Mining mogul Anil Agarwal’s Vedanta Ltd will get access to USD 4 billion of cash and another about USD 700 million a year following the merger with Cairn IndiaBSE -4.51 %, supporting repaying of USD 9 billion debt, S&P Global Ratings said today.
S&P said its rating on the UK-listed Vedanta Resources is not immediately affected by the merger of the company’s subsidiary Vedanta Ltd with Cairn India LtdBSE -4.51 %.
“In our view, the merger will improve the cash flow fungibility within Vedanta Ltd by simplifying the group structure to some extent. However, it will not change Vedanta Resources’ financial metrics nor will it materially improve cash flow fungibility between Vedanta Ltd and the holding company Vedanta Resources,” it said in a statement.
Vedanta Ltd, S&P said, will benefit from improved cash flow fungibility, given its high debt and significant short- term borrowings.
“Vedanta Ltd would get access to about USD 4 billion of cash at Cairn India and its free operating cash flows, which we estimate to be about USD 700 million annually. This should support Vedanta Ltd’s ability to service its debt of about USD 9 billion, including short-term debt, current maturities of long-term debt, and interest bearing payables of about USD 4 billion,” S&P said.
The rating agency said it awaits clarity on Vedanta Resources’ plan for the use of Cairn India’s cash that will be available to Vedanta Ltd.
Also, a dividend distribution could result in an additional about 20 percent leakage from dividend distribution tax.
In our view, the merger — by itself — will not materially affect the financial ratios that we assess on a proportionally consolidated basis. We expect the ratio of funds from operations to debt to remain at about 10 percent for the fiscal year ending March 31, 2018,” S&P said.
Also helping debt reduction is recent special dividends by group company Hindustan Zinc Ltd.
Vedanta would also benefit from the government policy extending the license for certain oil fields by 10 years including that of Cairn’s Rajasthan block.
“We believe this will be favourable to Vedanta Resources’ business because it allows Cairn India to extend the product sharing contract by 10 years beyond 2020 and plan for future investments that can improve production and reserves,” S&P said.
The extension will, however, be at the cost of paying 10 per cent higher share of profit to the government and would likely result in an increase in capital expenditure for the oil and gas business.
Vedanta Resources also continues to ramp up its aluminium operations, which will be important to improve the company’s overall business diversity and operating efficiency.
