After Adanis Crisis, Indias Vedanta Looks Vulnerable Too

Market skittishness in the wake of the turmoil at Adani Group, which came under attack from short seller Hindenburg Research in late January, means that other indebted Indian companies—which otherwise might have muddled their way through the Federal Reserve hiking cycle—could increasingly find themselves under investors’ microscopes. A Vedanta Resources dollar bond due in May 2023 was yielding about 50% on Friday according to Refinitiv—about double the level at the end of January.

The fundamental problem is that London-headquartered Vedanta Resources, with several billion dollars of debt, is reliant on transfers from its Indian subsidiary Vedanta Ltd. That unit has its own large direct debts, and holds the lion’s share of the group’s actual assets.

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Moody’s downgraded the firm’s debt deeper into junk bond territory earlier in the month. The rating agency says it needs about $4 billion in cash to pay off debt and interest coming due over the financial year ending in March 2024.

The company hopes to pay with the help of chunky cash flows from its Indian subsidiaries, but their finances are under pressure too. And Indian politics could make some of those payments difficult to realize.

On Tuesday Mumbai-listed Vedanta Ltd. said it will hand out its fifth dividend of about $927 million for the current financial year ending this month. Vedanta Ltd., 70% owned by Vedanta Resources, has announced dividends of $4.6 billion in the last 12 months, more than double the fiscal year before. But the firm’s interim CFO resigned during the week. Local ratings agency CRISIL Ratings also downgraded its outlook on Vedanta Ltd. to negative from stable, citing possible higher leverage and lower financial flexibility because of big dividend payments to the parent.

Vedanta Ltd.’s unit Hindustan Zinc, partly owned by the government of India, also announced a fourth dividend for the current fiscal year of about $1.3 billion last week. And Hindustan Zinc has offered $3 billion to buy its parent’s international zinc assets, a deal the government has vehemently opposed.

The big cash payments are also coming at a time of moderating commodity prices. Moody’s expects Vedanta Ltd.’s consolidated adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) will be $4.5 billion to $4.8 billion during the 2024 fiscal year, down from $6.4 billion in fiscal 2022.

Meanwhile Vedanta Ltd. itself has $2.6 billion of its own debt maturing in the next 12 months. And while its net debt to Ebitda ratio is an acceptable 1.21, raising further debt might not be easy in the current environment.

Crisil says Vedanta Ltd. currently only has the cash to cover Vedanta Resources’ maturities for the first half of fiscal 2024. If Hindustan Zinc’s generous offer to purchase its parent’s international zinc assets falls through—a real possibility with India’s general elections looming—then Vendanta Ltd. may struggle to keep paying fat dividends and Vedanta Resources will be in a tight spot.

Even assuming that Vedanta Ltd. and London-based Vedanta Resources ultimately avoid repayment trouble, the saga won’t be without consequences.

Investec analyst Ritesh Shah says that minority Vedanta Ltd. shareholders—though receiving fabulous dividends—are losing out on future returns because the firm will probably be forced to keep capital expenditures weak in the coming months. That may be one reason the company trades at a relatively low forward earnings multiple of 6.05, compared with global peers Anglo American or Teck Resources which trade at about eight.

The Adani saga has been obscured in recent weeks by the even more dramatic runctions in the U.S. banking sector. That doesn’t mean there won’t be further tremors emerging from India.