Vedanta Limited - Long-term rating upgraded to 'CRISIL AA '; outlook revised to 'Stable'

CRISIL Ratings has upgraded its rating on the long-term bank facilities and debt instruments of Vedanta Ltd (Vedanta; part of the Vedanta group) to 'CRISIL AA' from 'CRISIL AA-', and has revised the outlook to 'Stable' from 'Positive'. The short-term rating on bank facilities and commercial paper has been reaffirmed at 'CRISIL A1+'.

The rating action factors in stronger-than-expected operating profitability (earnings before interest, tax, depreciation and amortisation {EBITDA}), driven by elevated commodity prices during fiscal 2022, volume growth across businesses, and sustained cost efficiency, especially in the aluminium business. While commodity prices are likely to moderate in fiscal 2023, from current spot levels, prices are expected to remain healthy. EBITDA is thus, likely to be higher than expected, at over Rs 44,000 crore in fiscal 2022 (vis-à-vis around Rs 27,500 crore in fiscal 2021), and over Rs 40,000 crore in fiscal 2023, and aid improvement in free cash flow and return on capital employed over the medium term. Further, the management is expected to utilise the cash accruals to reduce the outstanding consolidated debt, and improve resilience to a decline in commodity prices.

Strong improvement in operating accrual and expected reduction in outstanding consolidated gross and net debt, should help net leverage drop to 2.2-2.3 times as on March 31, 2022, and to sustain below 2.5 times thereafter (net leverage was 3.1 times as on March 31, 2021).

Promoters have been looking to improve the corporate structure by increasing their shareholding in Vedanta Ltd. Between December 2020 and December 2021, they have increased their stake in Vedanta to 69.7% from 50.1%, through additional debt of nearly USD 2.4 billion. While this has helped reduce dividend payout to minority shareholders and enhanced the overall financial flexibility, it has also increased the consolidated debt. CRISIL Ratings believes that improved profitability of Vedanta in fiscal 2022, could help cut down debt at Vedanta Resources Ltd (VRL; rated 'B-/Stable' by S&P Global Ratings) from levels of December 2021, and thus support consolidated deleveraging. While promoter stake has increased by around 19.5% since December 2020 resulting in enhanced corporate structure for Vedanta, CRISIL Ratings understands that Vedanta's promoters may explore further improvement in the corporate structure of the group. That said, given the focus of the management on deleveraging, articulated through the recent capital allocation policy, consolidated gross and net debt (including VRL's debt) is expected to reduce in fiscal 2023. Further updates on actions taken by promoters to enhance the corporate structure and the consequent impact on leverage will be a key rating sensitivity factor.

Dividends from Vedanta will continue to help VRL meet its interest obligations, and the debt obligation in fiscal 2022, will be met through a mix of refinancing and dividends. That said, VRL faces near to medium term refinancing risk with scheduled debt repayments of USD 2.4 billion in fiscal 2023 (including upcoming bond maturity of USD 1,000 million in July 2022) and ~ USD 2.5 billion in fiscal 2024,. However, CRISIL Ratings believes VRL is expected to refinance/part repay the same in a timely manner. This should be supported by improved operating profitability and increased holding of the promoter in Vedanta. However, any delay in timely refinancing of debt at VRL will be a key monitorable.

Also, on November 17, 2021, Vedanta had announced setting up a committee to review the corporate structure and evaluate possible alternatives, including demerger(s), spin-off(s) and strategic partnerships, so as to unlock value and simplify the existing set-up. However, on February 8, 2022, the company announced that it will continue with the existing structure only.

As per the capital allocation policy of Vedanta, and as articulated by the management, potential strategic growth acquisition of BPCL, if happens, will not done through Vedanta or its parent, and will not be linked with balance-sheets of Vedanta or its parent entities. However, further developments on this front will 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, large capital expenditure (capex) and dividend, and susceptibility to volatility in commodity prices and regulatory risk.

CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) aggregating Rs 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 the withdrawal policy of CRISIL Ratings.

Shares of Vedanta Limited was last trading in BSE at Rs. 337.90 as compared to the previous close of Rs. 352.35. The total number of shares traded during the day was 996591 in over 19441 trades.

The stock hit an intraday high of Rs. 351.35 and intraday low of 335.70. The net turnover during the day was Rs. 341200093.00.

Source : Equity Bulls

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