Mumbai (Maharashtra) [India], Mar 4 : Crisil has revised its rating outlook on non-convertible debentures and long-term bank facilities totalling Rs 40,302 crore of Vedanta Ltd to negative from stable while reaffirming the rating at AA.
The rating on commercial paper and short-term bank facilities has been reaffirmed at A1-plus.
The operating profitability (earnings before interest, tax, depreciation, and amortisation) for fiscal 2020 has moderated due to weaker aluminium and zinc prices, and slower-than-expected ramp-up in volumes across the zinc and oil and gas businesses.
For fiscal 2021, despite the weaker outlook for commodity prices, operating profitability is expected to improve, mainly led by volume growth in zinc and oil and gas businesses, and expected earnings improvement in the aluminium segment, aided by lower alumina costs and cost-reduction initiatives such as increased coal and bauxite linkages.
The company is expected to undertake cash preservation measures such as reduced capital expenditure (capex) and minimal dividend payout in fiscal 2021 which should support liquidity during the period.
Also, change in dividend distribution policy as per Union Budget 2020 will result in reduced cash leakage for Vedanta. Leverage (adjusted net debt to EBITDA) is estimated at around 3.4 times as on March 31 but should reduce sustainably to below 2.8 times over the medium term in the base case.
The revision in rating outlook factors in the risk of sharply lower commodity prices, especially of Brent crude, zinc and aluminium, being sustained in fiscal 2021 in the wake of novel coronavirus (COVID-19) pandemic.
Operating profitability for fiscal 2021 could therefore be lower than earlier expectation resulting in net leverage sustaining at above 2.8 times, said Crisil.
Despite higher refinancing risks due to the weakening macro economy, Vedanta Resources Ltd is expected to refinance its upcoming maturing debt well in advance. Any delay in refinancing along with higher-than-expected dividends by Vedanta Ltd will be key rating sensitivity factors.
As the company's production consists of essential commodities (zinc, oil and gas, and steel) or fall under continuous process industries (aluminium), its production is unlikely to be impacted by the lockdown announced by the government.
However, the supply chain could be impacted temporarily as could sales volumes if the global pandemic prolongs longer than expected. These will be key monitorables.
The ratings continue to reflect a strong business risk profile driven by a diversified presence across commodities, cost-efficient operations in domestic zinc and oil and gas businesses, and the large scale of operations.
These credit strengths are partially offset by the high, albeit reducing, leverage, coupled with large capex plans, and susceptibility of the businesses to volatile commodity prices and regulatory risks, said Crisil.
( With inputs from ANI )