Crisil upgrades Vedanta's long term bank facilities and debt instruments rating on stronger-than-expected operating profitability; Stock skyrockets 7.5%

25 Feb 2022 , 12:04 PM

Crisil Ratings upgrades its rating on the long-term bank facilities and debt instruments of Vedanta to ‘CRISIL AA’ from ‘CRISIL AA-‘. Also, the rating agency has revised the outlook to ‘Stable’ from ‘Positive’. The short-term rating on bank facilities and commercial paper has been reaffirmed at ‘CRISIL A1+’

Crisil’s rating action for Vedanta 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.

In Crisil’s view, 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.

Further, Crisil stated that 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 of March 31, 2022, and to sustain below 2.5 times thereafter (net leverage was 3.1 times as on March 31, 2021).

Vedanta promoters are looking to improve the corporate structure by increasing their shareholding in the company. Data given by Crisil shows that 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 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.

Further, Crisil states that 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 promptly. This should be supported by improved operating profitability and increased holding of the promoter in Vedanta. However, any delay in the timely refinancing of debt at VRL will be a key 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 independent confirmation of their redemption. The ratings are withdrawn in line with the withdrawal policy of CRISIL Ratings.

At around 11.59 am, Vedanta was trading at Rs363.35 per piece up by Rs25.45 or 7.53% on BSE. The stock was near the day’s high of Rs365.40 per piece.