dependence on substantial dividend payout by Vedanta, thereby further impacting liquidity profile of the company from current levels (cash & cash equivalents of Rs 16,702 crore as on September 30, 2023)
• Delay in meaningful correction in financial leverage with net debt to Ebitda ratio sustaining above 3.2 – 3.4 times
• Financial stress at VRL leading to reduced financial flexibility at Vedanta
• Any incremental investment or support to VRL or Volcan Investments Ltd resulting in leverage at Vedanta remaining higher than our rating thresholds

Key Financial Indicators

Particulars	Unit	FY23	FY22
Operating income	Rs.Crore	148,790	131,192
Profit after tax (PAT)	Rs.Crore	14,503	23,710
PAT margin	%	9.7	18.1
Adjusted debt/adjusted networth	Times	2.92	1.59
Interest coverage	Times	6.1	9.45

Note: These reflect CRISIL Ratings-adjusted consolidated financials

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
INE205A07196	Debentures	25-Feb-20	9.20%	25-Feb-30	2000	Simple	CRISIL AA-/Watch Developing
INE205A07212	Debentures	31-Dec-21	7.68%	31-Dec-24	1000	Simple	CRISIL AA-/Watch Developing
INE205A07220	Debentures	29-June-22	8.74%	29-June-32	4089	Simple	CRISIL AA-/Watch Developing
INE205A08012	Debentures	16-Dec-22	3M T-bill	15-Mar-24	800	Simple	CRISIL AA-/Watch Developing
NA	Debentures%	NA	NA	NA	1555	Simple	CRISIL AA-/Watch Developing
NA	Commercial paper	NA	NA	7-365 days	10000	Simple	CRISIL A1+/Watch Developing
NA	Fund-based facilities^	NA	NA	NA	5,450	NA	CRISIL AA-/Watch Developing
NA	Fund-based facilities	NA	NA	NA	540		CRISIL AA-/Watch Developing
NA	Fund-based facilities**	NA	NA	NA	250		CRISIL AA-/Watch Developing
NA	Non-fund-based limit#	NA	NA	NA	19,990		CRISIL A1+/Watch Developing
NA	Non-fund-based limit	NA	NA	NA	820		CRISIL A1+/Watch Developing
NA	Non-fund-based limit*	NA	NA	NA	500		CRISIL AA-/Watch Developing
NA	Proposed long-term bank loan facility	NA	NA	NA	2607		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	30-Sep-26	38		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	31-Dec-26	41		CRISIL AA-/Watch Developing
NA	Term loan	14-Dec-21	NA	30-Sep-26	67		CRISIL AA-/Watch Developing
NA	Term loan	31-Oct-20	NA	31-Jan-25	54		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	30-Sep-26	126		CRISIL AA-/Watch Developing
NA	Term loan	27-Jul-18	NA	30-Sep-24	143.5		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	31-Dec-26	176		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	30-Sep-26	189		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	30-Sep-26	210		CRISIL AA-/Watch Developing
NA	Term loan	24-Mar-23	NA	23-Mar-28	238		CRISIL AA-/Watch Developing
NA	Term loan	30-Nov-19	NA	31-Mar-25	350		CRISIL AA-/Watch Developing
NA	Term loan	30-Sep-18	NA	30-Dec-28	348		CRISIL AA-/Watch Developing
NA	Term loan	12-Mar-20	NA	30-Jun-25	414		CRISIL AA-/Watch Developing
NA	Term loan	NA	NA	31-Dec-26	440		CRISIL AA-/Watch Developing
NA	Term loan	29-Apr-22	NA	31-Dec-26	443		CRISIL AA-/Watch Developing
NA	Term loan	28-Nov-22	NA	30-Nov-27	425		CRISIL AA-/Watch Developing
NA	Term loan	15-Feb-23	NA	31-Dec-27	490		CRISIL AA-/Watch Developing
NA	Term loan	08-Dec-22	NA	31-Dec-29	743		CRISIL AA-/Watch Developing
NA	Term loan	25-Jul-14	NA	30-Sep-25	708		CRISIL AA-/Watch Developing
NA	Term loan	18-Jul-22	NA	30-Jun-27	910		CRISIL AA-/Watch Developing
NA	Term loan	31-Mar-22	NA	31-Mar-28	1000		CRISIL AA-/Watch Developing
NA	Term loan	28-Sep-21	NA	30-Sep-26	940		CRISIL AA-/Watch Developing
NA	Term loan	30-Jun-22	NA	31-Mar-27	1157		CRISIL AA-/Watch Developing
NA	Term loan	30-Jan-23	NA	27-Feb-28	1166		CRISIL AA-/Watch Developing
NA	Term loan	14-Aug-18	NA	14-Nov-23	75		CRISIL AA-/Watch Developing
NA	Term loan	24-Nov-22	NA	30-Nov-24	300		CRISIL AA-/Watch Developing
NA	Term loan	30-Aug-21	NA	30-Sep-26	410		CRISIL AA-/Watch Developing
NA	Term loan	15-Sep-21	NA	30-Sep-26	410		CRISIL AA-/Watch Developing
NA	Term loan	31-Dec-21	NA	30-Sep-27	1945		CRISIL AA-/Watch Developing
NA	Term loan	26-Aug-21	NA	30-Sep-26	3901		CRISIL AA-/Watch Developing
NA	Term loan	03-Aug-18	NA	31-Mar-28	7038		CRISIL AA-/Watch Developing
NA	Term loan	31-Mar-22	NA	31-Mar-25	211		CRISIL AA-/Watch Developing
NA	Term Loan	Sep-23	NA	Sep-28	1000		CRISIL AA-/Watch Developing

^Fund-based limit is completely interchangeable with non-fund-based limit

#Non-fund-based limit of Rs 2,000 crore is interchangeable with fund-based limit

*Capex letter of credit limit is interchangeable with operational non-fund-based limit

%Yet to be placed

**Interchangeable between Fund Based (all categories’, including Intra-day overdraft) and Non-Fund Based”