Vedanta Buoyed by Surging Commodity Prices and Improved Output but What Is Agarwal's Vision?

Vedanta Resources: 9-Month Results on Track

Corporate Credit Analyst

Alan Greene

Credit

Vedanta Group's proposal to merge Cairn India with its Indian subsidiary company Vedanta Ltd. (VedI) goes to the shareholders vote at Cairn on Monday following similar exercises this week at Vedanta Resources plc (VRplc) and VedI. VedI will gain full control of Cairn's assets and cash generation which can be used to support VedI's large debt burden and underpin VedI's dividend stream to VRplc. VRplc's ownership interest in VedI falls to 50.1% after the transaction from 62.9%. Otherwise not much changes - VRplc debtholders remain structurally subordinated to VedI creditors. Also Cairn's legal challenges remain - the renewal of its production sharing contract (PSC) and the prohibition on its oil exports, while it struggles to boost production levels from its main Rajasthan field.VedI has been trying to buy out the minority shareholders in Hindustan Zinc (HZL) since 2009. All the arguments about group balance and diversification apply as much to HZL as they do to Cairn. It is simply the case that the minority shareholder in HZL has not capitulated to VedI's overtures so far. Minority shareholders of Vedanta-owned companies are treated with all due respect but the large dividend paid out of Hindustan Zinc earlier this year shows that perhaps all is not lost for minority shareholders in group companies, when debt at VRplc has to be serviced, and Cairn's cash could be used to pay meaningful dividends to its shareholders in future.Since June 2013, VRplc has not raised debt from the bondmarket, with bank debt raised in India being the chief source of funds. For VRplc to fulfill its role as the acquisition vehicle it needs to show that it can upstream cash to service acquisition debt. Apart from commodity price rises, output increases from the zinc, aluminium and iron ore operations will be limited in the next 12 months. Reduction in gross debt should occur and the group stay compliant with its reset covenants, but irrespective of the Cairn merger outcome, VRplc needs to see rising EBITDA before the outlook on its credit rating improves.

Vedanta Group's proposal to merge Cairn India with its Indian subsidiary company Vedanta Ltd. (VedI) goes to the shareholders vote at Cairn on Monday following similar exercises this week at Vedanta Resources plc (VRplc) and VedI. VedI will gain full control of Cairn's assets and cash generation which can be used to support VedI's large debt burden and underpin VedI's dividend stream to VRplc. VRplc's ownership interest in VedI falls to 50.1% after the transaction from 62.9%. Otherwise not much changes - VRplc debtholders remain structurally subordinated to VedI creditors. Also Cairn's legal challenges remain - the renewal of its production sharing contract (PSC) and the prohibition on its oil exports, while it struggles to boost production levels from its main Rajasthan field.VedI has been trying to buy out the minority shareholders in Hindustan Zinc (HZL) since 2009. All the arguments about group balance and diversification apply as much to HZL as they do to Cairn. It is simply the case that the minority shareholder in HZL has not capitulated to VedI's overtures so far. Minority shareholders of Vedanta-owned companies are treated with all due respect but the large dividend paid out of Hindustan Zinc earlier this year shows that perhaps all is not lost for minority shareholders in group companies, when debt at VRplc has to be serviced, and Cairn's cash could be used to pay meaningful dividends to its shareholders in future.Since June 2013, VRplc has not raised debt from the bondmarket, with bank debt raised in India being the chief source of funds. For VRplc to fulfill its role as the acquisition vehicle it needs to show that it can upstream cash to service acquisition debt. Apart from commodity price rises, output increases from the zinc, aluminium and iron ore operations will be limited in the next 12 months. Reduction in gross debt should occur and the group stay compliant with its reset covenants, but irrespective of the Cairn merger outcome, VRplc needs to see rising EBITDA before the outlook on its credit rating improves.

Cairn Merger - There Is No Quick Fix for Pressure on Vedanta's Credit Ratings