The tide is turning for Vedanta

Vedanta, the global natural resources major, has been battling debt problems, as it was caught on the wrong end of the down-cycle in commodities. Its operating profit declined 18.4 per cent a year in the past five years. Its interest costs surged
 
41 per cent a year during this period, while return on capital employed fell from 21.8 per cent in FY12 to 0.3 in FY16. 
 
The Vedanta group bought Cairn India in 2011, and funded it through debt. Consolidatd debt grew from Rs 999 crore in FY11 to Rs 3,741 crore in FY12. However, the crash in crude oil prices played spoilsport.
 
Even as Sterlite (the aluminium and copper major) merged into Sesa Goa (iron ore major) in 2013 to form a stronger entity, the merger didn’t help as metal prices kept fallling. Its operating profit, which was adequate to cover interest costs, however declined further.
 
Consolidated Ebitda fell from Rs 21,460 crore in FY14 to Rs 2,892 crore in FY15 before rebounding to Rs 6,711 crore in FY16 but interest costs continued to rise (Rs 5,704 crore in FY16), leading to a net loss in FY15 and FY16.
 
The silver lining for the group is that commodity prices of iron ore, base metals and oil have started to rise. Subsidiary Hindustan Zinc has been the star performer in the group as it generates large amounts of cash.
 
The merger of Cairn India into Vedanta will reduce debt substantially. Analysts at HSBC say that there will be significant reduction in leverage. As of June, Vedanta had debt of Rs 77,000 crore at the parent level (including Cairn acquisition debt), whereas Cairn had net cash of about Rs  23,600 crore. Also, Vedanta owes about Rs 8,400 crore to Cairn, which it will not have to pay after the merger.
 
Analysts at Credit Suisse say that once Cairn's $3.7 billion of cash becomes fungible, Vedanta could either deleverage or command better refinancing terms, given the potential improvement in credit rating. Also, Vedanta’s FY18 Ebitda would cover interest and capex. The tide seems to be turning in Vedanta’s favour.