Shares of mining major Vedanta opened on a weak note on Thursday, after rating agency Standard and Poor's downgraded London-based Vedanta Resources Plc's ratings one notch lower to 'BB-'.
The rating is said to reflect S&P’s apprehensions about the completion of the merger between Vedanta and Cairn India. The shares however recouped some of its losses by the end of the trading session.
The reason for the rating agency’s cautious view stems from three reasons.
One, the company’s cash flows have deteriorated due to the ongoing rout in commodity prices. While aluminium prices have been on a downtrend for some time now, the fall in zinc prices has been a cause for concern – given that it is the biggest contributor to Vedanta’s operating profits.
Global zinc prices, which stayed above $2,200 per tonne at the start of this year, has fallen below $1,800 per tonne currently. Reports indicate that China is turning from being a net consumer of the metal to a net producer, which is likely to keep prices under pressure.
Two, Vedanta is saddled with huge debt – Rs 36,800 crore on a standalone basis and Rs 77,700 crore on a consolidated basis as of March 2015. Meeting repayment obligations that come up in the short to medium term maybe a concern.
Three, given high debt and the weakness in commodity prices, the merger of its Indian arms – Vedanta and Cairn India – is critical for Vedanta Plc, according to S&P. This is because Cairn India is cash rich - Rs 16,867 crore as on March 2015.
However, in S&P’s view, there are uncertainties around the completion of the merger deal. Cairn India shareholders may not be in favour of the merger. There are concerns about the swap ratio terms too.
Besides Cairn India merger, there are also talks of merging its other subsidiary Hindustan Zinc, which has a cash pile of Rs 30,785 crore as of March 2015. Vedanta, which owns the majority stake of 65 per cent in the company, has to first acquire Government’s holding of 29.5 per cent in the company and this may delay the completion of the deal.