| Vedanta Limited | ||||||||||||||
| Rating outlook revised to 'Negative'; ratings reaffirmed | ||||||||||||||
| Rating Action | ||||||||||||||
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| 1 crore = 10 million | ||||||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has revised its rating outlook on the non-convertible debentures and long-term bank facilities of Vedanta Limited (Vedanta) to 'Negative' from 'Stable', while reaffirming the rating at 'CRISIL AA'. The rating on the commercial paper and short-term bank facilities has been reaffirmed at 'CRISIL A1+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Vedanta and its subsidiaries, to reflect the operational or financial linkages between them. Key subsidiaries include Hindustan Zinc Ltd (HZL; 'CRISIL AAA/Stable/CRISIL A1+'); the group's zinc business in Namibia and South Africa (termed as Zinc International); Bharat Aluminium Company Ltd (Balco; 'CRISIL A1+); Talwandi Sabo Power Ltd (TSPL; 'CRISIL AA(CE)/Negative/CRISIL A1+(CE)') and Electrosteel Steels Ltd (ESL; 'CRISIL AA/Negative/CRISIL A1+'). Refer to the annexure for full list of subsidiaries consolidated. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Diversified business risk profile: Businesses span across zinc, lead, silver, aluminium, oil and gas, iron ore, power and steel. The company is among the largest producers in all these segments, commanding a strong market position in India. A well-diversified business profile shields it from commodity-specific cyclicality and risks. * Low-cost position of key businesses: The domestic zinc, lead, and silver business is 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 capex recovery. Cash flow in this business is expected to benefit from capex-led improvement in volume over the medium term. The government's approval on the production-sharing contract policy for oil and gas fields for a period of ten years has also cleared uncertainties that surrounded this business earlier. * Strong volume growth expected, with capital allocation towards value-accretive zinc and oil and gas businesses: Production in the zinc and oil and gas businesses has improved, albeit slower than expected. Over 75% of capex during the past four years has been towards the low-cost and value-accretive zinc (EBITDA of more than USD 1,400/tonne in Zinc India) and oil and gas businesses (healthy internal rate of return of more than 20% even with crude prices at USD 40 per barrel). Volume growth of 20% in Zinc India, 30% in Zinc International, and over 10% increase in oil and gas production in fiscal 2021, should make the overall business risk profile more resilient. Weaknesses: * Large capex and dividend, resulting in high leverage: CRISIL expects average capex of about Rs 8,000 crore (reduced from Rs 10,000 crore) during fiscals 2021 and 2022, largely towards oil and gas, zinc, and aluminium businesses. Continued assistance through dividend to the parent, VRL, to support the latter's debt, has led to significant cash leakages to minority shareholders and dividend distribution tax. Net leverage, which was elevated at about 3.4 times as on March 31, 2019, should reduce to below 2.8 times over the medium term, due to improved profitability. Additionally, profitability is susceptible to volatility in prices of metals and oil and gas, although the risk is mitigated by diversified businesses and improving cost efficiency. The company needs to deleverage and maintain steady positive free cash flows, post capex and dividends. Any large capex, acquisition or higher-than-expected dividends could further delay the reduction in financial leverage and may negatively impact the credit risk profile. * Weak profitability in the aluminium business, having significant capital employed, although expected to improve: The company has cost-efficient operations in Zinc India and the oil and gas businesses, as reflected in first quartile position of respective businesses. However, the aluminium business has been lacking consistent cost efficiency despite significant capital employed. Lack of integrated operations, with only 25% domestic bauxite linkage and 50% owned alumina production, has impacted profitability (EBITDA declined from USD 319/tonne in fiscal 2017 to USD 179/tonne in fiscal 2019, and turned negative in the second quarter of fiscal 2020). However, with expected increase in bauxite linkage to 50% by the end of fiscal 2020, expansion of refinery capacity to 4 million tonne per annum (mtpa; increase by 100%) over the next two fiscals, and the recent win of the Jamkhani coal mine, Odisha, cost of production should reduce in the medium term. The ability to deleverage is highly dependent on successful EBITDA ramp-up in the aluminium business and will remain a key monitorable. * Exposure to changes in regulations: The businesses are vulnerable to regulatory risks. Since May 2018, the copper smelting plant at Thoothukkudi, Tamil Nadu, has remained 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, had an adverse impact on the iron ore business. The company had to also withhold the expansion of its Lanjigarh refinery, Odisha, as environmental approval from the Ministry of Environment & Forests was delayed, and received only in the fourth quarter of fiscal 2016. |
| Liquidity Strong |
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The cash balance was about Rs 35,200 crore and unutilised bank limit around Rs 8,400 crore, as on December 31, 2019. However, a part of the cash is at HZL, which is usually accessed via dividends, and thus results in outflow towards minority shareholders. |
| Outlook: Negative |
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CRISIL believes Vedanta's profitability and leverage could be materially impacted by slower-than-expected recovery in commodity prices and subdued volume growth. |
| Rating Sensitivity factors |
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Upward factors * Structural and sustained improvement in aluminium profitability, with EBITDA more than USD 400/tonne * Ramp-up in volume with continued cost efficiency across businesses, improving business resilience * Sustained deleveraging, with net debt to EBITDA sustaining below 2.8 times Downward factors * Lower-than-expected EBITDA because of high cost of production, slower volume ramp-up, or lower realisations * Delay in meaningful correction in financial leverage with the net debt-to EBITDA ratio sustaining above 2.8 times * Sustained negative free cash flows (post capex) or any incremental investments/support to VRL or Volcan Investments Ltd (Volcan) |
| About the Company |
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Vedanta's operations are diversified across metals, mining, power, and oil and gas. It is held 50.1% by VRL, which is based in London. Operations include copper, iron ore, aluminium assets at Jharsuguda and Lanjigarh in Odisha and power divisions (2400-megawatt [MW] and 1215-MW captive power plants for the aluminium business). The company also holds aluminium operations through its subsidiary, Balco. Also, a part of the power business (1,980 MW) is conducted through wholly owned subsidiary, TSPL. The oil and gas business has been merged with Vedanta, and the group operates the zinc business through HZL and Zinc International in South Africa and Namibia. Vedanta had, through its wholly owned subsidiary, Cairn India Holdings Ltd, acquired slightly over 51% equity stake in glass substrate manufacturer, AvanStrate Inc in December 2017. Also, in June 2018, Vedanta, through its wholly-owned subsidiary, Vedanta Star Ltd (VSL), acquired 90% stake in ESL (current operational capacity of 1.5 million tpa) for a total consideration of Rs 5,320 crore. However, as on March 25, 2020, VSL has been merged with ESL and Vedanta will now directly hold 95.5% share in ESL. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Non-fund-based limit of Rs 2000 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 - List of entities consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Non-fund-based limit of Rs 2000 crore interchangeable with fund-based limit ##Capex letter of credit limit, interchangeable with operational non-fund based limits $Foreign Currency Non-Resident (FCNR) Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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