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Business News/ Companies / Anil Agarwal’s Vedanta wins applause as mining ban ends for Sesa
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Anil Agarwal’s Vedanta wins applause as mining ban ends for Sesa

The end of mining ban comes as a relief for Vedanta, which has grappled with a loss of income from iron ore sales

Anil Agarwal’s Vedanta has $9 billion of repayments due in the five years through 2018, data compiled by Bloomberg shows. Photo: Indranil Bhoumik/Mint Premium
Anil Agarwal’s Vedanta has $9 billion of repayments due in the five years through 2018, data compiled by Bloomberg shows. Photo: Indranil Bhoumik/Mint

Mumbai: India’s decision to lift a mining ban on billionaire Anil Agarwal’s Vedanta Resources Plc. will boost the company’s credit quality and lower its borrowing costs, Moody’s Investors Service says.

A unit of the company, Sesa Sterlite Ltd, got clearance from a Supreme Court panel to restart iron ore mines in the Karnataka, it said in a statement on 28 December. The cost to protect Vedanta against non-payment for five years already declined 85 basis points in 2013 to 451, while the average price of credit-default swaps on eight Indian issuers climbed 34 basis points, according to data provider CMA.

“It’s been vitally important for Vedanta to get its assets going again and iron ore mining is a key one," Alan Greene, a Singapore-based analyst at Moody’s, said in a 30 December telephone interview. “This will help Sesa Sterlite’s creditworthiness. The loss of revenue from the iron-ore business had been a tremendous drag on its business."

The end of the mining ban comes as a relief for Vedanta, which has grappled with a loss of income from ore sales, an official investigation into its stake purchase in Hindustan Zinc Ltd and an aluminum unit facing a scarcity of raw material. The resumption of iron output from south India will also help ease shortages faced by local steelmakers including JSW Steel Ltd, unplugging a bottleneck to faster expansion in Asia’s third-largest economy.

Sanjeev Verma, a spokesman at Sesa Sterlite, didn’t respond to an e-mail seeking comment on the potential impact of the resumption of iron output on the firm’s finances.

Mining clearance

Sesa Sterlite, India’s top producer of aluminum, zinc and copper, has received clearance to produce as much as 2.29 million tonnes of iron ore a year, according to executive director Prasun Kumar Mukherjee. Output in the three months to March may reach 1.2 million to 1.5 million tonnes and can be sold through electronic auctions, he said. The company’s shares gained 0.3% in Mumbai after the mining ban was removed.

“There is enough local demand for iron ore and the prices are good," Mukherjee said in a 30 December interview. “We will sell the ore through online auction and also use some ore for our own needs."

The resumption of iron production by Vedanta in Karnataka has boosted optimism the company will be able to secure similar approvals for the neighboring state of Goa too, according to SJS Markets Ltd. The Supreme Court has also banned mining in Goa.

‘Huge positive’

“This is a huge positive for the group as it will not only add to their earnings but also improve their leverage ratios giving them better bargaining power for refinancing their debts," Hemant Dharnidharka, the Bangalore-based head of credit research at SJS Markets, said in a phone interview on Tuesday. “With this order, sentiment regarding the company’s operations in Goa has got a boost and there are reasons to believe that the company will get approvals to restart mining in Goa."

Vedanta has $9 billion of repayments due in the five years through 2018, data compiled by Bloomberg show. It raised $2.74 billion from the international loan market in 2013.

Indian companies raised $37.3 billion in foreign-currency loans and bond sales in 2013, 36% more than a year earlier, as borrowing costs at home remained relatively higher.

Top-rated five-year rupee company notes pay 9.76%, data compiled by Bloomberg show. The average yield on Indian dollar debt is 5.72%, according to JPMorgan Chase and Co. data. Ten-year sovereign securities in India pay 8.82%, compared with 3% in the US and 4.54% in China. The rupee lost 11% last year to 61.8 per dollar.

‘Negative stance’

Agarwal formed Sesa Sterlite in August by combining units Sterlite Industries (India) Ltd. and Sesa Goa Ltd. The merger has created a business with a larger asset pool that would allow it to secure more favourable funding terms, Greene of Moody’s said in October. It also transferred Vedanta’s ownership of Cairn India Ltd, along with $5.9 billion of debt raised to acquire the energy explorer in 2011, to Sesa Sterlite, cutting the parent’s liabilities by 61%.

Increased obligations after the merger and last year’s loss of income from mining pose risks to the Vedanta unit, according to ICICI Securities Ltd.

“We maintain our negative stance on the merged entity Sesa Sterlite on the back of the huge debt pile-up and a skewed earnings profile," Dewang Sanghavi and Shashank Kanodia, analysts at ICICI Securities, wrote in a report on Tuesday. “We continue to have a sell rating on the stock."

Narrowing spreads

Bond prices are signalling improved confidence in Vedanta. The extra yield on the company’s 6% dollar-denominated bonds due 2019 over similar-dated Treasuries has declined to 481 basis points, or 4.81 percentage points, from 649 in August, according to data compiled by Bloomberg.

The resumption of mining in Karnataka is expected to improve the cash flow on a standalone basis from the current level but incremental cash flow generated are not expected to be material as Goa mining operations are still shut, Sankalp Baid, senior analyst in Mumbai at India Ratings and Research, a local unit of Fitch Ratings. Sesa Sterlite currently continues to have relatively strong bargaining power with good investment holdings and capital market accessibility. Bloomberg

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Published: 01 Jan 2014, 11:23 AM IST
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