Fitch rates Vedanta Aluminium's proposed NCD at 'Fitch A-(ind)(exp)'

Fitch Ratings has assigned India-based Vedanta Aluminium Ltd's (VAL) proposed INR60bn non-convertible debentures (NCDs) a 'Fitch A-(ind)(exp)' rating. A list of VAL's outstanding ratings (including the above) is provided at the end of the commentary.

The ratings benefit from VAL's strong linkages with its parent, Vedanta Resources Plc (VRPLC: Long-Term Issuer Default Rating: 'BB+'/Stable), driven by the key role VAL is expected to play in the parent's global aluminium strategy. The strong linkage is also reflected in VRPLC and another subsidiary - Sterlite Industries India Ltd - guaranteeing over 90% of VAL's total external debt. VAL has also received unsecured loans from Sterlite and other group companies.

The ratings are, however, constrained by the non-availability of captive bauxite mines for VAL, which results in higher operating costs and low profitability. VAL's EBITDA margin declined to 14.4% in FY11 (the full year to end-March 2011) from 24.1% in FY10. Also, only a small part of VAL's aluminium production is likely to be in the form of value-added products.

VAL's plans to expand the capacity of its 1.4mtpa alumina refinery to 5mtpa have been put on hold due to lack of approvals for captive bauxite mines, with delays in receipt of requisite clearances. Also, although VAL has completed about 75% of its capex for a 1.25mtpa smelter, the operations are likely to be delayed given the absence of backward integration. The delay is likely to negatively affect the returns on the project.

The large debt-funded capex has resulted in high interest costs for VAL, which in turn led to a net loss of INR9,592m in FY11. Total debt as of FY11 was INR265.9bn (including unsecured loans of INR130.8bn from Sterlite and the VRPLC group). The company has consolidated most of its debt with an extended repayment schedule, and Fitch notes this may have a positive impact on VAL's liquidity, which is driven by its strong refinancing ability with the support of its sponsors.

Incorporated in 2001, VAL is a majority-owned subsidiary of VRPLC, which owns 70.5% of its equity, with Sterlite holding the remaining stake. The company also operates a 500,000 tpa aluminium smelter at Orissa, along with captive power.

For FY11, VAL reported revenues of INR46,211m (FY10: INR14,852m) with a net negative income of INR9,592m (FY10: a net profit of INR1991m). In H1FY12, VRPLC's revenues were USD6.6bn (H111: USD4.6bn), with EBITDA margins of 26.1% (29.4%).

The final rating is contingent upon the receipt of final documents conforming to information already received.

VAL:

- National Long-Term Rating: 'Fitch A-(ind)'; Outlook Stable

- Proposed INR60bn NCDs: 'Fitch A-(ind)(exp)'

- INR5.0bn non-fund based facilities: 'Fitch A-(ind)'/'Fitch A2+(ind)'

- USD125m non-fund based facilities: 'Fitch A-(ind)'/'Fitch A2+(ind)'

- INR2bn fund-based working capital facilities: 'Fitch AA(SO)(ind)'

- INR8bn non-fund based working capital facilities: 'Fitch AA(SO)(ind)'/'Fitch A1+(SO)(ind)'

- USD500m term loan: 'Fitch AA(SO)(ind)'

- INR161.5bn project finance facilities: 'Fitch AA(SO)(ind)'