Crisil revises ratings of base metal producers

Credit Rating Information Services of India (Crisil), the premier credit ratings organisation in the country, has revised credit ratings of India’s non-ferrous metal producers which may reflect on their fund raising programmes in future.

It has downgraded its ratings on the aluminium major Hindalco Industries to ‘AA-/Negative/P1+’ from ‘AA/Stable/P1+’ which reflects that weak aluminium prices will keep the company’s earnings under pressure over the medium term.

The aluminium business accounts for three-quarters of Hindalco’s profits. The decline in accruals, coupled with large planned capital expenditure (capex), will also keep the company’s gearing high.
Further, Hindalco is unlikely to realise the expected returns on its investment in Novelis Inc over the medium term, given the severe business downturn that Novelis faces.

Similarly, Crisil downgraded the ratings of Sterlite Industries to ‘AA/Negative/P1+’ from ‘AA+/Negative/P1+’) driven mainly by an expectation of a decline in the company’s consolidated profitability and cash accruals over the medium term.

This will arise because of continued weakness in global non-ferrous metal demand and prices, in the context of the global economic downturn.

The ongoing large capital expenditure across the businesses of the Sterlite group (includes Sterlite Industries itself, Sterlite Energy Ltd, HZL, Balco, and VAL) is likely to keep the group’s gearing at levels higher than were earlier expected.

The downgraded rating on Vedanta Aluminium (VAL)’s long-term debt to ‘AA(so)/Negative’ from ‘AA+(so)/Negative’) follows the downgrade of Crisil’s long-term rating on Sterlite Industries. VAL’s debentures and bank facilities are backed by an unconditional and irrevocable guarantee from Sterlite Industries. The rating on VAL’s short-term debt has been reaffirmed at ‘P1+(so)’.

However, the agency has re-affirmed ratings of its ‘AAA/Stable/P1+’ on Hindustan Zinc, the country’s largest zinc producer, reflects the expectation that the company’s financial risk will remain strong despite the lower-than-expected cash accruals that will result from lower zinc prices.

The rating is also underpinned by HZL’s leadership position in India’s zinc market, highly efficient and integrated operations, and strong liquidity. These strengths are partially offset by the company’s exposure to cyclicality in the galvanised steel sector.

The ratings of Bharat Aluminium Company (Balco) ‘AA/Stable/P1+’ continue to reflect the company’s comfortable financial risk profile, and the expected increase in the efficiency of its operations arising from the expansion of its aluminium production and captive power generation capacity.

These strengths are partially offset by the exposure of Balco’s financial performance to fluctuations in both aluminium and alumina prices, and by the company’s constrained financial flexibility because of a shareholding dispute between its two owners, SIL and the government.

In contrast, the ‘AA-/Stable/P1+’ ratings on Madras Aluminium Company (Malco) continue to reflect the company’s healthy financial risk profile, and the strong parentage of Vedanta Resources PLC (Vedanta, rated ‘BB/Stable/--’ by Standard & Poor’s).

The ratings also derive strength from the company’s comfortable liquidity position and its flexibility to earn revenues by selling surplus power in an environment of high power tariffs and low aluminium prices. These rating strengths are, however, partially offset by Malco’s high cost of aluminium production, modest size of operations, and exposure to fluctuations in the international prices of aluminium and coal.

Instruments rated 'AA' offer an adequate degree of safety with regard to timely payment of financial obligations, '-' or '+' denote a notch lower or upper, respectively.