London-listed Vedanta's operational risks in India-based metals and mining businesses, which are proposed to be put under a new entity, Sesa Sterlite, are rising, said global rating agency Standard and Poor's.
Assigning a negative outlook to the Anil Agarwal-led firm, S&P said, "Operational risks in Vedanta's metals and mining businesses in India are growing, in our opinion. The company has limited backward integration in aluminium, power, and copper."
Besides, it is also exposed to the volatility in the commodity prices, S&P said.
"The negative outlook reflects sizable refinancing requirements at the holding company over the next two years and our expectation that the company's cash flows could weaken because of increased operating and country risks in India," S&P's credit analyst Vishal Kulkarni said in a statement.
The rating agency, however, added that "the company's strong market position in zinc and low cost of production in oil and gas partly offset the above weaknesses."
Besides, Vedanta's cash flow coverage metrics are supportive of a higher financial risk profile when viewed on a consolidated basis, it said.
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The rating agency's negative outlook comes barely 10 days after Vedanta announcing revamp of its Indian operations, under which Sterlite Industries will be merged into another group firm Sesa Goa. The new entity, Sesa Sterlite will be the holding company for Vedanta's all Indian businesses.
"Vedanta's financial strategy, which we view as aggressive, places much of its debt, but none of its cash, at the holding company," S&P said, while affirming its 'BB' long-term foreign currency corporate credit rating to the metals and mining conglomerate.
According to the S&P, the rating reflects that Vedanta's financial risk profile is "aggressive", while its business risk profile is "fair".
"Vedanta's willingness to send cash upstream from its Indian subsidiaries, in which it has sizable minority interests, is untested," S&P said, while noting that its proposed reorganisation will not reduce group's consolidated debt of about $17 billion (as of December 31, 2011).
Stating that Cairn India acquisition will increase Vedanta's consolidated profitability and improve its cash flows, Kulkarni said that "the weaker-than-expected performance of other businesses is likely to somewhat offset the benefits from the Cairn acquisition."