Standard & Poor's Ratings Services today lowered its foreign currency long-term corporate credit rating on Vedanta Resources PLC, saying that the company's performance is likely to be weak over the next one year.
"The outlook for Vedanta Resources is negative. At the same time, we lowered our long-term issue ratings on the company's guaranteed notes and loans to 'BB-' from 'BB'," S&P Ratings Services said in a statement today.
The 'BB-' is a speculative grade indicating that the company is less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
Vedanta is London-headquartered oil and metals company with most of its operations in India.
"We downgraded Vedanta because we expect the company's financial performance to remain weak for at least 12 more months. Low oil prices have hit Vedanta's cash flows. Any delay in the ramp-up of the company's aluminium production could put additional pressure on the rating," S&P credit analyst Mehul Sukkawala said.
"We expect Vedanta's ratio of funds from operations (FFO) to debt (on a proportionate consolidation basis) to remain weak at about 10 per cent in year ending March 31, 2016 as compared with 7.5 per cent in fiscal 2015," S&P said.
"However, we expect the ratio to recover to more than 13 per cent in fiscal 2017, assuming a stronger performance of Vedanta's aluminium business. We therefore continue to assess Vedanta's financial risk profile as aggressive, it added.
S&P expects Vedanta to commission three potlines at its aluminium smelter at Jharsuguda in Odisha over the next two years and one at subsidiary Bharat Aluminium Co Ltd (Balco) over the next 12 months.
Vedanta's higher zinc production in India, focus on turning around its Zambia copper operations, and our projection of a recovery in oil prices should also enhance the company's operating performance.
Vedanta will continue to be exposed to India's evolving regulations and operating conditions. These factors have had an adverse impact on the company's operating performance in the past, it said.
"We expect Vedanta to continue to benefit from its low-cost operations, particularly in the zinc and oil segments. High operational risks in some businesses (iron ore and copper in Zambia), and exposure to volatile commodity prices temper these strengths. We therefore continue to assess the company's business risk profile as fair," S&P said.
"The negative outlook reflects the risk of a delay in improvement in Vedanta's operating performance because of challenges, particularly for the aluminium operations," Sukkawala said.
