Crisil revises Vedanta outlook to 'negative' citing large dividend payout

Crisil Ratings has downgraded the outlook for Vedanta to 'negative' from 'stable', citing increased cash outflow in the form of dividends towards large maturing debt obligations at its parent company, Vedanta Resources (VRL). The rating agency said that continued assistance through dividend payout to the VRL to support its debt has resulted in significant cash outflow to minority shareholders.

On Wednesday, the company led by billionaire mining tycoon Anil Agarwal declared the fifth interim dividend for the financial year ending March 31. The metal and mining company will pay a dividend of ₹20.50 per equity share, or at 2,050% of the face value of ₹1 per share, which will amount to ₹7,621 crore. The company, which operates iron ore, gold, and aluminium mines in Goa, Karnataka, Rajasthan, and Odisha, intends to use the dividend proceeds to repay its debt. It had a consolidated debt of ₹53,581 crore and cash and cash equivalent of ₹32,612 crore for FY22.

Earlier this year, the company declared a total interim dividend of ₹81 per share in four pay-outs - ₹31.50 in May, ₹19.50 in June, ₹17.50 in November, and ₹12.50 in February. With the fifth dividend, Vedanta’s total outgo will be ₹101.5 per share, which will amount to ₹37,730 crore, the highest ever by the company.

Vedanta has a strong track record of paying hefty dividends to its shareholders. It has paid 39 dividends since July 23, 2001, while it declared an equity dividend amounting to ₹81 per share in the past 12 months, as per Trendlyne data. At the current share price of ₹274.25, this results in a dividend yield of 29.54%.

Crisil has revised its rating outlook on the non-convertible debentures (NCDs) and long-term bank facilities of Vedanta to ‘negative’ from ‘stable’, while reaffirmed the rating at ‘CRISIL AA’. The rating on the commercial paper and short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

“The revision in outlook reflects possibility of higher-than-expected financial leverage and lower financial flexibility with reducing ratio of cash surplus to 1-year maturities for fiscals 2023 and 2024. This is due to increased cash outflow from Vedanta, in the form of dividends, towards large maturing debt obligations at its parent company viz. Vedanta Resources. This is owing to increased refinancing risk at VRL and moderating operating profitability (Ebitda) of Vedanta,” the agency said in a report released on Wednesday.

VRL has annual debt maturities of around $3 billion each in fiscal year 2024 and 2025 with high near-term maturities of around $1.7 billion in the first quarter of fiscal 2024. The rating agency said that the company is in discussion with lenders for refinancing upcoming maturities of the first quarter of fiscal 2024 and the same is expected to be completed by end of March 2023 or early April 2023.

The agency, however, said that the progress on the refinancing plans have been slower than expected, thereby resulting in increased dividend payout by Vedanta and reduced cash and cash equivalents during the fiscal.

“In case of any further delay in the expected refinancing plan, dependence on dividend payouts by Vedanta will increase; Vedanta currently has cash balances only to cover for VRL’s maturities for the first half of fiscal 2024, and hence will be a key rating sensitivity factor,” it said.

As per the report, including the recent dividend announced by Hindustan Zinc (HZL), the subsidiary of Vedanta, dividend payout by Vedanta for fiscal 2023 will be more than ₹40,000 crore (highest ever, including dividend payout by HZL to its minority shareholders). This is expected to result in a cash balance of less than ₹20,000 crore for March 2023 against more than ₹30,000 crore in March 2022.

Last week, HZL declared its fourth interim dividend for its shareholders for the financial year 2022-23. The country’s largest zinc miner declared an interim dividend of ₹26 per equity share, amounting to ₹10,985.83 crore. The interim dividend is 1,300% of the face value of equity share of ₹2 each.

On the earnings front, Vedanta’s consolidated operating profitability for fiscal 2023 has witnessed moderation due to higher-than-expected cost of production in key businesses such as aluminium and zinc, along with lowering of commodity prices from historical levels of last fiscal. Consolidated EBITDA is likely to drop this fiscal to around ₹35,000 crore from earlier expectation of ₹38,000-40,000 crore (around ₹45,000 crore in fiscal 2022). This along with reduced cash balance is likely to result in consolidated net leverage increasing to more than 3 times in fiscal 2023, Crisil said.

Crisil also noted the management’s focus on deleveraging, articulated through the capital allocation policy and other public interactions—including the intent to reduce the debt of VRL by around $4 billion by fiscal 2025. VRL has already witnessed debt reduction of nearly $2 billion in fiscal 2023. 

The ratings also consider 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, improving profitability in the aluminium business and large scale of operations. These strengths are partially offset by high debt, large capex and dividend and susceptibility to volatility in commodity prices and regulatory risk, it added.