CRISIL upgrades Vedanta's long-term debt, loans ratings from 'AA-' to 'AA'

CRISIL improved its rating on Vedanta Ltd. on account of stronger than expected operating profitability due to high commodity prices in FY22.

CRISIL Ratings has upgraded the rating on Vedanta Ltd's long-term bank facilities and debt instruments from “AA-” to “AA” on stronger-than-expected operating profitability driven by elevated commodity prices during FY22. The upgrade also factors in volume growth across businesses, and sustained cost efficiency, especially in the aluminium business.

The short-term rating on bank facilities and commercial paper has been reaffirmed at ‘CRISIL A1+’.

While commodity prices are likely to moderate in FY23, from current spot levels, prices are expected to remain healthy. Thus, earnings before interest, tax, depreciation and amortisation (EBITDA) are likely to be higher than expected, at over Rs 44,000 crore in FY22. It was around Rs 27,500 crore in FY21.

The company's EBITDA is likely to be over Rs 40,000 crore in FY23, and would 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.

CRISL said 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 on March 31, 2022, and to sustain below 2.5 times thereafter. The net leverage was 3.1 times as on March 31, 2021.

The company's promoters have been looking to improve the corporate structure by increasing their shareholding in Vedanta Ltd. Between December 2020 and December 2021, they have increased their stake in Vedanta to 69.7 per cent from 50.1 per cent, through additional debt of nearly $ 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.

The improved profitability of Vedanta in fiscal 2022, could help cut down debt at Vedanta Resources Ltd from levels of December 2021, and thus support consolidated deleveraging, it added.