Report on

Vedanta Limited
Credit Research Analysis

By Team 125

MARADA GOWTAM MALLA BHAVANA TEJITHA AJJUGUTTU

SANDEEP
PABBATHY CHERITH
CATHERENE
Table of Contents
I. INTRODUCTION ............................................................................................... 2
Description of Business
Operations & Products
II. INDUSTRY ANALYSIS ....................................................................................... 2

III. KEY RATING DRIVERS .......................................... Error! Bookmark not defined.

IV. Financial Analysis

V. Liquidity Analysis
VI. Credit Analysis
Executive Summary

Description of Business
Vedanta Limited (“Vedanta” or the “Company”) is a global diversified natural resources company
with operations across zinc, lead, silver, oil & gas, iron ore, copper, aluminium and commercial power.
The Company contributes ~27% of India’s domestic crude oil production.

The merger of Sesa Goa, Sterlite and Vedanta Aluminium created Sesa Sterlite, now renamed as Vedanta
Limited.

The company’s headquarters are in New Delhi, India.

Vedanta ltd. has its operations in various different business channels viz. Zinc India, Bharat Aluminium,
Western Cluster(Liberia), Skorpion & Lisheen, Talwandi, MALCO Power, Australian Copper Mines. The
following figure shows the structure of Vedanta Ltd. and its holdings in different subsidiaries.

Operations & Products

Zinc-Lead-Silver: HZL operates the zinc operations in India. The Vedanta group limited owns around 64.9% of the
share capital in the HZL.

Oil & Gas: Cairn India is one of the leading private sector crude oil producer. Sesa sterilite owns around 58.9% of share
capital in Cairn India.
Iron Ore:Sesa Sterlite is largest private sector exporter of iron ore in India and is developing large iron ore deposits in
Liberia. Iron ore mining operations are carried out in the Indian States of Goa and Karnataka. We also manufacture pig
iron and metallurgical coke. During FY 2013, our Indian iron ore operations were affected by a suspension of iron ore
mining activities across the states of Goa and Karnataka. The Honourable Supreme Court allowed resumption of
Karnataka mine in April, 13 subject to statutory clearances. Subsequent to receiving all the approvals they have started
mining in Karnataka from 28 December, 13. In 2011, Sesa Goa limited had acquired iron ore assets in Liberia, with
around 1 billion in reserves and resources across three deposits - Bomi Hills, Bea Mountain and Mano River, located at a
distance of 70-140 kilometers from the port at Monrovia. Extensive drilling at our Liberia assets has confirmed a billion
tonne of Iron Ore deposit last year with further multifold upside. Currently, they are reviewing the different phased
options including the first phase of 2 million tons. Sesa Sterlite is largest private sector exporter of iron ore in India. Its
subsidiary, Western Cluster Ltd is developing large iron ore deposits in Liberia.

Copper: they says "We aim to provide high-quality refined copper by improving our operational efficiency and reducing
our unit costs" Their copper business is principally a custom smelting operation located in India and Australia. Our
Indian operations include a smelter, refinery, phosphoric acid plant, sulphuric acid plant and copper rod plant at
Thoothukudi in southern India. Sesa Sterlite owns 100% of the Mt. Lyell copper mine in Tasmania, Australia, which
produces a portion of the total requirement of copper concentrate at our Indian Operations. Production of cathodes at
our Copper India business was 353kt in FY 2013. Our Australian operations produced 26kt of mined metal in FY
2013.Sesa Sterlite copper business is located in India. It also owns 100% stake in Copper Mines Of Tasmania Pty Ltd,
Australia.

Aluminium: BALCO has a smelter capacity of 345 ktpa with capabilities to produce ingots, wire-rods, billets, busbars
and rolled products. BALCO's operations include mines, refineries, smelters and captive power plants in the state of
Chhattisgarh in India. Sesa Sterlite holds a controlling 51% stake in BALCO, while the Government of India remains an
equity partner and holds the remaining 49% stake. The Korba-II Balco smelter produces 245 ktpa of aluminium and
they are expanding production capacity to 570 ktpa with the commencement of the new Korba-III 325 ktpa smelter in
FY 2014.BALCO's current operations have access to captive power from 540 MW thermal power plant. A new 1,200
MW power plant is expected to commence production soon.Beside this company has 1.75MTPA of aluminium
manufacturing unit at Jharsuguda,Odisha.

Power: Sesa Sterlite is one of India's leading power producers with a capacity of 3,900 MW in commercial power. They
have commercial power generation business which currently operates 2,400 MW Jharsuguda Power Plant in Odisha, 270
MW BALCO power plant in Chhattisgarh, 100 MW MALCO power plant in Tamil Nadu and 274 MW HZL wind
power plants at various locations in India. They are also setting up a 1,980 MW Talwandi Sabo power plant in the state
of Punjab. Talwandi Sabo Power Limited, a 100% subsidiary of Sesa Sterlite is setting up a 1,980 MW thermal power
project in Punjab, with the first unit starting operations by Q3 FY2014. Hindustan Zinc has 274 MW of wind power
generational capacity, making it one of the largest producers of wind power in India. MALCO operates a 100 MW plant.
Metallurgical Coke: Approximately 65% of total production is consumed by Sesa group, for its pig iron production. The
remainder is sold to customers located in India. Sesa Goa has patented a technology that provides high quality output
and produces power. It is a patented and follows a two-product process with metallurgical coke as the main product and
the sensible heat of the exhaust flue gas as a co-product. This heat can be used for producing clean electricity. The
company uses non-polluting, non-recovery Australian Technology. At the plant in Amona, negative pressure in the
ovens ensures no polluting leakages.

Pig Iron: This business is skewed towards catering to the steel mills and foundries of the Indian market, in particular the
Western and Southern India. The division manufactures basic, foundry and nodular grade pig iron and also sells slag.
The annual production capacity is 250,000 tons per annum.

INDUSTRY ANALYSIS

India holds a fair advantage in cost of production and conversion costs in steel and alumina. Its strategic location
enables convenient exports to develop as well as the fast-developing Asian markets.

India currently produces around 88 minerals which mainly include 50 non-metallic, 24 minor, 10 metallic, 4 fuel and 3
atomic minerals.

Rise in infrastructure development and automotive production are driving growth in the sector. Power and cement
industries are also aiding growth in the metals and mining sector. Demand for iron and steel is set to continue, given the
strong growth expectations for the residential and commercial building industry.

Market Size

India is the 3rd largest producer of coal. Coal production stood at 554.13 million tonnes in FY17 and 365.6 million
tonnes in FY18 (up to November 2017). India has the 5th largest estimated coal reserves in the world, standing at
308.802 billion tonnes in FY16. In 2016, India contributed around 11 per cent of the world’s production of coal.

India ranks 4th in terms of iron ore production globally. In FY17 and April-July 2017, production of iron ore stood at
192 million tonnes and 64.84 million tonnes, respectively. India has around 8 per cent of world’s deposits of iron ore.

India has become the 3rd largest steel producer in FY17 with the production of finished steel at 83.01 million tonnes.
India stood as the 3rd largest crude steel producer in 2016, while its production increased to 97.385 million tonnes in
FY17 as compared to 90 million tonnes in FY16. Crude steel production from April to November 2017 stood at 66.70
million tonnes.

According to Ministry of Mines, India has the 7th largest bauxite reserves- around 2,908.85 million tonnes in FY17.
Aluminium production stood at 1.7 million metric tonnes in FY17.

India has vast mineral potential with mining leases granted for longer durations of 20 to 30 years.

Coal-based power generation capacity in India, which currently stands at 192 GW is expected to reach 330-441 GW by
2040, according to Mr Gopal Singh, CMD, Coal India Limited.

Investments/ Developments
Cumulative FDI inflows into the mining sector between April 2000 and September 2017 stood at US$ 13.79 billion as
per Department of Industrial Policy and Promotion (DIPP).

Vedanta Resources Plc is planning to invest around US$ 9 billion in India and create more than a million direct or
indirect jobs in the country.

Metals and Minerals Trading Corporation of India (MMTC) Ltd is in talks with the National Mineral Development
Corporation (NMDC) to sign a new five-year pact for exporting 2.6 million tonnes of iron to Japan and South Korean
industries.

Under the Mines and Minerals (Development and Regulation) Act of 1957, FDI upto 100% under Automatic route is
allowed for the mining and exploration of metal and non- metal ores including diamond, gold, silver and precious ores,
while FDI upto 100% under Government route is allowed in for mining and mineral separation of titanium bearing
minerals and its ores.

The Government of India is taking steps boost the country's domestic steel sector and raise its capacity to 300 million
tonnes (MT) by 2030-31.

KEY RATING DRIVERS

High increase in volumes across segments:

New pots are commissioned at plant 1 and plant 2 in Jharsguda in FY17, which increased the aluminium volumes and
zinc volumes have increased mining along with bottlenecking of smelting capacity. Due to likely increase in Goa’s
mining limits the iron ore business volumes may also see a slight increase.

Strong, Diversified Business Profile: Vedanta has a strong and diversified business profile with a significant presence
in multiple business segments including zinc, oil & gas, copper, aluminium, iron ore, and power. Its low operating costs
in all its businesses, especially in its oil & gas is of great advantage. The diversification has helped Vedanta’s business, as
underperformance in some businesses has been offset by strong performance in other businesses. The company has
been trying to source bauxite to ensure complete backward integration as it depends on external purchase of alumina
which results in a higher cost of production (CoP)

Cost Leadership: Vedanta’s Indian zinc operations (held through Hindustan Zinc Limited (HZL)) are integrated and
the CoP is in the first quartile of the cost curve, with strong mining assets with a long reserve life. Though Vedanta is
benefitting from the current output prices, it also saw an increase in input costs with notable ones being in the zinc
business and the aluminium business. The Indian zinc business CoP increased to USD973/t in 1QFY18 (4QFY17:
USD794/t, FY17: USD830/t) driven by lower volumes and a lower proportion of open cast mining. The aluminium
segment’s CoP also increased in 1QFY18 to USD1727/t (4QFY17: USD1,492/t, FY17: USD1,463/t) as the prices of
key inputs (alumina, coal, coke, tar) increased in addition to the pot realignment expenses incurred during 1QFY18. Ind-
Ra expects input cost pressure to ease in 2HFY18 as pots in the aluminium segment come on-stream and coal
availability improves. Additionally, CoP in the HZL is expected to decline in 2HFY18 as volume ramps up and the cost
efficiency measures being put in place by HZL begin to show results, though the CoP would be higher than in the last
year. Consequently, Vedanta shall remain in a structurally lower cost curve whose benefits will be visible over the
medium term.
Successful Liability Management: The company has successfully refinanced the debt at Vedanta Resources PLC
(VRPLC) and at the standalone level, thus easing the repayment pressure over the next 12-15 months. Vedanta has debt
maturities of USD0.7 billion and USD1.1 billion in FY18 and FY19, respectively, while VRPLC has proforma debt
maturities of nil and USD0.8 billion in FY18 and FY19 after accounting for tied-up funds. Though Vedanta’s gross debt
declined to USD12.2 billion as of 1QFY18 (4QFY17: USD13.2 billion including preference shares), its net debt
increased to USD4.7 billion (USD3.4 billion including preference shares) as the cash balances declined to USD7.5 billion
(USD9.8 billion) post the dividend pay-out from HZL and Vedanta in 1QFY18. Of the USD12.2 billion in gross debt,
USD3.5 billion is the commercial paper outstanding. The debt at VRPLC declined to USD5.97 billion as of 1QFY18
(4QFY17: USD6.29 billion) post receipt of USD500 million in dividends from Vedanta during 1QFY18. Ind-Ra while
arriving at the ratings considers the net debt at both Vedanta and VRPLC.

Commodity Prices Strengthen: The prices of the key commodities (aluminium and zinc) have strengthened over the
last two quarters. The rising prices coupled with Vedanta’s low-cost operations (excluding alumina) and volume ramp-up
have ensured healthy EBITDA generation. Ind-Ra expects Vedanta to achieve EBITDA of USD4.2 billion in FY18,
driven by both strong pricing and healthy volume ramp-up beginning 3QFY18. FY19 EBITDA would be supported by
the higher volumes and lower CoP even if the prices were to soften.

Net Leverage Level to Decline; Highly Leveraged Parent: Consolidated net leverage (adjusted consolidated net
debt/EBITDA), inclusive of VRPLC debt, declined to 3x in FY17 (FY16: 4x), driven by an improvement in the
EBITDA to USD3.3 billion (USD2.3 billion). Ind-Ra expects the consolidated net leverage levels to decline below 2.5x
in FY18, driven by the improvement in EBITDA and a decline in net debt levels. This is because Vedanta is likely to
generate USD1 billion-1.2 billion in free cash flow at the consolidated level after adjusting for dividend distribution in
FY18 at HZL and at the standalone level.

Vedanta’s parent is highly leveraged and hence depends on dividend income from the former and its operating
subsidiary HZL to service its debt, which results in material cash leakage due to the presence of minority shareholders
and dividend distribution taxes. A continued high level of dividends against Ind-Ra’s expectations could result in higher-
than-expected leverage levels.

FINANCIAL ANALYSIS
Inputs Unit 2016 2017

Sales - Volume
Gross Profit Margin GPM/Sales % 56.64% 56.83%
EBITDA EBITDA/Sales % 55.10% 55.20%
PBT PBT/Sales % 17.04% 22.38%
Net Profit Margin NPM/Sales % -25.91% 22.94%

Debt Ratio Debt/Total Assets x 0.13 0.15

Debt/Total Capital Debt/(debt+equity) x 0.15 0.00
Gross Gearing Gross Debt/Equity x 0.00 0.00
Net Gearing Net Debt/Equity x -0.02 -0.02
 Interest Cover EBITDA/Interest x 7.03 6.84

LIQUIDITY ANALYSIS
Inputs Unit 2016 2017

Current Ratio CA/CL x 0.52 0.68

Acid test (CA-Inventory)/CL x 0.44 0.59
Cash Ratio (Cash+Mkt x 0.24 0.37
Sec)/CL
Working Capital CA-CL ¥ - -
33,150 18,233

PERFORMANCE ANALYSIS

Inputs Unit 2016 2017

Asset t/o Sales/Total asset x 0.25 0.29

Inventory t/o COGS/Inventory x 3.81 3.76
Inventory o/s 365/ITO days 95.79 97.10
Receivables t/o Sales/Receivables x 19.77 26.58
Receivables o/s 365/RTO days 18.46 13.73
Payables t/o COGS/Payables x 1.33 1.55
Payables o/s 365/PTO days 274.36 235.87
Operating Cycle DIO+DRO-DPO x -160.10 -125.04

The attached excel sheet contains the financial analysis data in an excel file.