Crisil revises rating outlook on Vedanta Ltd to negative from stable

Delay in debt refinancing of Vedanta Resources, higher-than-expected dividends by Vedanta Limited seen as key rating sensitivity factors

Crisil has revised its rating outlook on non-convertible debentures and long-term bank facilities of Vedanta Limited to 'Negative' from 'Stable'.

The outlook revision factors in the risk of sharply lower commodity prices of Brent crude, zinc and aluminium in FY21 in the wake of the Coronavirus (Covid-19) pandemic.

Also, the operating profitability (EBITDA {earnings before interest, tax, depreciation, and amortisation}) for FY20 has moderated due to weaker aluminium and zinc prices, and slower-than-expected ramp-up in volumes across the zinc and oil and gas businesses.

For FY21, despite the weaker outlook for commodity prices, operating profitability is expected to improve, mainly led by volume growth in zinc and oil and gas businesses, and expected earnings improvement in the aluminium segment, aided by lower alumina costs and cost-reduction initiatives such as increased coal and bauxite linkages, said Crisil in its release today.

The company is also expected to undertake cash preservation measures such as reduced capital expenditure (capex) and minimal dividend payout in FY21 (only to cover interest payments at the parent, Vedanta Resources Ltd,) which shall support liquidity during the period.

Operating profitability for FY21 could be lower than earlier expectation resulting in net leverage sustaining at above 2.8 times.

Also, change in dividend distribution policy as per union budget 2020, shall result in reduced cash leakage for Vedanta.

Leverage (adjusted net debt to EBITDA) is estimated at around 3.4 times as on March 31, 2020, but should reduce sustainably to below 2.8 times over the medium term in the base case, said Crisil.

Despite higher refinancing risks due to the weakening macro economy, Vedanta Resources is expected to refinance its upcoming maturing debt well in advance. Any delay in refinancing along with higher-than-expected dividends by Vedanta Limited would be key rating sensitivity factors, said Crisil.

As the company's production consists of essential commodities (zinc, oil and gas, and steel) or fall under continuous process industries (aluminium), its production is unlikely to be impacted by the lockdown announced by the central government.

However, the supply chain could be impacted temporarily as could sales volumes if the global pandemic prolongs longer than expected. These would be key monitorables.  

The ratings continue to reflect a strong business risk profile driven by a diversified presence across commodities, cost-efficient operations in domestic zinc and oil and gas businesses, and the large scale of operations. These credit strengths are partially offset by the high, albeit reducing, leverage, coupled with large capex plans, and susceptibility of the businesses to volatile commodity prices and regulatory risks.