BackVedanta Resources may struggle to meet cash needs in March 2021 quarter: Moody's
Earlier this month, Vedanta’s voluntary delisting bid failed after it could not get the minimum number of bids required from its minority shareholders to take it private
PremiumMumbai: Vedanta Resources Ltd (VRL), billionaire Anil Agarwal’s Singapore-listed holding company that controls the domestic metals and mining conglomerate Vedanta Ltd, will struggle to cover its cash needs in the January-March quarter and this cash shortfall will deteriorate further through September 2022, research report by global credit ratings agency Moody’s has said. Large upcoming debt maturities and VRL's negative free cash flow in FY2021 increase the risk that it will run out of liquidity, it said.
Credit analysts are focusing on the $7.5 billion (about 50% of the Vedanta Resources group's total consolidated debt that will come due in March 2022, including $2.5 billion at VRL and $425 million at VRL's sole shareholder Volcan Investments. “Without operations of its own, VRL’s need to refinance debt maturities at a time of tight capital market liquidity puts undue pressure on key subsidiaries to upstream cash," the report by Moody’s said.
Earlier this month, Vedanta’s voluntary delisting bid failed after it could not get the minimum number of bids required from its minority shareholders to take it private. If Vedanta had completed the delisting process, it would have given the company complete control of its cash-rich subsidiaries, Hindustan Zinc Ltd (HZL) and Cairn India Holdings Ltd, to send funds upstream through dividend payments and corporate loans. Mint reported last week that VRL was exploring the option of taking on inter-corporate loans from its subsidiaries to tide over its cash needs, a move that may not go down well with its minority investors.
“The governance risk (at VRL) also remains high, with share pledges, persistently weak liquidity and large imminent refinancing needs reflecting an aggressive financial strategy and high-risk appetite," Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer, said in the report. The report added that VRL remains weakly capitalised with thin equity and that “Volcan has not infused any fresh equity into VRL since its 2003 initial public offering even during periods of acute stress at the holding company (VRL). We do not expect any equity infusions in the future."
In July, Vedanta pledged 14.83% of its shareholding in subsidiary Hindustan Zinc Ltd to raise a ₹10,000 crore long-term loan that will refinance its short-term debt. Moody’s said that this was “the first time in its operating history that Vedanta pledged its shareholding in cash-rich and profitable subsidiary Hindustan Zinc Limited against a new loan from State Bank of India, a reflection – in our view – of reduced bank support."
Last week, HZL reported an interim dividend payout of ₹9,000 crore, at ₹21.30 a share, or 1065% of its face value. Vedanta holds a 64.92% stake in HZL. Vedanta followed this by announcing its own interim dividend of ₹9.50 per equity share amounting to a payout of ₹3,500 crore.
VRL's sources of funds to service its debt are primarily dividends from Vedanta, management fees from its various operating subsidiaries and any shortfall met through new debt raised by VRL. This fiscal, in addition to these sources of funds, VRL will also receive $ 900 million from its step-down subsidiary Cairn India Holdings Ltd, of which a part was already upstreamed in H1. “From Vedanta’s minority shareholders' perspective, this cash movement skips one layer in the capital structure with the cash being used to fund the risk appetite of Vedanta’s shareholder. We expect growing investor awareness of governance risk to increasingly reduce VRL’s ability to move funds to itself," Moody’s said.
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