Crisil affirms AA-negative, A1-plus on Vedanta's debt instruments, bank facilities; operating profitability in FY21 likely to be lower

Mumbai: Vedanta Ltd said on Friday that Crisil has reaffirmed its ratings on the company’s debt instruments and bank facilities totalling Rs 40,303 crore at AA-negative and A1-plus. Crisil has withdrawn its rating on the Rs 900 crore non-convertible debentures of Vedanta on receiving confirmation of redemption by the trustee. The reaffirmation of ratings reflects an expectation of sustained operating profitability (earnings before interest, tax, depreciation, and amortisation) in fiscal 2021 despite the weaker outlook for commodity prices, said  Crisil. This is mainly led by the expected improvement in earnings in the aluminium segment aided by lower alumina cost and increased coal and bauxite linkages, and volume growth in the zinc and oil and gas businesses. The COVID-19-led lockdown has had a limited impact on its operations as it produces essential commodities (zinc, oil and gas, and steel) or falls under continuous process industries (aluminium). Also, an increase in export offset decline in domestic demand during the lockdown, supported by its low-cost position in key businesses. However, disruption in the supply chain and a decrease in sales volume on account of the prolonged global pandemic will be key monitorables. Click here to follow LIVE updates on coronavirus outbreak The company is expected to undertake  cash preservation measures such as reduced capital expenditure (capex) and limited dividend payout in fiscal 2021 (only to cover interest payments of the parent Vedanta Resources Ltd which will support liquidity. Additionally, to preserve liquidity, Vedanta has availed moratorium on its term debt obligation as per Reserve Bank of India’s guidelines after approval from respective banks. Leverage (adjusted net debt to EBITDA) is estimated at 3.4 times as on 31 March but is expected to reduce sustainably to below 2.8 times over the medium term in the base case. The negative rating outlook reflects the risk of lower-than-expected volume or significantly lower commodity prices, especially of Brent crude, zinc, and aluminium, being sustained in fiscal 2021 in the wake of the pandemic. Operating profitability in fiscal 2021 could, therefore, be lower than expected, said Crisil, resulting in net leverage sustaining at above 2.8 times. The negative outlook also reflects the risk of weakening of Vedanta’s financial risk profile following the completion of Vedanta Resources Ltd’s proposed debt-funded privatisation of Vedanta. At the current offer price of Rs 87.25 per share, the consideration would be Rs 16,173 crore to purchase the 49.86 percent shareholding of minority investors. While the deal will simplify the corporate structure, improve the group’s financial flexibility and could be positive for Vedanta in the medium term, it will also increase leverage. Progress on the deal by Vedanta Resources Ltd at the discovered price based on the reverse book building process along with details of the funding will be key monitorables. Despite higher refinancing risks because of the weakening macroeconomy and heightened risk aversion in the capital market, Vedanta Resources Ltd is likely to refinance its maturing debt well in advance. Delay in refinancing and higher-than-expected dividend by Vedanta will be key monitorables. The ratings continue to reflect Vedanta’s strong business risk profile driven by diversified presence across commodities, cost-efficient operations in domestic zinc and oil and gas businesses, and large scale of operations. Crisil said these strengths are partially offset by the high albeit reducing leverage coupled with large capex plans and susceptibility to volatility in commodity prices and regulatory risks.