Vedanta Limited Rating outlook revised to ‘Positive’; Ratings reaffirmed
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term rating on the bank facilities and debt instruments of Vedanta Limited (Vedanta; part of the Vedanta group) to ‘Positive’ from ‘Stable’, while reaffirming the rating at ‘CRISIL AA-’. The rating on the commercial paper programme and short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.
The ‘Positive’ outlook factors in expectation of improved operating profitability (earnings before interest, tax, depreciation and amortisation {EBITDA}), driven by stronger-than-expected commodity prices and volume growth across businesses, and sustained cost efficiencies especially in the aluminium business. These factors could result in higher than expected EBITDA of more than Rs 40,000 crore in fiscal 2022 (around Rs 27,500 crore in fiscal 2021), along with increased free cash flow and improved return on capital employed over the medium term. Further, the management is expected to utilise improved cash accrual towards reduction in outstanding consolidated debt, to improve resilience to volatility in commodity prices.
Strong improvement in operating accrual, supporting faster-than-expected reduction in consolidated gross and net debt, and resulting in net leverage reducing to sustainably below 2.5 times by fiscal 2022, may lead to a rating upgrade (net leverage was 3.1 times as on March 31, 2021) .
In December 2020, the promoters had increased their stake in Vedanta to 55.1% from 50.1%, by acquiring 4.98% stake, through debt of USD 400 million. Subsequently, they bought another 10.07% stake, for an additional debt of around USD 1,200 million through a voluntary open offer in April 2021, increasing their stake in Vedanta to 65.18%. While this has helped reduce dividend payout to minority shareholders and enhanced the overall financial flexibility of the group, it has also increased debt levels. CRISIL Ratings believes improved profitability of Vedanta during the current fiscal should support debt reduction at Vedanta Resources Ltd (VRL; rated 'B-/Stable' by S&P Global Ratings) from the levels of April 2021, supporting consolidated deleveraging. However, CRISIL Ratings understands that Vedanta’s promoters remain committed towards improving the corporate structure of the group. Hence, further updates on the same and consequent impact on the leverage shall 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 the large scale of operations. These strengths are partially offset by high debt along with large capex and dividend, and susceptibility to volatility in commodity prices and regulatory risks.
CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) aggregating Rs 2,900 crore (see annexure 'Details of Rating Withdrawn' for details) on receipt of an independent confirmation of their redemption. The ratings are withdrawn in line with CRISIL Ratings’ rating withdrawal policy. |
Analytical Approach To arrive at the 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 (TSPL; ‘CRISIL AA-(CE)/Stable/CRISIL A1+(CE)’) and ESL Steel Ltd (ESL; ‘CRISIL AA-/Stable/CRISIL A1+’). Refer to the annexure for the consolidated list of entities.
CRISIL Ratings has also included the debt of VRL (USD 8.4 billion or around Rs 62,000 crore as on April 30, 2021) 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 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. Earnings in the zinc business also benefited from higher share of silver production and better realisations in fiscal 2021. Profitability in the oil and gas business is aided by low operating cost and a business model that ensures recovery of capital expenditure (capex). Cash flow in this business will be driven by from capex-led improvement in volume over the medium term.
The Delhi High Court, through its order dated March 26, 2021, has ruled in the favour of the government in the dispute over additional 10% profit petroleum demanded by the government under profit sharing contract (PSC) extension policy for the Rajasthan block. This had resulted in increased cash outflow of around USD 60 million for fiscal 2021 for Vedanta. While the court order shall result in reduced profit margin for Vedanta’s oil and gas business, profitability should still be healthy. Notably, the government has been providing only short-term extensions for continuity of operations for the Rajasthan block. Furthermore, additional claim of dues related to disallowed costs, raised by the Directorate General of Hydrocarbons (DGH), is under arbitration. While CRISIL Ratings understands from the company that the final PSC is expected to be approved soon by the government, with effect from May 15, 2020, it would be a key monitorable.
Improved linkage coal sourcing (increased from 45% in fiscal 2018, to over 70% in fiscal 2021), reduced coal prices, and lower cost of imported alumina, improved the cost efficiency for the aluminium business (EBITDA of more than USD 525 per tonne during fiscal 2021, against less than USD 150 per tonne in fiscal 2020). With improved production rates, continued cost efficiencies and strong aluminium realisation, Vedanta reported EBITDA per tonne of more than USD 950 during first quarter of fiscal 2022. Increased share of captive and linkage coal, supported by access to the Jamkhani coal mine, Radhikapur (west) coal block and Kuraloi (A) north coal block in Odisha, and focus on increasing the share of local bauxite and alumina sourcing should further enhance cost efficiencies over the medium term. Recent announcement of refinery capacity expansion to 5 mtpa (from current capacity of 2 mtpa), should also support the operating efficiencies.
Increased mined metal capacity of 1.2 million tonne per annum (mtpa) in domestic zinc, along with ramp-up of Gamsberg’s operations in Zinc International should ramp up volume. Furthermore, expected addition of new wells and surface facilities during the first half of fiscal 2022, should lead to higher volume in the oil and gas business. Strong volume growth, over the medium term, should make the overall business risk profile more resilient. Recently announced brownfield expansion of the aluminium smelter capacity by 414 KTPA (under subsidiary Balco) and expansion of aluminium refining capacities to 5 MTPA from existing 2 MTPA, is expected to be completed over the next two years. This would further support volume growth for the company over the medium term.
Weaknesses:
Continued assistance through dividend payout to the parent, VRL, to support the latter’s debt has been resulting in significant cash outflow to minority shareholders. This, along with sizeable annual capex (Rs 12,000-13,000 crore expected in fiscal 2022, against about Rs 6,000 crore and Rs 9,000 crore in fiscals 2021 and 2020, respectively) resulted in elevated net leverage of 3.1 times as on March 31, 2021, and at 3.8 times for fiscal 2020. Improved profitability should support reduction in consolidated debt as well as net leverage over the medium term. However, the profitability margin remains susceptible to volatility in prices of metals and oil and gas and thereby, any material acquisition or higher-than-expected cash outflow to support VRL will remain a key monitorable.
The businesses are vulnerable to regulatory risks. Since May 2018, the copper smelting plant at Thoothukkudi, Tamil Nadu, has been closed, 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 The company had cash balance of Rs 31,318 crore (net of inter-company loans to VRL) as on June 30, 2021. 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 12,000 crore as on June 30, 2021).
Term debt obligation is expected to be around Rs 8,455 crore in last nine months of fiscal 2022, against cash accrual (pre-dividend) of more than Rs 33,000 crore during the full fiscal. In addition, flexibility towards capex also supports liquidity. Vedanta may also look to refinance a significant portion of its principal debt obligation in fiscal 2022 as well, based on its strong refinancing track record.
The parent, VRL has an annual interest expense of around Rs 4,800 crore (around USD 650 million) towards its outstanding debt, which will be mainly serviced through dividends received from Vedanta. VRL had refinanced it debt maturities due in June 2021, in a timely manner during last quarter of fiscal 2021, through improved refinancing ability on account of increased stake in Vedanta and better profitability. Further, the remaining debt maturities of ~ USD 800 million due in last nine months of fiscal 2022, are expected to be repaid by VRL during the fiscal. |
Outlook: Positive Vedanta’s credit risk profile should benefit from strong commodity prices, low cost of production across key businesses, and expected volume growth, resulting in higher operating profitability. Expected improvement in profitability and utilisation of free cash flow towards debt reduction should support deleveraging and improve financial profile. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company VRL holds 65.1% stake in Vedanta and has diversified operations across metals, mining, power, and oil and gas.
During the first quarter of fiscal 2022, Vedanta reported revenue, EBITDA and profit after tax of Rs 28,412 crore, Rs 10,032 crore and Rs 5,282 crore, respectively, against Rs 15,973 crore, Rs 4,008 crore and Rs 1,522 crore in the corresponding period of the previous fiscal.
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Key Financial Indicators
Note: These reflect CRISIL Ratings-adjusted consolidated financials *Includes non-cash exceptional expense on account of impairment of assets in fiscal 2020 |
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 limits % 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 - Details of Bank Lenders & Facilities | ||
| Facility | Amount (Rs.Crore) | Rating |
| Foreign Currency Term Loan$ | 920.4 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 100 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 1000 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 400 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 5 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 150 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 1000 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 600 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 1000 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 500 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 200 | CRISIL AA-/Positive |
| Fund-Based Facilities** | 200 | CRISIL AA-/Positive |
| Non-Fund Based Limit* | 4000 | CRISIL A1+ |
| Non-Fund Based Limit* | 3780 | CRISIL A1+ |
| Non-Fund Based Limit* | 730 | CRISIL A1+ |
| Non-Fund Based Limit* | 800 | CRISIL A1+ |
| Non-Fund Based Limit* | 350 | CRISIL A1+ |
| Non-Fund Based Limit* | 1150 | CRISIL A1+ |
| Non-Fund Based Limit* | 1000 | CRISIL A1+ |
| Non-Fund Based Limit* | 300 | CRISIL A1+ |
| Non-Fund Based Limit## | 500 | CRISIL AA-/Positive |
| Proposed Long Term Bank Loan Facility | 5130.3 | CRISIL AA-/Positive |
| Term Loan | 224.9 | CRISIL AA-/Positive |
| Term Loan | 421.2 | CRISIL AA-/Positive |
| Term Loan | 2312.4 | CRISIL AA-/Positive |
| Term Loan | 5000 | CRISIL AA-/Positive |
| Term Loan | 391.2 | CRISIL AA-/Positive |
| Term Loan | 410.3 | CRISIL AA-/Positive |
| Term Loan | 2718.7 | CRISIL AA-/Positive |
| Term Loan | 288 | CRISIL AA-/Positive |
| Term Loan | 423.6 | CRISIL AA-/Positive |
| Term Loan | 650 | CRISIL AA-/Positive |
| Term Loan | 125.5 | CRISIL AA-/Positive |
| Term Loan | 2000 | CRISIL AA-/Positive |
| Term Loan | 1000 | CRISIL AA-/Positive |
| Term Loan | 2000 | CRISIL AA-/Positive |
| Term Loan | 2000 | CRISIL AA-/Positive |
| Term Loan | 500 | CRISIL AA-/Positive |
| Term Loan | 500 | CRISIL AA-/Positive |
| Term Loan | 1150 | CRISIL AA-/Positive |
**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 letter of credit limit, interchangeable with operational non-fund based limits
$ Foreign currency non-resident (FCNR) loans
Criteria Details
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