Fitch downgrades Cairn India to ‘B+’ on lower oil prices

PTI New Delhi | Updated on April 06, 2020 Published on April 06, 2020

Fitch Ratings on Monday said it has downgraded ratings of Vedanta Group firm Cairn India Holdings Ltd’s rating as a drop in oil prices will hurt earnings of the company.

Fitch downgraded the Long-Term Issuer Default Rating (IDR) of Cairn India Holdings Limited (CIHL) to ‘B+’ from ‘BB-’ The outlook is stable.

“The downgrade follows a revision of our forecast for weaker economic growth stemming from the coronavirus pandemic, which is likely to pressure commodities,” it said in a statement.

It revised down its price assumptions for zinc, aluminium and oil and gas, which together contribute about 90 per cent of Vedanta Resources Ltd’s (VRL), previously known as Vedanta Resources PLC) pre-tax profits.

VRL is the parent of Vedanta Ltd (VLTD), India’s largest private upstream oil and gas producer, which fully owns CIHL.

The stable outlook reflects the expectation that VLTD’s credit profile should remain steady.

Oil and gas business

Fitch expected the EBITDA contribution from oil and gas business to drop by about 45 per cent in FY21 and 20 per cent in FY22 due to falling oil prices and volume growth. “We expect the lower oil prices to be partly offset by decreased operating expenses, as the cost of some raw materials is linked to the oil price.”

CIHL also expects further cost cuts, as contractor prices are typically negotiated lower in case of a persistent low oil-price environment, it said.

VRL, it said, has the ability to defer capex for some of its oil and gas and other mineral projects to mitigate a drop in cash flow from the low-price environment. “We do not expect the company to proceed with certain big-ticket oil and gas projects till the trajectory of oil prices reverses.”

The company also has flexibility in adjusting exploration capex. Nonetheless, its overall capex is still substantial, which, along with lower profitability from key business segments, is likely to result in neutral to negative free cash flow over the medium-term.

Fitch said it expects VLTD’s earnings to be weaker than previous expectations. “This reflects a cut of 39 per cent and 21 per cent in our crude-oil price assumptions, a cut of 11 per cent and 10 per cent in our aluminium LME (London Metal Exchange) price assumptions and a cut of 15 per cent and 7 per cent in our Zinc LME price assumptions over FY21 and FY22, respectively.”

However, the company’s operations are expected to improve over FY21-FY22 on cost rationalisation at its zinc and aluminium businesses and volume ramp-up post any temporary weakness due to the coronavirus pandemic, cushioning the effect of weaker prices.

“We forecast the cost of VLTD’s aluminium production to fall to below $1,500 per tonne over the next two years,” it said. “VLTD’s low-cost operations across key commodities should help it to defend its margins during the currently weak industry conditions; this underpins our Stable Outlook. Cash flow volatility is further lowered by VLTD’s commodity diversification, with zinc, O&G and aluminium contributing 47 per cent, 32 per cent and 9 per cent, respectively, to FY19 EBITDA.”

Published on April 06, 2020

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