After the Adani crisis, the Vedanta group is being closely monitored, beware

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In attempting to reduce its debt, Vedanta Resources is eroding its subsidiary companies.

Vedanta Group Chairman- Mr. Anil Agarwal

Vedanta’s Struggling with Debt

Adani Group, a struggling Indian infrastructure giant, hasn’t yet knocked over any further huge dominoes. Vedanta Resources, a massive mining corporation in India, is also appearing unsteady.

Due to market trepidation following the instability at Adani Group, which was the target of a short sale by Hindenburg Research in late January, other indebted Indian companies—who otherwise could have muddled through the Federal Reserve’s rate hike cycle—may come closer to scrutiny from investors. According to Refinitiv, a dollar bond issued by Vedanta Resources due in May 2023 was earning around 50% on Friday—roughly twice as much as it was at the end of January.

The main issue is that company Resources, with its headquarters in London and multiple billions of dollars in debt, is dependent on transfers from its Indian subsidiary Vedanta Ltd. The majority of the group’s actual assets are held by that entity, which also has significant direct obligations of its own.

Vedanta was downgraded by Moody’s Analytics

Early in the month, Moody’s further downgraded the company’s debt, pushing it into junk bond territory. To pay off debt and interest that will become due during the course of the fiscal year ending in March 2024, according to the rating agency, it will require roughly $4 billion in cash.

Debt Repayment Strategy

The corporation anticipates being able to make payments thanks to large cash flows from its Indian operations, although even they are under financial strain. However, some of those payments may be challenging to implement due to Indian politics.

Vedanta Ltd., a company listed in Mumbai, announced on Tuesday that it will distribute its fifth dividend, totaling roughly $927 million, for the current fiscal year that ends this month. Vedanta Ltd., which firm Resources owns at 70%, declared dividends of $4.6 billion over the past 12 months, a significant increase from the previous fiscal year. Yet, the company’s acting CFO quit during the week.

CRISIL Rates Vedanta

The local rating agency CRISIL Ratings also lowered Vedanta Ltd.’s outlook from stable to negative, citing potential increases in leverage and less financial flexibility as a result of significant dividend payments to the parent.

According to Crisil, Vedanta Ltd. only has enough cash on hand to pay the maturities of Firm Resources for the first half of the fiscal year 2024. Due to the impending general elections in India, it may be difficult for Vedanta Ltd. to continue paying out large dividends, which would put Firm Resources in a difficult situation. If Hindustan Zinc’s generous offer to buy its parent company’s overseas zinc holdings fails.

A fourth dividend of about $1.3 billion for the current fiscal year was also announced last week by Hindustan Zinc, a division of Vedanta Ltd. that is partially owned by the Indian government. The government has vehemently opposed the $3 billion offer made by Hindustan Zinc to purchase the international zinc assets of its parent company.

The large cash transfers are also occurring at a time when commodities prices are moderating. The consolidated adjusted Ebitda (earnings before interest, taxes, depreciation, and amortization) for Vedanta Ltd. is predicted by Moody’s to fall from $6.4 billion in fiscal 2022 to $4.5 billion to $4.8 billion in fiscal 2024.

Vedanta Ltd., on the other hand, has $2.6 billion in debt that will mature in the next year. Even if the company’s net debt to Ebitda ratio is an acceptable 1.21, the present economic climate makes it difficult to raise further debt.

The ordeal won’t be without ramifications, even if Vedanta Ltd. and London-based Firm Resources manage to escape payback issues in the end.

Although minority firms’ shareholders are enjoying fantastic dividends, according to Investec analyst Ritesh Shah, they are missing out on future gains since the company will likely be obliged to keep capital expenditures low in the near future. Compared to global peers Anglo American or Teck Resources, which trade at roughly eight, the business trades at relatively low forward earnings multiple of 6.05, which may be one of the reasons.

The far more spectacular recent events in the U.S. financial industry have overshadowed the Adani story. This does not preclude the possibility of more tremors coming from India.

What does Vedanta do?

Ans. Vedanta do mine iron ore, steel, copper, aluminium, zinc, lead, and silver. In India, they have three active blocks that are producing both oil and gas. In our zinc, lead, silver, copper, and aluminium smelters and other processing facilities throughout India and Africa, they process and smelt extracted minerals to create refined metals.

Does Vedanta have no debt?

Ans. In 2020, Vedanta took up a $400 million loan from Oaktree Capital Group, owned by Howard Marks. According to FT, Agarwal stated that firm has “less than $13 billion overall debt” and that “being a zero-debt firm is not a faraway fantasy, but a medium-term, feasible ambition.”

Is Vedanta group in trouble

Ans. The mining behemoth has therefore made press headlines for all the wrong reasons. Everyone is raising doubts about the Group’s capacity to pay off its massive debt load, which includes $ 500 million in obligations due on December 31, 2023, and a $ 1 billion bond payment due in January 2024.

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