The permanent closure of Vedanta Resources Plc’s copper operations in India is marginally credit negative as it will lower the company’s scale and business diversity, Moody’s Investors Service today said. The Tamil Nadu government on May 28 ordered the state pollution control board to seal and “permanently” close the Vedanta group’s Sterlite copper plant in Tuticorin following violent protests over pollution concerns during which 13 people were killed in police firing.
“The permanent closure of Vedanta’s Indian copper operations is credit negative because it will reduce the company’s scale and business diversity, adding pressure to its other business segments to maintain their strong performance and make up the total revenue and EBITDA decline,” Moody’s said in a statement. Further, it said, the cancellation of Vedanta’s land rights towards the copper expansion is a key concern in view of the company’s ability to restart copper smelting operations. It is yet unclear to what extent the company will be compensated for the land acquired for the expansion.
“Only 26 per cent of the USD 717 million capital spending was incurred until March 2018, but the company’s ability to recoup the amount spent is likely to be difficult,” it said. Moody’s further said it expects Vedanta’s other businesses – zinc, aluminium and oil and gas – to deliver a solid performance in 2018-19, mirroring strong commodity prices and higher production volumes. As such, the copper smelter shutdown has no immediate impact on Vedanta’s ratings, the statement said.
“We expect the company’s scale, as measured by pro forma revenue for fiscal 2018, to decline by 25 per cent to USD 11.5 billion from USD 15.4 billion. Vedanta’s reported EBITDA will decline 5 per cent to USD 3.85 billion from USD 4.1 billion pro forma for fiscal 2018,” it said. Vedanta’s copper operations have historically generated low profitability as compared with the company’s other business segments. The company’s copper operations in India generated single digit EBITDA margins, because the operational and financial performance of the copper smelter depends upon the availability and the price of the copper concentrate which is used to produce end products such as copper bars, rods and wires.