September 12, 2024

Vedanta Limited: Ratings continue on Rating Watch with Developing Implications

Summary of rating action

Previous Rated Current Rated

Instrument* Amount Amount Rating Action
(Rs. crore) (Rs. crore)
[ICRA]AA Rating Watch with Developing
Long term/Short term – Implications/[ICRA]A1+ Rating Watch with
1,847.00 47.00
Unallocated limits Developing Implications; ratings continue on rating
watch with developing implications
[ICRA]AA Rating Watch with Developing
Long term – Fund based – Term
1,653.00 3,453.00 Implications; rating continues on rating watch with
loan
developing implications
[ICRA]A1+ Rating Watch with Developing
Commercial paper 2,500.00 2,500.00 Implications; rating continues on rating watch with
developing implications
Total 6,000.00 6,000.00
*Instrument details are provided in Annexure-I

Rationale

The ratings consider an expected improvement in Vedanta Limited’s (VDL) credit metrics, following the successful fund-raising
worth ~$1 billion by the company via a qualified institutional placement (QIP) in July 2024 and an additional ~$400 million
generated from the offer for sale (OFS) of Hindustan Zinc Limited (HZL) in August 2024. These funds are expected to be
primarily allocated towards deleveraging, which will also lower the overall interest expenses for the entity. Further, the $500
million raised by Vedanta Resources Limited (VRL) through a stake sale in VDL in July 2024 will help reduce the Group's overall
debt burden. Consequently, the overall group leverage (total debt/OPBDITA) is anticipated to decline to ~2.3-2.5 times in
FY2025 and FY2026, from 3.6 times reported in FY2024, substantially strengthening the entity’s credit profile. The interest
coverage is also expected to improve to ~3.5-4.0 times in FY2025 and FY2026 from 2.2 times in FY2024. Additionally, VRL is
looking to refinance a substantial portion of its outstanding bonds to lower the consolidated entity’s interest costs further. All
the deleveraging efforts are expected to improve the overall financial flexibility of the Group.
The ratings also factor in the better-than-expected performance in Q1 FY2025 on the back of better realisation and low cost
of operations in its key businesses, aluminium and zinc, which together contributed over 80% to the consolidated OPBITDA in
FY2024 and Q1 FY2025. In Q1 FY2025, the company reported a healthy OPBITDA of ~Rs. 10,275 crore vis-à-vis ~Rs. 6.975 crore
in Q1 FY2024. The entity is expected to report an OPBITDA of ~Rs. 48,000-49,000 crore (including brand fees) in FY2025 on
expectation of healthy realisation in the near term and VDL’s sustained cost reduction initiatives across segments. Further, the
full ramp-up of the enhanced alumina refineries capacities and the expected commencement of the captive coal/bauxite blocks
in the near term would impart cost efficiency and is likely to partially hedge the profits in the medium term against the volatility
in commodity prices. Once operationalised, VDL would be better placed to withstand the shocks during the cyclical downturns.
The share of value-added products is also likely to increase, supporting the operating margins.
The ratings continue to reflect the strong business risk profile of Vedanta, driven by its diversified product portfolio, its large
scale of operations with a healthy market share in the domestic aluminium and zinc businesses and the cost-efficient
operations in the domestic zinc and oil and gas segments. The assigned ratings also factor in VDL’s calibrated approach towards
capital deployment with expected capital expenditure plans of ~Rs. 15,000-16,000 crore per annum, primarily towards
improving the cost structure and volume growth. However, ICRA notes that significant cash flow support would be required
from VDL to meet the debt servicing requirement of holding company VRL, thus constraining VDL’s free cash flows to an extent.
While in the current year, the repayment obligations have been addressed through the fund raised from the stake sale in VDL
and likely higher dividend outflow by the latter, the repayment remains sizeable at ~800 million in FY2026 and the cash flow

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 deficit post VDL’s support would require refinancing, thus exposing VRL to refinancing risks. However, the Group has taken
steps to deleverage VRL’s long-term debt, expected at ~$4.6 billion in FY2025 from ~$9.1 billion in FY2022, which ICRA believes
is expected to reduce further in the medium term. Further, the recent efforts to refinance the high-cost bonds would mitigate
the refinancing risk to an extent. Nonetheless, any stress at VRL’s level impacting the financial flexibility of VDL would remain
a key monitorable. The ratings are also constrained by the susceptibility to volatility in commodity prices and regulatory risk.
The ratings continue to remain on watch with developing implications owing to the ongoing demerger of Vedanta Limited’s
(VDL) aluminium, oil and gas, power, base metal (zinc international and copper business) and iron and steel businesses into
separate standalone listed entities, which is expected to be concluded by December 2024. ICRA will continue to monitor the
development of the demerger process and the timelines involved and will take appropriate action, as required.
ICRA also notes the recent ruling, wherein the Supreme Court of India upheld the state governments’ power to tax mineral
rights and mineral-bearing lands under Entries 49 and 50 of List II in the Constitution’s Seventh Schedul and gave states the
discretion to decide on the retrospective application of the tax. However, any tax demand will not impact transactions
conducted before April 1, 2005. In case of retrospective tax demand, the payments will be spread over 12 years, starting from
April 1, 2026. While the impact on Vedanta Limited would be limited as the entity does not have major mining operation in
VDL, the Hindustan Zinc business might feel the heat due to its mining operation in Rajasthan. This will continue to be a key
monitoring event for the entity.

Key rating drivers and their description

Credit strengths

Significant improvement in credit metrics post deleveraging expected in FY2025; credit profile to improve further in FY2026
- On the back of the recent developments, including the successful fund-raising worth ~$ 1 billion by the company via a QIP in
July 2024 and an additional ~$400 million generated from Hindustan Zinc Limited’s OFS in August 2024, the overall group
leverage and coverage metrics is expected to improve in FY2025 and beyond. ICRA anticipates the Group’s leverage (total
debt/OPBDITA) to decline to ~2.3-2.5 times in FY2025 and FY2026, from 3.6 times reported in FY2024, substantially
strengthening the entity’s credit profile. The interest coverage is also expected to improve to ~3.5-4.0 times in FY2025 and
FY2026 from 2.2 times in FY2024. Additionally, VRL is actively pursuing to refinance a substantial portion of its outstanding
bonds, aiming to lower the consolidated entity’s interest costs further. All the deleveraging efforts are also expected to
improve the overall financial flexibility of the Group.

Expected improvement in earnings in FY2025 driven by volume growth and cost efficiencies along with higher metal prices
- At a consolidated level, VDL reported an operating income of Rs. 1,43,727 crore and OPBDITA of Rs. 35,198 crore in FY2024.
The overall operating profitability (OPM) remained steady at ~24.5% in FY2024 (~23.9% in FY2023) on the back of improved
cost of production and range-bound metal price movements. The entity is expected to report an OPBITDA of ~Rs. 48,000-
49,000 crore (including brand fees) in FY2025 on expectation of healthy realisation in the near term at least and VDL’s sustained
cost reduction initiatives across segments. Further, a full ramp-up of the enhanced alumina refineries capacities and the
expected commencement of the captive coal/bauxite blocks in the the near term would impart cost efficiency and is likely to
partially hedge the profits in the medium term against the volatility in commodity prices.The sales volume is expected to
improve in the aluminium, zinc international and iron ore segments.

Diversified product profile with leading market share in domestic aluminium and zinc business - VDL has a diversified metals
portfolio spanning zinc, silver, lead, aluminium, copper and nickel. The company also has healthy presence in oil and gas,
ferrous metals, including iron ore, and power IPP projects. The large scale of operations with a healthy market share in the
domestic aluminium and the zinc businesses and the cost-efficient operations in the domestic zinc and oil and gas segments
strengthen VDL’s operating profile. In the aluminium business, the entity is enhancing its alumina refinery and has taken other
cost reduction initiatives through captive coal/bauxite blocks, which would further strengthen its operational profile. Once
operationalised, VDL would be better placed to withstand the shocks during cyclical downturns.

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 Focus on increasing share of value-added products in sales mix and higher backward integration to support margins in the
aluminium business - VDL is increasing the share of valued-added capacities in the aluminium segment to 2.6 mtpa from 1.5
mtpa in the current fiscal, which is expected to increase the product premium over London Metal Exchange (LME) prices, going
forward. Moreover, the ongoing vertical integration would result in a lower cost of production in the medium term, generating
better OPBITDA/tonne in the segment. The zinc business is also supported by the low cost of production from large high-
quality mining reserves.

Favourable domestic demand scenario to support volume growth – ICRA expects growth in demand for non-ferrous metals
(viz. zinc, aluminium and copper) to remain healthy at ~10% in FY2025. The healthy demand is likely to support volume growth.

Credit challenges

Exposure to price risks and inherent cyclicality in metal industry - While VDL has a demonstrated track record in the metal
and mining business, the company’s operation is exposed to the cyclical characteristics inherent in volatile metal prices, which
causes swings in profitability and cash flows and increases the business risks. Nonetheless, VDL’s competitive cost position in
most businesses, especially zinc, mitigates the risk to some extent.

Exposure to regulatory risks – With its presence in the metal and mining business, the company remains exposed to the
industry wide risks pertaining to Government policies on land acquisition, environmental and forest clearance, etc that may
adversely impact its operations in case of any adverse rulings. Nonetheless, a demonstrated track record of presence in the
metal and mining business over the last few decades mitigates the risk to some extent.

Sizeable repayment obligations in the medium term expose VRL to refinancing risks - VRL’s income largely comprises
dividends and brand fee from VDL, which are used for principal and interest servicing. The company’s LM exercise concluded
in January 2024, wherein the maturities for three bonds were postponed along with the increase in coupon rate and payment
of consent fees to the bondholders. However, VRL’s repayments continue to be sizeable in the upcoming fiscals. While, the
current year repayment obligations have been addressed through the fund raised from the stake sale in VDL and the likely
higher dividend outflow by VDL, the repayment remains sizeable at ~800 million in FY2026 and the cash flow deficit post VDL’s
support would require refinancing, thus exposing VRL to refinancing risks. However, the Group has taken steps to deleverage
VRL’s long-term debt, expected at ~$4.6 billion in FY2025 from ~$9.1 billion in FY2022, which ICRA believes is expected to
reduce further in the medium term. Further, the recent efforts to refinance the high-cost bonds would mitigate the refinancing
risk to an extent.

Environmental and Social Risks

Vedanta has a dominant position in the metals and mining sector and has diversified its business risk profile with presence
across multiple commodities, such as zinc, aluminium, oil and gas, and iron ore. This exposes VDL to the risks of strict
regulations and necessitates investments in alternative, environment-friendly mining, smelting technologies. The metals and
mining sector has a significant impact on the environment owing to high greenhouse gas (GHG) emissions, waste generation
and water consumption. This is because of the energy-intensive manufacturing process and its high dependence on natural
resources such as coal.

Social risks for entities in mining and metals manifest from the health and safety aspects of employees involved in mining and
manufacturing activities. Casualties/accidents at operating units due to gaps in safety practices could lead to production
outages and invite penal action from regulatory bodies. The sector is exposed to labour-related risks and the risks of
protests/social issues with local communities, which might impact expansion/modernisation plans. Also, the adverse impact
of environmental pollution in nearby localities could trigger local criticism.

Liquidity position: Adequate

VDL’s liquidity position is expected to remain adequate, with free cash and liquid investments of ~Rs. 24,900 crore as on July
31, 2024, excluding the unutilised fund-based limits. ICRA expects VDL’s consolidated cash flow from operations, accumulated

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 liquid cash and bank balances and additional liquidity from the recent developments to remain adequate to meet the capex
requirement of ~Rs. 15,0000-20,000 crore and the company’s planned prepayments/repayment obligations. Further, while
the expected dividend inflows at VRL and the additional liquidity from VDL’s stake sale will remain adequate to meet the debt
servicing obligations in the current fiscal, the liquidity at VRL remains stretched in the medium term, given the sizeable
repayments in FY2026 and FY2027. It will continue to depend on the cash flow support from VDL to meet its debt servicing
requirement and may also require refinancing in the medium term.

Rating sensitivities

Positive factors – ICRA could upgrade VDL’s long-term rating if the company is able to achieve a significant growth in earnings
and cash flows, which leads to further deleveraging of the balance sheet and result in a sustained improvement in the
consolidated total debt/OPBDITA (inc. VRL debt).

Negative factors– Pressure on VDL’s ratings could arise in case of a lower-than-anticipated improvement in earnings, resulting
in a deterioration of the consolidated credit metrics and liquidity profile. Also, any large debt-funded capex adversely impacting
the leverage and any stress at VRL’s level impacting the financial flexibility of VDL would be credit negatives. A specific trigger
for downgrade would be total debt/OPBDITA (inc. VRL debt) of above 3.0 times on a sustained basis.

Analytical approach

Analytical Approach Comments

Corporate Credit Rating Methodology
Non-Ferrous Metals (Primary Producers)
Applicable rating methodologies
Oil Exploration & Production
Power – Thermal
Parent/Group support Not Applicable
For arriving at the ratings, ICRA has considered the consolidated financials of VDL, including
the entities mentioned in the Annexure II. ICRA has also considered the total debt and
financial expenses of Vedanta Resources Limited (Parent) to calculate the adjusted leverage
Consolidation/Standalone
and coverage metrics of VDL. ICRA understands that the interest and principal servicing of
VRL’s debt remains highly dependent on VDL’s cash flows. ICRA also understands that there
is no legal recourse to VDL with respect to VRL’s debt obligations

About the company

Vedanta Limited, VDL, incorporated in June 1965 by Mr. Anil Agarwal, is a subsidiary of Vedanta Resources Limited. It is
headquartered in Mumbai, India. Vedanta has a diverse portfolio of assets comprising Indian and global companies involved
in metals and minerals, such as zinc, silver, lead, aluminium, copper, nickel, oil and gas. There is a traditional ferrous vertical,
including iron ore and steel, and a power vertical comprising coal and renewable energy. The company is now foraying into
the manufacturing of semiconductors and display glass. The Group is among the largest producers in aluminium and zinc
segments, commanding a strong market position in India.

Key financial indicators (audited)

VDL Consolidated FY2023 FY2024 Q1 FY2025*

Operating income 147,581 143,727 35,764
PAT 14,506 7,537 5,095
OPBDIT/OI 23.9% 24.5% 27.8%
PAT/OI 9.8% 5.2% 14.3%
Total outside liabilities/Tangible net worth (times) 2.8 3.5 --
Total debt/OPBDIT (times) 2.3 2.5 --
Interest coverage (times) 5.7 3.7 4.5

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 Source: Company, ICRA Research; All ratios as per ICRA’s calculations; Amount in Rs. crore; PAT: Profit after tax; OPBDIT: Operating profit before depreciation,
interest, taxes and amortisation *Provisional

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years

Current (FY2025) Chronology of rating history for the past 3 years

FY2025 FY2024 FY2023 FY2022

Amount
rated
Instrument Type Sep 12, 2024 Date Rating Date Rating Date Rating Date Rating
(Rs
crore)

[ICRA]AA Rating Watch

Sep with Developing
04, Implications/ [ICRA]A1+
2024 Rating Watch with
Developing Implications
[ICRA]AA [ICRA]AA- Rating Watch
Rating Aug with Developing
Watch with 26, Implications/ [ICRA]A1+ - - - - - -
Developing 2024 Rating Watch with
Long
Unallocated Implications Developing Implications
term/Short 47.00
limits /[ICRA]A1+ [ICRA]AA- Rating Watch
term
Rating May with Developing
Watch with 30, Implications/ [ICRA]A1+ - - - - - -
Developing 2024 Rating Watch with
Implications Developing Implications
[ICRA]AA- Rating Watch
May with Developing
16, Implications/ [ICRA]A1+ - - - - - -
2024 Rating Watch with
Developing Implications
Sep [ICRA]AA Rating Watch
04, with Developing
[ICRA]AA 2024 Implications
Term loan
Rating Aug [ICRA]AA- Rating Watch
Long term 3,453.00 Watch with 26, with Developing - - - - - -
Developing 2024 Implications
Implications May [ICRA]AA- Rating Watch
30, with Developing - - - - - -
2024 Implications
Sep [ICRA]A1+ Rating
04, Watch with Developing
[ICRA]A1+ 2024 Implications
Rating Aug [ICRA]A1+ Rating
Commercial
Short term 2,500.00 Watch with 26, Watch with Developing - - - - - -
paper
Developing 2024 Implications
Implications May [ICRA]A1+ Rating
30, Watch with Developing - - - - - -
2024 Implications

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 Complexity level of the rated instruments

Instrument Complexity Indicator

Long term/Short term – Unallocated limits Not Applicable
Long term – Fund-based – Term loan Simple
Commercial paper Very Simple

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument’s
credit rating. It also does not indicate the complexity associated with analysing an entity’s financial, business, industry risks or
complexity related to the structural, transactional or legal aspects. Details on the complexity levels of the instruments are
available on ICRA’s website: Click Here

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 Annexure I: Instrument details
Amount
Coupon
ISIN Instrument Name Date of Issuance Maturity Rated Current Rating and Outlook
Rate
(Rs. crore)
[ICRA]AA Rating Watch with
Long term/Short
Developing Implications
NA term – Unallocated NA NA NA 47.00
/[ICRA]A1+ Rating Watch with
limits
Developing Implications
Long term – Fund- Up to [ICRA]AA Rating Watch with
NA NA NA 3,453.00
based – Term loan FY2034 Developing Implications
Yet to be [ICRA]A1+ Rating Watch with
Commercial paper NA NA NA 2,500.00
placed Developing Implications
Source: Company

Please click here to view details of lender-wise facilities rated by ICRA

Annexure II: List of entities considered for consolidated analysis

Name % of Shareholding Consolidation Approach

Thalanga Copper Mines Pty Limited (TCM) 100.00% Full Consolidation

Bharat Aluminium Company Limited (Balco) 51.00% Full Consolidation
Desai Cement Company Private Limited 100.00% Full Consolidation
ESL Steel Limited 95.49% Full Consolidation
Ferro Alloy Corporation Limited (Facor) 99.99% Full Consolidation
Hindustan Zinc Alloys Private Limited 64.92%* Full Consolidation
Hindustan Zinc Fertilizers Private Limited 64.92%* Full Consolidation
Hindustan Zinc Limited (Hzl) 64.92% Full Consolidation
MALCO Energy Limited (Mel) 100.00% Full Consolidation
Vedanta Zinc Football & Sports Foundation 64.92%* Full Consolidation
Hindmetal Exploration Services Private Limited 64.92%* Full Consolidation
Sesa Mining Corporation Limited 100.00% Full Consolidation
Sesa Resources Limited (SRL) 100.00% Full Consolidation
Talwandi Sabo Power Limited (TSPL) 100.00% Full Consolidation
Vizag General Cargo Berth Private Limited 100.00% Full Consolidation
Zinc India Foundation 64.92%* Full Consolidation
AvanStrate Inc (ASI) 51.63% Full Consolidation
Cairn India Holdings Limited 100.00% Full Consolidation
AvanStrate Taiwan Inc. 100.00% Full Consolidation
Western Cluster Limited 100.00% Full Consolidation
Bloom Fountain Limited 100.00% Full Consolidation
Amica Guesthouse (Proprietary) Limited 100.00% Full Consolidation
Namzinc (Proprietary) Limited 100.00% Full Consolidation
Skorpion Mining Company Proprietary Limited (Nz) 100.00% Full Consolidation
Skorpion Zinc Proprietary Limited (Szpl) 100.00% Full Consolidation
THL Zinc Namibia Holdings (Proprietary) Limited (VNHL) 100.00% Full Consolidation
Killoran Lisheen Mining Limited 100.00% Full Consolidation
Lisheen Milling Limited 100.00% Full Consolidation
Lisheen Mine Partnership 100.00% Full Consolidation
Vedanta Lisheen Mining Limited 100.00% Full Consolidation
Cairn Energy Hydrocarbons Limited 100.00% Full Consolidation
Black Mountain Mining (Proprietary) Limited 74.00% Full Consolidation
AvanStrate Korea Inc 100.00% Full Consolidation
Monte Cello BV (MCBV) 100.00% Full Consolidation
THL Zinc Holding BV 100.00% Full Consolidation
Vedanta Lisheen Holdings Limited 100.00% Full Consolidation
Fujairah Gold FZC 100.00% Full Consolidation

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 Name % of Shareholding Consolidation Approach

Gaurav Overseas Private Limited 50.00% Equity Method

Madanpur South Coal Company Limited 17.60% Equity Method
Goa Maritime Private Limited 50.00% Equity Method
Rosh Pinah Health Care (Proprietary) Limited 69.00% Full Consolidation
Gergarub Exploration And Mining (Pty) Limited 51.00% Full Consolidation
Roshskor Township (Pty) Limited 50.00% Equity Method
THL Zinc Ventures Limited 100.00% Full Consolidation
THL Zinc Limited 100.00% Full Consolidation
Sesa Iron & Steel Limited 100.00% Full Consolidation
Vedanta Displays Limited 100.00% Full Consolidation
Vedanta Aluminium Metal Limited 100.00% Full Consolidation
Vedanta Base Metals Limited 100.00% Full Consolidation
Vedanta Iron and Steel Limited 100.00% Full Consolidation
Vedanta Semiconductors Private Limited 100.00% Full Consolidation
Vedanta Copper International VCI Company Limited 100.00% Full Consolidation
Meenakshi Energy Limited 100.00% Full Consolidation
*Wholly-owned subsidiary of Hindustan Zinc Limited

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 ANALYST CONTACTS
Girishkumar Kadam Vikram V
+91 22 6114 3441 +91 40 6939 6410
[email protected] [email protected]

Sumit Jhunjhunwala Devanshu Gupta

+91 33 7150 1111 +91 124 4545 321
[email protected] [email protected]

RELATIONSHIP CONTACT
L. Shivakumar
+91 22 6114 3406
[email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
[email protected]

Helpline for business queries

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

[email protected]

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company,
with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency
Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

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