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Vedanta Resources in Debt Crisis: Moody's Downgrades to Junk Bond Category

Vedanta Ltd.'s troubles continue with debt downgrade and dividend payouts.

3 April 2023

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Abhisek Dash

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  • Vedanta Ltd. faces financial difficulties, owing several billion dollars and requiring $4 billion to pay off debts and interest due by March 2024.

  • Falling dividends, CFO resignation, downgraded outlook by Moody's and CRISIL, and Hindustan Zinc's acquisition bid for Vedanta Ltd.'s zinc assets in trouble.


  • Vedanta Ltd. may struggle to pay dividends and limit capital expenditures in the future.

The recent troubles at Adani Group have left the Indian market apprehensive, and it seems that other debt-ridden companies may come under investors' scrutiny. One such company is Vedanta Resources, a mining firm that owes several billion dollars and relies on funds from its Indian subsidiary, Vedanta Ltd. Moody's has downgraded the company's debt further into the junk bond category, stating that it requires approximately $4 billion in cash to pay off its debts and interest due by the end of the financial year ending in March 2024.


Vedanta Ltd. declared dividends amounting to $4.6 billion in the last year, which is over twice the amount declared in the preceding fiscal year. However, the local ratings agency CRISIL Ratings has recently downgraded Vedanta Ltd.'s outlook from stable to negative, citing the interim CFO's resignation and the potential for higher leverage and decreased financial flexibility stemming from substantial dividend payments to the parent company.


Hindustan Zinc, Vedanta Ltd.'s subsidiary, partly owned by the Indian government, announced a fourth dividend for the current fiscal year of around $1.3 billion last week. Additionally, Hindustan Zinc has offered $3 billion to acquire its parent's global zinc assets, a deal that the government has strongly opposed.


Moody's predicts that Vedanta Ltd.'s consolidated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will be between $4.5 billion to $4.8 billion during the fiscal year 2024, down from $6.4 billion in fiscal year 2022, with moderating commodity prices. Meanwhile, Vedanta Ltd. has $2.6 billion in debt that will mature in the next 12 months, and raising further debt may not be feasible in the current market conditions.


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Vedanta Ltd. reportedly has adequate funds to cover Vedanta Resources' maturities only for the first half of fiscal year 2024, as per CRISIL.. If Hindustan Zinc's bid to purchase its parent's global zinc assets fails, Vedanta Ltd. may find it difficult to keep paying dividends, and Vedanta Resources may be in trouble.


Ritesh Shah, an Investec analyst, suggests that minority shareholders in Vedanta Ltd. may miss out on future returns because the company will probably be forced to limit capital expenditures in the coming months. That may be one reason why the firm's forward earnings multiple of 6.05 is relatively low compared to its global peers

.

While recent issues in the US banking sector have taken the limelight, there may be additional shocks emanating from India due to the ongoing turmoil at Adani Group.


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