Entry to Value-added Steel: The acquisition of ESL will provide a modest improvement to VL's business profile with a focus on value-added steel products. VL has a 0.8mtpa pig iron capacity in Goa. The acquisition will add 1.5mtpa steel capacity now and another 1mtpa upon the completion of expansion program. ESL is located in Jharkhand where VL has a prospecting license for iron ore mining. VL's pre-feasibility report proposes a 5mtpa iron ore mining capacity for the assessed resource base of 186.7mtpa of iron ore with an average grade ranging 54%-65% (Fe content). The acquisition will provide synergies in form of forward integration of ESL's steel plant with VL's possible mining operations in Jharkhand.
Limited Impact on Balance Sheet Leverage: The acquisition will have marginal impact on VL's balance sheet leverage in FY19 (FY18 estimate: 2.2x; FY17: 3x). This will be due to a combination of events including the cash outflows relating to the ESL acquisition and stoppage of Goan iron ore mining and copper smelting operations. Ind-Ra expects the loss of cash flows from this division to be countered by higher-than-expected operational cash flows in the base metals and oil & gas divisions, supported by increased volumes. On commodity prices, the agency views the LME zinc prices could taper-off with increase in global mining volumes while those of crude oil and aluminium could remain steady at current prices.
In February 2018, the Honourable Supreme Court's order to stop iron ore mining operations in Goa impacted VL's iron operations. Also, in March 2018, VL's copper smelting operations were shut down due to the denial of annual consent for operations. Vedanta's iron ore division posted an EBITDA of INR2.7 billion in 9MFY18 (9MFY17: INR9.35 billion) while copper division posted INR9.0 billion compared to overall consolidated EBITDA of INR175 billion (INR142 billion).
ESL's Business Profile: ESL is part of Electrosteel Group and has an integrated operational steel capacity of 1.5mtpa with presence in pig iron, ductile pipes and long products.
It consists of a sinter plant, pellet plant, coke oven, blast furnace, basic oxygen furnace, billet caster, wire rod mill, bar mill and power plant. ESL is yet to commission a capacity of 1mtpa. The ESL's 9MFY18 EBITDA is INR1.9 billion and 3QFY18 EBITDA is INR0.7 billion.
VL's Business Profile: Vedanta has a significant presence across multiple business segments including zinc, oil & gas, copper, aluminium, iron ore, and power. The company has low operating costs in a majority of businesses, especially in its oil & gas and Indian zinc operations, which together contributed about two-thirds to its consolidated EBITDA in 9MFY18 and FY17. The diversification has helped Vedanta's business, as underperformance in some businesses would be offset by a strong performance in other businesses.
Acquisition Details: VL's resolution plan for the acquisition of ESL was approved by National Company Law Tribunal pursuant to a corporate insolvency resolution process implemented by way of the Insolvency and Bankruptcy Code 2016. VL's wholly owned subsidiary will hold 90% equity stake in ESL for a total infusion of INR53.21 billion, split into equity of INR18.06 billion and debt funds of INR35.15 billion. The remaining 10% of ESL will be held by the existing shareholders and financial creditors. The funds received by the subsidiary will be used to fully settle the debts owed to the existing financial creditors of ESL. The completion of acquisition is subject to approval from Competition Commission of India and Securities and Exchange Board of India. The agency is waiting for more details on further infusions required to improve the capacity utilisation and working capital requirements.
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