Vedanta Resources Plc -- Moody's affirms Vedanta's ratings; outlook remains negative

The outlook for both ratings remains negative.

RATINGS RATIONALE

Vedanta's rating reflects its earnings generation underpinned by its acquisition of Cairn India Ltd. (CIL) in December 2011 but its operating cash flow is restrained by softer commodity prices in the current year. While capital investment can be deferred to compensate for weaker cash flow, the purchase of the Government of India's stake in Hindustan Zinc Ltd. (HZL) at some stage, and the Group's refinancing requirements over the next nine months leave undue pressure on its liquidity and rating. Nevertheless, Vedanta still showed USD484 million of free cash flow post-expansionary capex in H1 FY13.

"Vedanta's EBITDA for the financial year ended March 2013 will include a full twelve months of Cairn India instead of the less than four months' of contribution made in FY12. However, given the output challenges in the iron ore business and only modest output ramp-ups elsewhere, EBITDA in H2 FY13 is not expected to advance on that achieved in H1 FY13," says Alan Greene, a Moody's VP-Senior Credit Officer.

"The bedrock of the business is clearly Vedanta's 58.5% stake in Cairn India, and following its recent restructuring, it is now able to convert its cash flow into dividends." continues Greene, also Moody's Lead Analyst for Vedanta.

Moody's notes the progress being made towards refinancing forthcoming debt maturities, but expects companies to have confirmed funding well in advance of repayment dates. However, Moody's concerns are partially alleviated by Vedanta's track record of timely access to global debt capital markets and through its subsidiaries, to bank finance in India. At the same time, Moody's is affording some leeway to allow for the Group's structural changes underway.

"The formation of Sesa-Sterlite should be completed this month and we expect the HZL purchase to be close behind," says Greene. "Once the new entity is finalised, it may be preferable to raise debt finance in this vehicle, which will have its own, substantial operating cash flow as well as significant dividend income, and so we expect Vedanta to be constantly reviewing its funding options", continues Greene.

Moody's retains the two-notch differential between the corporate family rating of the Group and the senior unsecured debt issued by the Parent company. The primary driver for this remains the inherently weak financial profile of the standalone UK-listed entity. At the same time, the proportion of priority debt in the subsidiaries to total debt remains uncomfortably high, bearing in mind that Vedanta's creditors are subordinated to the minority shareholders and not just the creditors of the operating subsidiaries. The gap may change once the new Sesa Sterlite structure has crystallized and on gaining access to the liquid funds currently trapped within HZL.

There is limited upward pressure on the rating over the near-term. However, the outlook could be stabilized if 1) commodity prices, especially oil, move higher, thus supporting cash flow growth; 2) CIL maintains or increases its output; 3) Vedanta's refinancing of maturing debt progresses smoothly and 4) the restructuring of Indian subsidiaries is completed.

Conversely, the ratings could come under downward pressure if 1) CIL encounters material production difficulties; 2) the parent remains thinly capitalized with less than expected dividends upstreamed from the core operating subsidiaries; 3) Vedanta undertakes further acquisitions, investments or shareholder remuneration policies that include incremental debt beyond our expectations; or 4) it fails to satisfactorily execute its expansion projects in aluminium and power.

Credit metrics that Moody's would consider for a ratings downgrade include CFO (less dividends)/Adjusted Debt below 15%, Adjusted Debt to EBITDA exceeding 3.5-4.0x, or EBIT interest coverage declining to 3.5x or less on a sustained basis.

The principal methodology used in rating Vedanta was the Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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Alan Greene VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Philipp L. Lotter MD - Corporate Finance Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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