Vedanta's financial flexibility improves with Cairn India merger: S&P

Vedanta would benefit from government policy extending license for certain oil fields by 10 years

Mining mogul Anil Agarwal's Vedanta Ltd will get access to $4 billion of cash and another about $700 million a year following the merger with Cairn India, supporting repaying of $9 billion debt, S&P Global Ratings said on Thursday.

S&P said its rating on the UK-listed Vedanta Resources is not immediately affected by the merger of the company's subsidiary Vedanta Ltd with Cairn India Ltd.

"In our view, the merger will improve the cash flow fungibility within Vedanta Ltd by simplifying the group structure to some extent. However, it will not change Vedanta Resources' financial metrics nor will it materially improve cash flow fungibility between Vedanta Ltd and the holding company Vedanta Resources," it said in a statement.

Vedanta Ltd, S&P said, will benefit from improved cash flow fungibility, given its high debt and significant short- term borrowings.

"Vedanta Ltd would get access to about $4 billion of cash at Cairn India and its free operating cash flows, which we estimate to be about $700 million annually. This should support Vedanta Ltd's ability to service its debt of about $9 billion, including short-term debt, current maturities of long-term debt, and interest bearing payables of about $4 billion," S&P said.

The rating agency said it awaits clarity on Vedanta Resources' plan for the use of Cairn India's cash that will be available to Vedanta Ltd.

"We expect Vedanta Resources to remain exposed to cash flow leakage, despite the merger. This is because minority shareholders will have a 49.9 per cent stake in Vedanta Ltd after the merger," the statement said.

Also, a dividend distribution could result in an additional about 20 per cent leakage from dividend distribution tax.

In our view, the merger — by itself — will not materially affect the financial ratios that we assess on a proportionally consolidated basis. We expect the ratio of funds from operations to debt to remain at about 10 per cent for the fiscal year ending March 31, 2018," S&P said.

Also helping debt reduction is recent special dividends by group company Hindustan Zinc Ltd.

Vedanta would also benefit from the government policy extending license for certain oil fields by 10 years including that of Cairn's Rajasthan block.

"We believe this will be favourable to Vedanta Resources' business because it allows Cairn India to extend the product sharing contract by 10 years beyond 2020 and plan for future investments that can improve production and reserves," S&P said.

The extension will, however, be at the cost of paying 10 per cent higher share of profit to the government and would likely result in an increase in capital expenditure for the oil and gas business.

Vedanta Resources also continues to ramp up its aluminium operations, which will be important to improve the company's overall business diversity and operating efficiency.