Shares of Vedanta fell over 1% in intraday trade on Thursday after the domestic brokerage India Ratings downgraded the metal and mining firm’s rating with a negative outlook. The stock of billionaire Anil Agarwal-led firm declined as much as 1.4% to ₹225.10 apiece on the BSE.

India Ratings and Research (Ind-Ra) has downgraded Vedanta’s long-term issuer rating to ‘IND AA-’ from ‘IND AA’, while placing it on rating watch with negative implications. The agency has also cut outlook to negative, the brokerage says in its report.

“Ind-Ra continues to take a consolidated view of Vedanta and its subsidiaries due to the strategic, operational and financial linkages among them. The agency also consolidates the debt of the parent company, Vedanta Resources Limited (VRL), while arriving at the ratings,” it says in a report released on October 11, 2023.

As per the report, the downgrade reflects Vedanta’s increased liquidity risk and reduced financial flexibility on account of delays in tying up the refinancing (longer-than-expected time taken by VRL) for managing its large upcoming bond maturity in January 2024 and FY25, which could potentially impact Vedanta’s liquidity and financial flexibility in the interim.

The downgrade also reflects lower-than-expected cash accruals at Vedanta owing to corrections in the commodity cycle together with the higher cost of borrowing for the latest bond issuance, which could impact its liquidity cover as well as its ability to support VRL, the report notes.

Ind-Ra has placed the ratings on rating watch with negative implications in view of the in-principle approval of the board of directors to demerge VDL’s existing business into six separate standalone listed entities over the next 12-18 months, with VRL as the holding company.

On September 29, Vedanta announced that it would split the company into Vedanta Aluminum, Vedanta Oil and Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta Ltd, which will be listed as separate entities on domestic bourses. The demerger is planned to be a simple vertical split, for every 1 share of Vedanta Ltd, the shareholders will additionally receive 1 share of each of the 5 newly listed companies.

Ind-Ra is awaiting clarity from Vedanta regarding the implications of the aforesaid demerger on its liquidity and credit profile, as the details of the break-up of assets and liabilities have not yet been disclosed. In Ind-Ra’s view, while the transaction provides opportunities to monetise assets at each of the individual verticals, it could potentially also increase the structural subordination at Vedanta’s post the monetisation of some of these assets.  Ind-Ra would also evaluate the details of the demerger as and when it is available to assess the implications on the credit profile of Vedanta, it added.

Reacting to the news, Vedanta shares opened 1% lower at ₹225.55 against the previous closing price of ₹227.70 on the BSE. Extending opening losses, the mining heavyweight slipped to day’s low of ₹225.10, while the market capitalisation dropped to ₹84,138 crore.

Last month, the stock touched its 52-week low of ₹207.85 on September 28, 2023, amid a slew of negative developments such as the withdrawal of Taiwan's Foxconn from a $19.5 billion semiconductor joint venture. The renewed concerns about piling debt of its London-based parent, Vedanta Resources, which has to repay term debt worth $4.2 billion in the FY24, also dented sentiments. 

However, Vedanta shares regained momentum and rose nearly 10% from its 52-week low after the company announced demerger plan, which could potentially unlock value for its shareholders. Vedanta’s demerger plan is being seen as part of the group’s strategy to help its parent company manage its debt load. The London Stock Exchange (LSE)-listed Vedanta Resources is the parent company of Vedanta, which has to repay term debt worth $4.2 billion in FY24.

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