S&P upgrades outlook on Vedanta Resources from 'negative' to 'stable'

Rating agency Standard & Poor's has upgraded the outlook on Vedanta Resources from "negative" to "stable" on reduced refinancing risk. The upgrade also reflects the company's strengthened ability to meet its debt obligations over the next 12-18 months.

"Vedanta Resources Ltd's open offer to increase its ownership in subsidiary Vedanta Ltd to 65 per cent is positive for liquidity at the holding company level. It has announced an open offer to acquire an additional 10 per cent stake in its 55 per cent-owned subsidiary Vedanta Ltd. We anticipate the transaction, which should conclude by March 2021," the rating agency said. 

"The India-based commodity conglomerate's strong underlying earnings and recent redemption of a large part of its June 2021 bonds have lowered its refinancing risk. The company continues to improve its capital structure," S&P said in statement.

Strong operating momentum and sizable free cash flow generation at Vedanta Ltd also improve liquidity at the holding company level.

The free cash flow at Vedanta Ltd. (including Hindustan Zinc Ltd.) is expected to be $1.6-1.8 billion over the 12 months to March 31, 2022. This, together with $4.8 billion of cash available at Hindustan Zinc and Vedanta Ltd, gives Vedanta Resources greater flexibility to utilise dividend payments for debt servicing if needed. It reduces dividend leakage after the open offer.

Additional debt incurred for the open offer will likely be offset by the benefits of a more efficient corporate structure. Based on the floor price, Vedanta Resources will incur an additional $800 million in debt to fund the acquisition of a 10 per cent stake in Vedanta Ltd. This debt is in addition to the $400 million raised for the earlier increase in stake to about 55 per cent, from 50.1 per cent, S&P added.

Strong underlying earnings also mitigate the impact of increased debt. Vedanta Resources' adjusted debt-to-EBITDA ratio is expected to be about 4.5x as of March 31, 2021 and about 3.5x by March 31, 2022. These estimates are close to previous expectations in October 2020, when we had not assumed any debt-funded strategic transactions, the rating agency said.