Vedanta’s delisting failure raises risks over parent co’s ability to service debt beyond 12 months

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October 20, 2020 3:48 PM

The failed delisting of Anil Agarwal’s Vedanta Ltd has narrowed the refinancing options for its parent company Vedanta Resources, raising risks over the company's ability to sustainably service its debt beyond the next 12 months.

In its press release, the group had said that the bid to delist Vedanta Resources' Indian subsidiary Vedanta Ltd has not been successful, but the group wanted to reiterate its unflinching commitment to India, particularly in the natural resources sector.

The failed delisting of Anil Agarwal’s Vedanta Ltd has narrowed the refinancing options for its parent company Vedanta Resources, raising risks over the company’s ability to sustainably service its debt beyond the next 12 months, said rating agency S&P Global. On Tuesday, S&P Global affirmed its ‘B-’ long-term issuer credit rating on Vedanta Resources and the ‘B-‘ long-term issue rating on the senior unsecured bonds. The negative outlook on Vedanta Resources indicates that S&P Global could downgrade the firm if it is unable to lower refinancing risk by improving funding access and service its debt sustainably.

Over the next year, Vedanta Resources faces debt maturities of about $1.8 billion. “These include a US$414 million loan due in December and a US$670 million bond due in June 2021,” S&P Global said. The rating agency further added that according to it dividend payments and intercompany loans will be adequate for debt servicing over the next 12 months. Currently the firm has adequate liquidity to meet debt obligations, however, concerns remain beyond the 12-month period. Improvement is funding access at Vedanta Resources is, therefore, critical.

Key weaknesses

“The failed privatization of Vedanta Ltd. has narrowed Vedanta Resources’ refinancing options. An inefficient corporate structure remains Vedanta Resources’ key credit weakness and rating driver,” S&P Global said. Had Vedanta Resources managed to delist Vedanta Limited earlier this month, the company’s funding options would have improved. The report noted that fundraising has become more challenging for Vedanta Resources  following the sell-off in bonds.

Beyond the next 12 months, Vedanta Resources has a $1 billion bond due in July 2022. Reduction in cash at subsidiary level would pose a challenge for the company. The positive operational outlook for Vedanta helps it avert immediate downgrade pressure. “We now see material earnings upside from the aluminum and zinc businesses, where silver has also emerged as a solid earnings contributor. Accordingly, we have revised our EBITDA expectation for fiscal 2021 to $3.2 billion-$3.6 billion, from$2.6 billion-$3.0 billion,” the rating agency said.

Liquidity concerns drag on outlook

S&P Global has a negative outlook on the mining industry major. “We could downgrade Vedanta Resources if the company’s liquidity at the holding company level does not improve over the next few quarters,” it said. On the other hand, outlook could improve if Vedanta Resources improves its liquidity at the holding company level by regaining consistent access to external funding.

After the delisting of Vedanta Limited failed to get through the stock has plummeted to trade at Rs 98 per share. “Because of the overhang of the promoter’s balance sheet stress, the stock is currently trading at 4.5x 12-month forward consensus EBITDA,” said global brokerage and research firm Credit Suisse. Analysts at Credit Suisse, however, expect the street to upgrade numbers given the rally in commodity prices and also heightened likelihood of improving volumes in silver and better Al profitability. Credit Suisse has a target price of Rs 140 on Vedanta Limited stocks with an Outperform rating. Domestic brokerage Emkay Global has a target price of Rs 124 on Vedanta Limited with a Buy rating, as it expects Vedanta to distribute dividend received from Hindustan Zinc’s and better commodity prices.

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