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Moody’s revises Vedanta Resources’ outlook to negative from stable

Moody’s Investors Service has revised Vedanta Resources’ outlook to negative from stable saying the sharp drop in crude oil prices could impact the company’s credit profile.

“While Vedanta may able to increase production in its traditional metals operations, such as zinc and aluminium, the sharp drop in the price of oil, which previously accounted for over half of the group’s operating EBITDA, will result in weaker credit metrics,” said the ratings agency in its release today.

Based on a working interest of 138,000 barrels of oil equivalent per day Moody’s expect Cairn India to generate around $ 1.0 billion of EBITDA in FY2016 compared with the $ 2.347 billion of EBITDA reported in FY 2014 on an average Brent price of $ 107.6 per barrel.

The agency anticipates some increase in production of zinc and aluminium in India where existing assets are being developed while cheaper fuel should lead to lower mining costs across the group. Its copper mining interests remain a challenge and Moody’s regards any increase in Indian iron ore production as a bonus.

“Despite the best efforts of management, the drop in EBITDA of over $ 1.3 billion from Cairn cannot be easily offset and so from an EBITDA level of $ 5.2 billion seen in FY 2014, we expect EBITDA of around $ 4.0 billion to $ 4.2 billion in FY2016,” says Alan Greene, a Moody’s Vice President, Senior Credit Officer.

The resulting fall in cash flow will lead to a reduction in free cash flow but we expect the company to take steps to reduce expansionary capital expenditure. However, in order to mitigate the lost contribution from oil, the company will need to spend varying amounts on capital expenditure to achieve more output from its iron ore mining, its aluminium operations and the zinc business in India.

Nevertheless, future exploration and production capex at Cairn together with spending on the Gamsberg zinc development, could be reined in and total capex is likely to be below the $ 2.2 billion spent in FY2014.

During the remaining 10 weeks of FY2015, several developments are expected that could add to the pressure on Vedanta’s balance sheet in the short-term. Vedanta is likely to be bidding in India’s coal mine auctions to replace its previously de-allocated coal block.

“We also expect the long drawn out negotiations and rulings on the sale of the Government of India’s interests in Hindustan Zinc Ltd. (HZL, unrated) and BALCO to reach a conclusion,” said Moody’s.


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