July 31 - Fitch Ratings has revised Vedanta Resources Plc's
(Vedanta) Outlook to Positive from Stable while affirming its Long-Term Foreign
Currency Issuer Default Rating (FC IDR) at 'BB+'. The agency has also affirmed
Vedanta's senior unsecured debt rating at 'BB'. A list of additional rating
actions is provided at the end of this commentary.
The Outlook revision reflects Fitch's expectation that Vedanta will be able to
deleverage from FY13 onwards from its FY12 level, when adjusted net debt/EBITDAR
was already below 2x on a pro-forma basis. This is due to execution of a large
part of its capex plans, which should lead to positive free cash flow generation
even if metal prices remain soft.
Vedanta's FC IDR reflects the diversification of its EBITDA and cash flow
profile across various metal and energy businesses. It also reflects Vedanta's
strong cost and market positions; the company is in the lowest quartile in terms
of cost in zinc, iron ore and oil and gas businesses. However, this is partly
counteracted by its relatively higher cost structure in the aluminium business
due to lack of backward linkages in bauxite mining. Also, the company's
profitability has been impacted due to an increase in export duties on iron ore
fines and lumps from 5% and 15% respectively to 20% post March 2011 and further
to 30% post December 2011, a mining ban in Karnataka, and a higher cess in the
oil and gas business.
The ratings also factor in the regulatory issues impacting India's mining
industry and hence Vedanta's various businesses. The company awaits
environmental clearance for expansions at its alumina refining and copper
Fitch also notes that the re-organisation announced in February 2012 is likely
to address the high level of debt at the holding company level. Till the
restructuring takes place by end-2012, the agency expects that dividends
(including extra-ordinary dividends) are likely to be used for debt servicing.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to
- The company continues to generate positive FCF (post acquisitions) and
maintain an adjusted debt/operating EBITDAR below 2x on a sustained basis.
Negative: The current Rating Outlook is Positive. As a result, Fitch's
sensitivities do not currently anticipate developments with a material
likelihood, individually or collectively, of leading to a rating downgrade.
However, margin pressures and/ or more than anticipated capex or a major debt
funded acquisition which leads to the FCF (post acquisitions) turning negative
may lead to the Outlook being revised back to Stable.
The notch differential between the FC IDR and the senior unsecured rating
continues to reflect structural subordination at Vedanta (the holding company)
due to its complex and fragmented holding structure. Fitch may equalise the
senior unsecured rating with the FC IDR if structural subordination is reduced
such that the difference between the adjusted net debt (plus minority
interest)/EBITDAR and the adjusted net debt/EBITDAR ratios is sustained around
In FY12, Vedanta generated proforma revenue of USD15.6bn (FY11: USD11.4bn) and
EBITDA of USD5.4bn (USD3.6bn). The key contributors to the EBITDA were the oil
and gas and zinc businesses contributing about 68%. At end-March 2012, Vedanta's
total debt was about USD17bn, with USD9.3bn of debt at the holding company
level, and liquidity in the form of cash balance of USD6.9bn which was largely
at Hindustan Zinc Ltd (USD3.6bn) and Cairn India Ltd (USD1.8bn).
Fitch has also affirmed the ratings on Vedanta's debt instruments as follows:
- USD1.25bn senior unsecured bonds: affirmed at 'BB'
- USD1.65bn senior unsecured bonds: affirmed at 'BB'
- USD180m senior unsecured loan facility: affirmed at 'BB'
Twinstar Holdings Ltd, Mauritius
- USD150m unsecured loan facility backed by an unconditional, irrevocable
guarantee of Vedanta Resources Plc: affirmed at 'BB'
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable criteria, "Corporate Rating Methodology", dated 12 August 2011, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology