India Ratings assigns Sterlite NCD programme 'IND AA+(EXP)'

India Ratings has assigned Sterlite Industries India Limited (SIIL) a Long-Term Issuer rating of ‘IND AA+’. The Outlook is Stable. The agency has also assigned SIIL’s INR10bn proposed non-convertible debenture (NCD) programme an expected rating of 'IND AA+(EXP)'. The final rating is contingent upon the receipt of transaction documents conforming to information already received. 

The ratings reflect SIIL’s strong business profile as reflected in its EBITDA of USD2.1bn in FY12 (FY11: USD1.8bn) and EBITDA margin of 24.82% (26.5%). This is supported by its diversified presence across aluminium, copper, zinc and power. The company benefits from its low-cost operations supported by its fully integrated zinc and aluminium facilities, including respective captive mines with long reserve lives and captive power generation. The company has also been allocated captive coal mines which once developed is likely to further improve its cost structure. Also, being a custom smelter, SIIL largely passes price increases in copper concentrate to its customers.

The ratings also benefit from SIIL’s strong financial profile as reflected by its continued negative net debt position on a consolidated basis since FY08. This is driven by its strong liquidity with cash equivalents of USD4.6bn as of end-FY12. SIIL's credit profile also benefits from its financial flexibility to raise funds from capital markets.

The ratings also reflect India Ratings’ expectations that SIIL will maintain its current credit profile post re-organisation at Vedanta Resources Plc (Vedanta). The re-organisation process involves a merger of SIIL with Sesa Goa (SG) to form Sesa-Sterlite (SS). The re-organisation will also result in Cairn India Limited (CIL) and Hindustan Zinc Ltd (HZL) becoming SS’s subsidiaries and Vendanta Aluminium Ltd’s (VAL) aluminium business being transferred into the newly formed entity. Total gross debt at SS level is likely to be USD13.0bn (including SIIL's USD2.65bn in FY12) and consolidated EBITDA would be USD4.8bn (including SIIL's USD2.1bn in FY12 and CIL FY12 financials).

India Ratings believes the strong operations and profitability of SG and CIL, along with that of SIIL, will be consolidated in SS. This will mitigate to a large extent the negative impact of debt at VAL.

Most of Vedanta’s debt will be directly held at SS - as opposed to most of the cash and EBITDA being generated at CIL and HZL. However, India Ratings believes SS will be able to access the cash by way of dividends or other means besides having financial flexibility to monetise some of its equity holdings in its subsidiaries. Also, management has planned to increase the dividend payout at its subsidiaries. Furthermore, SS has already tied up most of its debt requirements for its ongoing capex. However, a significant increase in structural subordination issues at Vendanta could also result in a negative rating action for SIIL.

The ratings are, however, constrained by SIL’s volatile EBITDA margins (Q1FY13: 21.7%, Q1FY12: 28%) and earnings due to exchange rate and metal price fluctuations. Also, the company’s ongoing large capex programmes expose it to operational and execution risks.

The ratings also factor in the recent adverse developments in Goa and Karnataka as well as the proposed closure of SIIL’s alumina refinery operations in 2012. Regulatory risks would remain a concern.

WHAT COULD TRIGGER A RATING ACTION?

Positive: India Ratings does not envisage any positive rating action for SIIL in the near term.
 
Negative: Future developments that may lead to negative rating action include:

• net adjusted debt/EBITDAR beyond 1.75x on a sustained basis
• additional capex as well as time and/or cost overruns in project implementation

In FY12, SIIL reported a consolidated turnover of USD8.5bn (FY11: USD6.6bn), a profit after tax of USD1.6bn (FY11: USD1.6bn) and debt of about USD2.5bn (FY11: USD1.9bn).

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