CRISIL believes that Cairn India's oil and gas business is one of the key elements of the Vedanta group's overall strategy to be a globally diversified natural resources major. Till now, Vedanta's access to liquidity in Cairn India (cash and marketable securities of Rs.170 billion as on March 31, 2015) was limited to the dividends distributed, coupled with the loans and advances extended by the latter in 2014-15 (USD1.25 billion). The proposed merger is a step in the simplification of the group structure. Post the merger, improvement in Vedanta's net debt/EBIDTA will continue to be a key rating monitorable.
The transaction is subject to Vedanta, Cairn India and Vedanta Resources Plc (rated BB-/Negative by S&P) shareholder approvals, as well as approvals from the court, stock exchanges and other regulatory bodies. The transaction is likely to be concluded by end of 2015-16 (refers to financial year, April 1 to March 31).
In January 2015, CRISIL had revised its rating outlook on the debt instruments and bank facilities of Vedanta Ltd due to expectation of moderation in Vedanta's cash flows due to a combination of lower oil prices, delayed ramping up of aluminium smelting and power capacities, and lower volumes from the iron ore business. Ramp up of the aluminium and power capacities, coupled with oil prices and the resultant cash flows continue to remain key rating sensitivity factors.
The ratings continue to reflect Vedanta's diversified business risk profile; its leadership position in zinc, and the oil and gas segments; and its healthy financial risk profile. These rating strengths are partially offset by the company's susceptibility to volatility in commodity prices, to regulatory risks in the iron ore business, and to project execution risks associated with sizeable capital expenditure programmes in its aluminium and power projects.
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