Crisil upgrades Vedanta's credit rating to 'AA'

Crisil Ratings has upgraded its rating on the long-term bank facilities and debt instruments of mining giant Vedanta Ltd from “AA-” to “AA” and revised the outlook to "stable" from "positive".

The rating agency cited stronger-than-expected 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, according to Crisil. Thus, operating profitability is likely to be higher than expected, at over ₹44,000 crore in FY22. It was around ₹27,500 crore in FY21.

The company's EBITDA is likely to be over ₹40,000 crore in FY23, aiding improvement in free cash flow and return on capital employed over the medium term, it adds.

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, the agency says.

The company’s promoters have been looking to improve the corporate structure by increasing their shareholding in Vedanta.

“Between December 2020 and December 2021, they have increased their stake in Vedanta to 69.7% from 50.1%, through additional debt of nearly $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,” the ratings firm says.

Crisil expects the improved profitability of Vedanta in the ongoing fiscal to cut down debt at Vedanta Resources (VRL) and thus support consolidated deleveraging. The rating agency, however, cautioned that the 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.

The company is also vulnerable to regulator risk, according to Crisil. “Since May 2018, the copper smelting plant at Thoothukkudi, Tamil Nadu, has been shut down, 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,” it adds.

The Vedanta group is present in various businesses, spanning zinc, lead, silver, aluminium, oil and gas, iron ore, power and steel.

Earlier this month, Vedanta partnered with chip maker Foxconn to make semiconductors in India as the country plans to cut its reliance on imported chips.

Hon Hai Technology Group, the world's largest contract electronics manufacturer and supplier of Apple iPhone, signed a memorandum of understanding (MOU) with Vedanta to form a joint venture company that will make semiconductors in India.

Vedanta will hold the majority of the equity in the JV, while Foxconn will be the minority shareholder. Vedanta chairman Anil Agarwal will be the chairman of the joint venture company. The targeted project plans to set up a plant for semiconductor manufacturing, Vedanta had said.