Vedanta's Electrosteel buyout credit neutral: Report

A bird flies by the Vedanta office building in Mumbai August 16, 2010. India-focused miner Vedanta Resources said it will buy 51-60 percent of Cairn India for about $8.5-9.6 billion in cash to be funded via debt and cash resources, a move that would represent Vedanta's first foray into oil and gas, and help Edinburgh-based Cairn Energy fund an expensive drilling programme in Greenland. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS ENERGY) - RTXSAAV

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Vedanta's acquisition of the crippled Electrosteel Steels is credit neutral on the resources major as it will have only a marginal impact on its overstretched balance sheet, says a report.

The London-based Vedanta group is highly leveraged with Rs 1.03 trillion in debt. Its debt-equity ratio stood at 2.2 times last fiscal.

In a report India Ratings today said the lower impact on its credit rating is despite higher cash outflows relating to the acquisition of 90 per cent stake in Electrosteel and closure of Goa iron ore mining and copper smelting operations.

The agency expects loss of cash flows from this divisions to be countered by higher-than-expected operational cash flows in the base metals and oil and gas divisions, supported by increased volumes.

It also termed the deal between Vedanta and ESL as credit neutral.

The report sees the Electroseteel deal stretching balance sheet to 2.5 times in FY19 from 2.2 times in FY18.

"FY19 net leverage is likely to increase to a range of 2.3x-2.5x from FY18 estimate of 2.2x. This will be due to the cash outflows relating to this acquisition and stoppage of Goan iron ore mining and copper smelting operations," the report said.

Billionaire Anil Agarwal-led Vedanta's resolution plan for the bankrupt ESL was approved by the National Company Law Tribunal last week, making it the first of the 12 largest accounts referred by the Reserve Bank last June to NCLT for resolution.

As per the deal, Vedanta will pick up 90 per cent stake in Electrosteel for Rs 5,321 crore. Of this Rs 1,806 crore will be equity and Rs 3,515 crore of debt. The remaining 10 per cent will be held by the existing shareholders and financial creditors.

The funds received by Electrosteel will be used to fully settle the debts owed to its existing financial creditors. Electrosteel owned over 13,000 crore to bankers before it turned bankrupt.

Vedanta has a 0.8 million tonne per annum pig iron capacity in Goa. The acquisition will add 1.5 mt capacity to this and another 1 mt on the completion of the expansion programme.

Electrosteel plant is in Jharkhand where Vedanta has a prospecting licence for iron ore mining.

Vedanta's pre-feasibility report proposes a 5 mt iron ore mining capacity for the assessed resource base of 186.7 mt of iron ore with an average grade ranging 54-65 per cent.

The report further said the acquisition will provide synergies in form of forward integration of Electrosteel's steel plant with Vedanta's possible mining operations in Jharkhand.

In February, the Supreme Court had ordered closure of iron ore mining in Goa, which impacted Vedanta's operations. Also, in March, its copper smelting operations were shut down due to the denial of annual consent for operations, according to the report.