Credit Research Challenge 2017-18 Team 149 1 AA+ Executive Summary Business Risk – Good Solvency – Good The businesses are fairly diversified both Paid up a significant amount of its debt recently geographically and in terms of product offering and increased its D-to-E from 0.63 to 0.48 Compliance with the changing policies Operating current ratio has also improved from regarding environmental and legal aspects 0.45 to 0.52 Ability to maintain, retain and acquire new Ability to meet debt payments as DSCR has mining licenses across different metals increased from 2.19 to 3.53 Distance to Default – Good AA+ Outlook – Stable Vedanta has a probability of default of 4%, which has increased in the recent 2-3 years. However, it Steady capital expenditure to increase capacity still seems under control and aim to reduce the debt in the future Debt Covenants: Recent acquisition of Cairn to bring in fresh revenues and improve diversification Debt/EBITDA = 1.17 < 3.75 Strong Corporate Governance policy (UK CG EBITDA/ Interest Expense = 3.64 > 3 Code since 2014) NA / Debt = 3.18 > 1.4 2 AA+ Our Agenda Business Description Industry Overview & Competitive Positioning Investment Summary Management and Corporate Governance Capital Structure Liquidity Analysis Financial Analysis Credit Rating Matrix and KMV Model 3 AA+ Business Description Vedanta Limited is a subsidiary of Vedanta Resources (50.1% stake) and is into 6 diversified businesses Vedanta Resources’ Copper, Iron ore, COPPER Power and Aluminum sites in Jharsuguda and Lanjigarh are directly under Vedanta Limited VEDANTA ZINC LIMITED (HZL, ZINC INTL.) A part of Aluminum operations are ALUMINIUM being operated under BALCO (JJHA, BALCO) VEDANTA Talwandi Saboo, a wholly owned OIL AND GAS RESOURCES subsidiary also holds a part of the (CAIRN INDIA) power business POWER KONKOLA COPPER (TSPL) Vedanta Limited also operates the MINES PLC recently merged zinc business of IRON ORE Vedanta Resources under HZL and Zinc International in South Africa and Namibia respectively 4 AA+ Business Description Vedanta Limited is a leading player in Copper, Zinc and Aluminium Industries in India COPPER – 28% revenue ZINC – 26% revenue ALUMINIUM – 19% revenue Largest copper rod producer of India HZL - Largest Zinc producer in the world $4.8 billion expansion of aluminum business Lowest global net cost of copper Serves 6% of the Global Zinc market BALCO & Vedanta - 50% Indian market share conversion Serves 72% of India’s Zinc Market Vedanta converts Bauxite supplied by BALCO 160 MW plant to convert by products into Acquired Anglo American Plc Zinc into Alumina for a conversion fee Sulphuric and Phosphoric acid operation in Namibia, South Africa and Refining capacity of 6000 KTPA – 33% utilized Owns a few mines in Australia – Under Ireland - Increase in production capacity Smelting capacity 1750 KTPA – 70% utilized maintenance since July 2014 and diversification of risk OIL & GAS – 14% revenue POWER – 7% revenue IRON ORE – 6% revenue Merger of Cairn India in March 2017 Sub-critical coal-based power plants with Exports from Goa, Mangalore and Cairn operates in India, Sri Lanka, S.Africa a capacity of 2,400 MW in Jharsuguda and Krishnapatnam - Captive fleet of 33 barges Rajasthan block’s production sharing 106.5 MW in Mettur, Tamil Nadu Mining issues in Karnataka and Goa relaxed valid till 2020 – GOI expected to renew New power plant of 1980 MW capacity in favor of Vedanta Low oil prices have been a strong source established in Talwandi Sabo, Punjab Sold 2.7mn tone in 2017 - Quota for of cash flows and profit but an expected Long term power purchase agreement increased to 4.5mn tone per annum increase in oil prices is a major risk with GRIDCO and Punjab Electricity Board 5 Industry Overview & Competitive Positioning Oil Copper Zinc Aluminium & Gas • Demand for the domestic copper • Zinc is predominantly used by the • Primary user segment is Electronics • Threat from substitutes is medium market is dependent on the global steel industry for the sector followed by automotive, to low as the search for alternates electrical (34%), construction (8%), purpose of galvanizing. construction, packaging, consumer is still in infancy. automobiles (11%), consumer • Correlation between Zinc and Steel durables, industrial durables segment (8%) Demand is 0.96 • Domestic LNG demand is expected • Production stood at 2.8 M MT in • Domestic demand of refined • Galvanizing and die-casting alloy to grow at a CAGR of 16.89 % to copper is expected to increase at a FY17 and it is estimated to reach 306.54 MMSCMD by 2021 sector will increase at a modest 3.33 M MT per annum in FY20 CAGR of ~ 4.2% reaching at the pace between FY18 and FY21 levels of 560.25 MMT by 2020 • Demand of aluminum in India is • The country's gas production is • Demand from the other end-user expected to grow at 17-18 % per expected to touch 90 Billion Cubic • Aluminum is expected to continue segments: zinc oxides/chemicals, annum Meters (BCM) in 2040 from 21.3 replacing copper demand from the brass and the dry cell industry is • The pricing power is limited BCM in 2017-2018 (Apr-Nov) electrical which is likely to cap the expected to increase at a because of regulatory structure demand for copper marginally slower pace and margins are fixed. • Hindalco: 50% • Vedanta: 72% • Hindalco: 60% • IOCL, ONGC, BPCL, HPCL, OIL, GAIL, Reliance, Shell, BP & Cairn India 6• Vedanta (40%), HCL (10%) • NALCO, HCL (small fragmented) • Together with Nalco & Balco: 95% AA+ Investment Summary Acquisition of Cairn India is a positive sign, will help in stabilizing revenues, access to huge cash pile Increased production capacity in existing assets -Zinc production capacity to reach 1.2mn tonnes by 2020 TITLE GOES HERE TITLE GOES HERE -Aluminum production capacity to reach 1.6mn tonnes by 2018 -Iron ore : Additional 2.6mn tonnes capacity acquired in Goa Capital expenditure in expansion projects -Acquired Cairn India to venture into Oil and Gas Industry -Capital expenditure in copper projects at Lanjigarh & Tuticorin Short-term investment strategy -Ramp up production in Aluminium, Zinc, Power and Iron ore -Repay long term debt to lower interest payments and D/E -Invest in achieving operational efficiencies Long-term investment strategy -High cash flows and low debt/equity : Vedanta has more appetite for faster expansion especially in the oil and gas TITLE GOES HERE 7 Management & Corporate Governance 8 board members at the end of Financial Year 2017 Adopted principles of the UK Corporate Governance Code during FY2017 - Re-election for other members in next financial year as there is eligibility of only one year - Setup an Audit committee to meet the requirements of UK Corporate Governance Code - Shows commitment of senior management to have a strong corporate governance High participation of board members in meetings - Approx. 100% Compensation of board members linked to company’s performance Competence Integrity Risk Appetite Overall - Highly experienced in - High attendance - Acquired Cairn India diverse sectors - Re-election every year - Multi expansion projects 8 - International experience - Gender Diversity Capital Structure AA+ High Total D/E in ‘14-16 because of debt funded acquisition of Cairn India and business lines Long-Term Debt to Equity Ratio Total Debt to Equity Ratio Industry Vedanta Industry Vedanta 1.2 1.2 1.13 1 1 0.94 0.8 0.8 0.6 0.62 0.6 0.63 0.46 0.48 0.4 0.4 0.4 0.33 0.29 0.2 0.2 0.19 0.16 0.15 0.08 0.16 0.15 0.09 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 Lower D/E ratio than Industry – Improved in 2017 and is expected to improve further as firm aims to pay off its debt 9 Liquidity Analysis AA+ Healthy liquidity but needs monitoring regarding ability to pay short term borrowings & trade payables Total Current Liabilities and Cash Ratio Cash ratio has declined as compared to the previous year and has fallen below 1 – Not a cause of concern as Total Current Liabilities this is mainly due to a one-off increase in short term borrowings and trade payables Cash Ratio Cash ratio has declined despite an increase in cash Operating Current Ratio and marketable securities because current liabilities have 90000 1.2 increased significantly 80000 0.95 1 70000 1.07 Decline in Current ratio from 1.26 in 2016 to 0.93 in 0.88 60000 0.82 0.8 2017 due to an increase in Current Liabilities - Ratio is 50000 0.74 still healthy 0.6 40000 0.52 0.56 Negative working capital due to a significant increase Total current liabilities in crores 30000 0.45 0.4 20000 in trade payables - Highlights the increase in bargaining 0.2 10000 power of the company 0 0 Operating Current Ratio has improved marginally 2015 2016 2017 2018E from 0.45 in the previous year to 0.52 Cash Ratio = Cash + Marketable Securities/Current Liabilities 10 Operating Current Ratio = (Cash – Investments) / (Current Liabilities – Short Term Debt) Financial Analysis AA+ Debt Service Coverage Ratio has increased in 2017 which is a good indicator but expected to decrease Interest coverage ratio has also increased in 2017 which shows the ability of the firm to repay Debt Service Coverage Ratio Interest Coverage Ratio Debt Service Coverage Ratio Interest Coverage Ratio Total Debt Coverage Ratio 4.5 4 4 3.9 3.5 3.53 3.5 3.53 3 3 2.7 2.7 2.5 2.42 2.5 2.19 2.19 2 2 1.5 1.5 1 1 0.5 0.68 0.51 0.5 0.25 0 0.26 0 2015 2016 2017 2018E 2015 2016 2017 2018E Debt Service Coverage Ratio = FCFF / (Principal + Interest) 11 Total Debt Coverage Ratio = FCFF / (Total Long Term + Short Term Borrowings) Interest Coverage Ratio = EBITDA/ Interest Payment Profitability & Operating Performance AA+ Gross Profit Margins have been stable stating stable material costs.