Vedanta needs to strengthen its balance sheet, says Moody's

Vedanta Resources will have to strengthen its balance sheet for the current financial year to avoid further pressure on its credit ratings, according to Moody’s.

While the ratings agency lifted its negative outlook on Vendanta’s Ba1 credit rating, and found the company’s results for full-year 2015 to be in line with estimates, Moody's said that the natural resources outfit needed to do more as its operating performance was bound to come under pressure in the face of declining commodities prices.

Vedanta's revenue for 2015 came in at $12.9bn; broadly flat year-on-year. However, Moody’s pointed to its EBITDA of $3.7bn; a 17% decrease year-on-year. Vedanta blamed the decline on lower global commodity prices, lower volumes, and consequently higher unit costs across a number of its businesses, principally its zinc operations, Cairn India and Copper Zambia.

It added that the higher unit costs were predominantly a result of regulatory changes in the form of higher royalties and coal cess.

Moody's senior analyst Kaustubh Chaubal said the company was adapting to a tough operating climate. Its gross debt of $16.7bn in 2015 was $200m million less than what was recorded the year before.

“Its results for 2016 should register at the upper end of our estimates. However, Vedanta will have to strengthen its balance sheet in FY2016 to avoid further pressure on its ratings.

“For instance, $800m was spent by the company on share buybacks across the group. While the strengthening of ownership in the different group entities is credit positive in the long run, the cash could have provided some cushion to Vedanta's balance sheet to weather the multi-year cyclical downturn in commodity prices,” Chaubal concluded.