Oct 01 -
-- We expect Vedanta's oil subsidiary, Cairn, to generate strong cash
flow, offsetting to an extent a subdued performance in its metals and mining
business and operating risks for its iron ore business.
-- We're uncertain whether the Indian oil and metal mining company will
receive sufficient dividends from its subsidiaries to partially repay its
large debt maturities over the next 12 months.
-- We are affirming the 'BB' long-term foreign currency corporate credit
rating on Vedanta and the 'BB' issue rating on the company's outstanding
senior unsecured notes.
-- The negative outlook reflects the sizable refinancing needs at Vedanta
and the vulnerability of the company's cash flows to operating risks,
primarily in the iron ore segment.
On Oct. 1, 2012, Standard & Poor's Ratings Services affirmed its 'BB'
long-term foreign currency corporate credit rating on oil and metals mining
company Vedanta Resources PLC. The outlook is negative. At the same time, we
affirmed the 'BB' issue rating on the company's senior unsecured notes. We
also affirmed the 'BB' ratings on the senior unsecured notes issued by
Vedanta's wholly owned subsidiaries and guaranteed by the company. Vedanta is
listed in London, but most of its assets are in India.
We affirmed the rating on Vedanta to reflect our expectation that the
company's India-based oil subsidiary, Cairn India Ltd. (unrated), will
continue to perform strongly over the next 12 months because of favorable oil
prices. Cairn's contribution should offset the likely subdued cash flow
generation at Vedanta's other entities due to weak metal prices and operating
The rating on Vedanta reflects the company's exposure to commodity prices, and
country and operating risks in India. Constraints include iron ore mining
restrictions, time-consuming approval processes, and changes in taxes and
royalties. These weaknesses are tempered by Vedanta's good business diversity
following the acquisition of Cairn in 2011, the company's favorable market
position in India, and its advantageous cost position, particularly in zinc
We view Vedanta's financial risk profile as "aggressive" and its business risk
profile as "fair," as defined in our criteria. Cairn generates strong cash
flow for Vedanta and increases its diversity; metal and mining previously
dominated business lines. Nevertheless, Cairn has asset-concentration risk and
its key oil block in Rajasthan has a short operating record.
Production at Cairn is in line with our expectations; but the company's
increasing tax burden has reduced our expectation of its EBITDA for fiscal
2013 (ending March 2013) to US$2.1 billion from US$2.5 billion. Still, we
believe Cairn will continue to provide about a third of Vedanta's consolidated
EBITDA in fiscals 2013 and 2014. Including Cairn, Vedanta's EBITDA in the
first quarter of fiscal 2013 increased by about 27% from a year earlier.
Vedanta's exposure to metal prices was shown in the first quarter of fiscal
2013, when non-oil EBITDA dropped 35%, primarily due to weaker metal prices.
Country and operational risks in Vedanta's metals and mining businesses in
India have yet to subside. In particular, recent restrictions on iron ore
mining in the state of Goa could have a material impact on Vedanta's EBITDA
unless they are removed and production resumes to their earlier levels over
the next three months. The lack of cash flow from iron ore production may
become more acute at a time when Vedanta and its subsidiaries face sizable
refinancing requirements. This is because iron ore is a key contributor to the
cash flows of Sesa Sterlite, a subsidiary that will be formed after a
corporate reorganization at Vedanta. The segment is also key to Sesa
Sterlite's capacity to service its debt and intercompany loans following the
completion of the restructuring this year.
Vedanta benefits from strong cash flow from its oil and zinc businesses. The
diversity of its businesses--which include oil, base metals, iron ore and
power--provides cash flow stability. The company's oil and zinc businesses are
currently in the lowest cost quartile. The aluminum business can attain that
once Vedanta secures its own bauxite sources; the business is currently in the
second cost quartile.
Vedanta's financial strategy, which we view as aggressive, places much of its
debt, but very limited cash, at the holding company. Vedanta's cash flow
coverage would be supportive of a stronger financial risk profile when viewed
on a consolidated basis. We expect the company's ratio of consolidated funds
from operations (FFO) to gross debt to be about 25% over the next two years.
The debt maturity at Vedanta and its subsidiaries is sizable, at about US$3
billion over the next two years. While analyzing the company's debt maturity
profile, we assume that bondholders of Vedanta's US$2.1 billion convertible
bonds will exercise their put option. The large size of the company's
maturities and the recurrent and time-bound nature of raising funds will test
Vedanta's current ability to access the capital markets. The company's
refinancing plans include using meaningful cash from its subsidiaries to
partially repay debt. The effectiveness of this strategy remains to be seen,
given the large size of maturing debt. Nonetheless, we believe Vedanta will
continue to have access to multiple sources of funding from the capital
Vedanta's reorganization of its Indian subsidiaries should help to reduce and
service debt at the holding company. The restructuring is on track for
completion in 2012, pending judicial approvals. Post-restructuring, interest
payments for the holding company will drop to less than US$200 million a year
from more than US$500 million at present. The reorganization, however, will
keep the consolidated debt unchanged.