Detailed Rationale

CRISIL Ratings has downgraded its long-term rating on the bank facilities of MALCO Energy Ltd (MALCO; part of the Vedanta group) to ‘CRISIL AA- (CE)/CRISIL A’ from ‘CRISIL AA (CE)/CRISIL A+’ and revised its rating watch to 'Rating Watch with Developing Implications' from 'Rating Watch with Negative Implications'. Also, the rating on the short-term bank facilities placed on ‘Rating Watch with Developing Implications’.

 

The rating action reflects a corresponding rating downgrade on the bank facilities and debt instruments of the parent company, Vedanta Limited (Vedanta), to ‘CRISIL AA-/Watch developing/CRISIL A1+/Watch developing’ from ‘CRISIL AA/Watch Negative/CRISIL A1+’.

 

The rating also takes into account the support MALCO derives from its parent, Vedanta on account of having strong financial and managerial linkages with the parent. These strengths are partially offset by weak standalone financial risk profile of MEL, susceptibility to volatility in commodity prices, and sensitivity to guarantor’s rating and non-adherence to payment mechanism.

Analytical Approach

For guaranteed ratings, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The ‘CE’ suffix reflects the payment structure that is designed to ensure full and time-bound payment to lenders.

 

For non-guaranteed ratings, CRISIL Ratings has followed standalone approach to arrive at the rating. Further, CRISIL Ratings has also applied its parent notch-up framework to factor in the strong managerial and financial support available to MEL from its parent, because of strong business, financial and managerial linkages VEL.

Key Rating Drivers & Detailed Description

Strengths:

Unconditional and irrevocable corporate guarantee (CG) and payment mechanism by the parent

Credit quality of the guaranteed working capital bank facilities reflects the credit quality of the CG provider. Vedanta has provided an unconditional and irrevocable guarantee to the bank guarantee of MEL, which covers the entire principal and interest obligations. CRISIL Ratings understands that VEL will undertake timely servicing of payments against the fund and non-fund based working capital facilities in a full and time-bound manner. According to the payment mechanism, VEL will pay the amount due in relation to the facilities, as per the defined timeline structure, on the due date.

 

Strong support from Vedanta group:

MEL is a 100% subsidiary of VEL. MEL is likely to receive strong managerial and financial support from the parent, VEL. The management has articulated to extend support to assets in case of any adversity. Any change in the parent's support philosophy is a key rating sensitivity factor. VEL has also extended CG for the working capital debt raised by MEL. Also, CRISIL Ratings understand that VEL will provide the need based financial support to MEL with respect to capex requirements over the medium term.

 

CRISIL Ratings believes MEL, will, in case of exigencies, receive distress support from its parent for timely repayment of debt obligations, considering the strategic importance of the entity and high moral obligation on account of majority shareholding.

 

Weakness:

Weak standalone financial risk profile; expected to improve over the medium term

MEL has started the commercial production of met coke in fiscal 2022, post the acquisition of assets of Gujrat NRE Coke Ltd (GNCL) by VEL through Insolvency and Bankruptcy Code (IBC) process in June 2021. While higher met coke demand in fiscal 2022 resulted in MEL registering strong EBITDA margins, MEL incurred operating losses in fiscal 2023 due to higher coking coal prices. This led to erosion of adjusted net-worth which remained negative as on March 31, 2023. Other business of Nickel production (acquired by VEL under IBC process in January 2022) started operations in Q1 of fiscal 2023. While the nickel business has healthy demand prospects over the medium term, due to its applications in batteries and stainless steel, the business is still in nascent stage. The increase in scale of operations with improvement in profitability of the businesses of the company will be key monitorable.

 

Currently the company has limited external debt as the operations are supported by inter-company loans provided by the parent. Company is expected to incur a capex of around Rs 200 crore over the FY24-25, which is mainly to be funded by internal accruals, however any shortfall in internal accruals towards the capex are expected to be supported by the parent. With increase in scale of operations at MEL over the medium term, overall financial risk profile of MEL is expected to improve, and the same will be a key monitorable.

 

Susceptibility to volatility in commodity prices

Operating margins remain susceptible to volatility in prices of key raw materials (Coking coal and Nickel concentrates). CRISIL Ratings understands that company undertakes back-to-back contracts as a mitigant against risk of volatility in prices. Efficient management of the same will remain a key monitorable going forward.

 

Sensitivity to guarantor’s rating and non-adherence to payment mechanism

The rating primarily reflects the credit strength of the guarantor. Hence, any adverse movement in the rating on the guarantor may result in a rating action on this facility. Also, non-adherence to payment mechanism will be a credit weakness.

Liquidity

Liquidity for guaranteed facilities: Strong

The rating for the guaranteed facilities is driven by the CG from the guarantor, VEL, which has healthy liquidity. The payment mechanism as per the guaranteed structure (unconditional and irrevocable guarantee by VEL) ensures timely repayment of debt.

Liquidity for non-guaranteed facilities: Adequate

MEL is currently dependent on its parent, VEL, which has healthy liquidity to cover any shortfall in meeting debt obligation at MEL. Further, MEL has a cash balance of Rs 39 crore as on June 30, 2023, against no major scheduled debt repayment obligation and requirement for planned capital expenditure (capex) in the current fiscal is largely availed from parent, VEL. It is expected that the liquidity will witness improvement through its performance in the coming fiscal.

Rating Sensitivity factors

Upward factors:

• Change in the credit risk profile of the parent, resulting in an upgrade in the rating of the parent, by 1 notch
• Substantial improvement in financial and operating performance of MEL on back of strong ramp-up in operations.

 

Downward factors:

• Weakening of the credit risk profile of the parent, resulting in a downgrade in parent’s rating by 1 notch
• Change in the ownership and support philosophy of Vedanta Ltd towards MEL.

Adequacy of credit enhancement structure

The guarantee provided by VEL is unconditional and irrevocable and covers the entire existing facility amount. Trustee/lender-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligations on the rated facilities. The payment mechanism provides adequate timeline for the guarantor to make full and timely payments in case of a default by the borrower.

 

To assess VEL, CRISIL Ratings has combined the business and financial risk profiles of VEL and its subsidiaries. CRISIL Ratings believes the instruments will have a high degree of safety regarding timely meeting of financial obligation.

Unsupported ratings: ‘CRISIL A’

CRISIL Ratings has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the Securities and Exchange Board of India’s circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of MEL. It has also factored in the support that MEL is likely to receive from its parent, VEL. This is because VEL and MEL have business and financial linkages.

About the Company

MEL, is a 100% subsidiary of Vedanta Ltd. as on March 31, 2022. MEL entered Met Coke Business after acquiring the assets of Bhachau and Khambalia blocks of Gujarat NRE Coke Limited, company under liquidation as per the Insolvency and Bankruptcy Code 2016 on 20 May 2021. Similarly, it acquired Nickel business assets of Nicomet Industries Limited which was under liquidation process as per the Insolvency and Bankruptcy code,2016 on 6th January 2022. While the commercial operations of Met Coke business started in fiscal 2022 itself, the commercial operations of Nickel business started only in Q1 of fiscal 2023.

About the Parent/ Guarantor

Vedanta is a diversified metals, mining, power, and oil and gas company. London-based Vedanta Resources Ltd holds 63.9% stake in the company. Vedanta’s operations include copper, iron ore and aluminium assets at Jharsuguda and Lanjigarh in Odisha, and power (2,400-MW and 1,215-MW captive power plants for the aluminium business). The company also has aluminium operations through its subsidiary, Bharat Aluminium Company Ltd (BALCO). Also, a part of the power business (1,980 MW) is conducted through wholly owned subsidiary, Talwandi Sabo Power Ltd. The oil and gas business has now been merged with Vedanta and the group operates the zinc business through Hindustan Zinc Ltd (HZL) and Zinc International in South Africa and Namibia. In June 2018, Vedanta, through its wholly owned subsidiary, Vedanta Star Ltd (VSL), acquired 90% stake in ESL Steels Ltd (ESL, current operational capacity of 1.5 million tonne per annum [MTPA]) for Rs 5,320 crore. However, effective from March 25, 2020, VSL has been merged with ESL and Vedanta now directly holds 95.5% share in ESL.

Key Financial Indicators^ of MEL

As on/for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	491.97	214.32
PAT	Rs crore	(221.24)	15.71
PAT margin	%	(44.60)	7.33
Adjusted debt/adjusted networth	Times	(1.03)	0.51
Interest coverage	Times	(9.07)	7.14

    ^CRISIL Ratings adjusted numbers

List of covenants

The material covenants for the working capital bank facilities (bank guarantee) are as follows

• The shareholding of Vedanta Ltd should not fall below 51% in MALCO Energy during the tenure of the facility.
• MALCO Energy would not enter into transaction(s) which results in disposal of more than 10% value of its fixed assets

Any other information

Payment Mechanism

For working capital facilities:

Particulars	Timeline
Scheduled due date for payment of interest and principal by MEL, as per the sanction letter	T day
Scheduled due date for invocation of Guarantee by the lender	T+30 days
Timeline for guarantor to make the payment after invocation of the Guarantee by the Lender	T+30 days^

^As per guarantee document – The Guarantor(s) hereby unconditionally and irrevocably agrees and undertakes that the Guarantor(s) shall at all times, upon first demand or notice by the Beneficiary/Lender(s), forthwith (but not later than 1 (one) Business Day) pay to the Beneficiary/Lender(s) without any demur or protest or reference to the Borrower (s) or any other Person and without the right of any set off and/or deductions and/or adjustments of any kind whatsoever, all the amounts payable under the Transaction Documents.

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Proposed Working Capital Facility	NA	NA	NA	500	NA	CRISIL A/Watch Developing
NA	Working Capital Facility	NA	NA	NA	350	NA	CRISIL AA- (CE)/Watch Developing
NA	Non-fund-based limit	NA	NA	NA	135	NA	CRISIL A1+ (CE)/Watch Developing
NA	Fund-Based Facilities*	NA	NA	NA	15	NA	CRISIL AA- (CE)/Watch Developing

*Fund-based facility is fully interchangeable with non-fund-based facility