CRISIL upgrades outlook on Vedanta's debt to 'positive'

Expects improvement in profitability drives upgrade

Rating agency CRISIL has revised its outlook on debt instruments of Anil-Agarwal controlled Vedanta Ltd to "positive" from "stable" on expected improvement in operating profits in next financial year.

The outlook revision reflects expected strong improvement in EBITDA (earnings before interest, tax, depreciation, and amortisation) in fiscal 2018. The improvement is driven by production ramp-up of zinc, aluminium, and iron ore, and better profitability due to operating leverage, and continued focus on reducing cost of production.

Additionally, better realisations in zinc will partly offset moderation in cash flow in the oil and gas business compared with that before fiscal 2015. Also, favourable commodity prices will lead to better-than-expected cash flow, CRISIL said in a statement.

Consequently, net debt to EBITDA ratio, which increased to 4 times in fiscal 2016, is expected to be about three times in fiscal 2017, in line with CRISIL's earlier expectation. It may improve to less than 2.5 times in fiscal 2018 primarily due to increase in EBITDA.

Many factors are expected to contribute to enhancing financial flexibility. First, recent refinancing of debt at Vedanta Plc, further plans to refinance debt due in fiscals 2018 and 2019 are key factors. Plus, focus on reduction in gross debt and access to Cairn India's cash post-merger will also contribute to financial flexibility.