CHENNAI: Vedanta Resources Plc’s acquisition of financially distressed Electrosteel Steels Limited (ESL) is credit positive for the resources major as it will enhance its business profile and resource generation while having a marginal effect on credit quality, Moody’s said on Monday.
For Vedanta, the acquisition will be a strategic fit in its overall portfolio, particularly in the light of its captive iron ore mines. According to the credit rating agency, steelmaking is a natural forward integration for Vedanta’s iron-ore business because iron ore is a key raw material in steel.
“The integration of iron ore and steel operations will enhance this business’ profitability. We expect some synergies with Electrosteel given that Vedanta is exploring undeveloped iron ore deposits in Jharkhand with a potential of 150-200 million tons,” it added.Electrosteel owns and operates an integrated steel manufacturing facility near Vedanta’s potential Jharkhand iron ore deposits. The plant has a capacity of 1.5 million tonnes per annum (mtpa), with an option to increase it to 2.5 mtpa. “To ramp up Electrosteel’s capacity to 2.5 mtpa, we estimate that Vedanta will incur capital spending of $100-$150 million in fiscal 2019 and 2020,” Moody’s noted.
The London-based Vedanta group is highly leveraged with `1.03 lakh crore in debt. As per the deal, Vedanta will pick up 90 per cent stake in Electrosteel for `5,321 crore. Of this, `1,806 crore will be equity and `3,515 crore debt. The remaining 10 per cent would be held by the existing shareholders and lenders. It expects the transaction to close by the middle of 2018.
“If Vedanta funds the acquisition fully with debt, we expect pro forma adjusted debt/EBITDA for fiscal 2018, which ended March 31, 2018, to increase to 3.7x (times) from around 3.5x (times), which is still below our quantitative downgrade guidance of 4.0x (times) for a Ba3 rating,” Moody’s said.
Vedanta’s foray into steelmaking is backed by strong demand growth in India’s steel market.