CRISIL has reaffirmed its 'CRISIL AA/Negative/CRISIL A1+' ratings on the non-convertible debentures (NCDs), commercial paper programme and bank facilities of Vedanta Limited (Vedanta; part of the Vedanta group).
CRISIL has withdrawn the rating on commercial paper of Rs 10,000 crore as per the company's request as it has repaid the outstanding amount. Additionally, CRISIL has withdrawn its proposed rating on NCDs of Rs 500 crore on receiving confirmation from the company, as the same was unutilised. The ratings are withdrawn in line with CRISIL's rating withdrawal policy.
Reaffirmation of the ratings reflect expectation of sustained operating profitability (earnings before interest, tax, depreciation, and amortisation [EBITDA]) in fiscal 2021 despite the weaker outlook for commodity prices. This is mainly led by 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 lockdown on account of Covid-19 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, increase in exports offset the decline in domestic demand during the lockdown, supported by its low-cost position in key businesses. However, disruption in the supply chain and decrease in sales volume on account of the prolonged global pandemic will be key monitorables.
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 [VRL; formerly Vedanta Resources PLC; rated 'B-/Stable' by S&P Global Ratings]), which shall 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) was elevated at more than 3.8 times as on March 31, 2020, on account of moderated operating profitability in fiscal 2020, because of lower commodity prices. Profitability was also impacted on account of the nationwide lockdown during the second half of March 2020, along with lower-than-estimated recoverable capex in the oil and gas business. However, leverage is expected to reduce sustainably to below 2.8 times, over the medium term, in the base case.
The negative 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 on account of the pandemic. Operating profitability in fiscal 2021 could therefore be lower than expected, 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 VRL'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% shareholding of minority investors. While the deal will simplify the corporate structure, improve the group's financial flexibility, and could be a positive for Vedanta over the medium term, it will also increase leverage. Progress on the deal by VRL, 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 macro environment and heightened risk aversion in the capital market, VRL 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. These strengths are partially offset by the high, albeit reducing, leverage, coupled with large capex, and susceptibility to volatility in commodity prices and regulatory risks.
Shares of Vedanta Limited was last trading in BSE at Rs.110.05 as compared to the previous close of Rs. 110.05. The total number of shares traded during the day was 782266 in over 4175 trades.
The stock hit an intraday high of Rs. 111.9 and intraday low of 109.1. The net turnover during the day was Rs. 86316420.