Fitch Revises Outlook On Cairn India To Negative

Fitch Ratings has revised its outlook on Cairn India Holdings Ltd. to ‘negative’ from ‘stable’ saying in its assessment the consolidated credit profile of the company's owner, Vedanta Ltd. is expected to weaken on lower metal prices.

Vedanta owns half of its 70 percent in the prolific Rajasthan oil block through Cairn India Holdings.

In a statement, Fitch Ratings said it has revised its outlook on CIHL to negative from stable and affirmed the Long-Term Issuer Default Rating of 'BB-'.

"The Outlook revision reflects Fitch's assessment that the consolidated credit profile of CIHL's owner, Vedanta Ltd., is expected to weaken in the financial year ending March 2020 (FY2020) and FY22, after we recently lowered our long-term mid-cycle metals and mining price assumptions, including aluminium and copper price assumptions, due to falling demand," it said.

This has reduced CIHL's headroom at the current rating level. CIHL's rating is aligned with the consolidated credit profile of Vedanta, which owns 100 percent of CIHL, reflecting their strong linkages.

"Our assessment reflects the group's complex shareholding structure and the risk of cash leakages other than dividend distributions to parties outside of ultimate parent Vedanta Resources," Fitch said.

In January 2019, CIHL invested in a structured product of Volcan Investments Ltd., a shareholder of Vedanta Resources, although the investment was subsequently unwound profitably in August 2019.

"The transaction raised concerns from investors, including Vedanta Ltd.'s minority stakeholders, and led to declines in its share and bond prices. Vedanta Resources has since committed to abstain from similar transactions; Fitch will monitor Vedanta Resources to see if any group entities provide further support to Volcan that could weaken their liquidity and hence VLTD's credit profile. The current assessment does not factor any cash outflow aside from dividends to Vedanta Resources," it said.

CIHL has participatory interest in an oil and gas block in Rajasthan where all fields are producing. CIHL's production scale, based on its 35 percent share of the block, is small at about 66,000 barrels of oil equivalent per day and comparable to that of oil and gas producers in the 'B' category.

CIHL, however, benefits from the low-cost structure of the Rajasthan block with operating costs of around $7.5 per barrel (bbl) and finding and development costs of about $5-6/bbl. "The cost position is significantly lower than that of peers and supports its strong operating cash flow. This underpins CIHL's positive free cash flow - despite its planned investments of around $1 billion over the next four years - and its continuing strong financial profile with a net cash position," it said.

Fitch said CIHL's investments at the Rajasthan block are expected to increase their proven (1P) and probable (2P) reserves. Management expects the company's 2P reserve base to increase by about 100 million boe in due course, enhancing the reserve life to about ten years from eight years, in line with the increase in the exploration and appraisal capex.

CIHL's share of 1P and 2P reserves in the Rajasthan block was about 112 million boe and 180 million boe, respectively, at FYE19, resulting in proved reserve life (based on 1P reserves) of about five years. The company's exploration capex slowed in the last few years due to the decline in global crude oil prices.

The company expects the profitability and volumes improvement mainly from their aluminium and zinc business segments, to result in better financial metrics as compared to Fitch's expectations.

"If the company is successful in demonstrating a better performance, Fitch may revise the Outlook back to Stable," it said. "However further sustained weakness in the company's consolidated financial metrics over the coming quarters, could result in a downward rating action."

CIHL's Standalone Credit Profile of 'b+' is driven by its concentrated and small scale of operations, which are counterbalanced by its low-cost position and strong standalone financial profile.

Fitch said it expects Vedanta's consolidated financial profile to be weaker than earlier estimates based on revised metal price assumptions and minor downward revisions to the 2019-20 operational assumptions based on year to date trends.

Vedanta fully owns CIHL and both entities hold equal shares of 35 percent in the group's largest oil and gas block at Rajasthan. Vedanta is also the operator of the Rajasthan block.

Oil and gas business is the second-largest contributor to Vedanta's earnings before interest, taxes, depreciation, and amortisation, after the Indian zinc operations. "We believe oil and gas will remain strategically important to Vedanta, given its low-cost operations and significant earnings contribution," it said.

Fitch lowered its long-term mid-cycle metals and mining price assumptions - most significantly for aluminium, cutting prices by 6 percent in 2019-20, 15 percent in 2020-21 and 13 percent in 2021-22.

Aluminium faces a challenging outlook due to weakened demand, primarily from the automotive sector, and increasing supply from China (expected to rise by 7.1 percent in 2020), which is unlikely to be deferred, it said adding the impact of lower prices is expected to be cushioned by falling input costs.

The rating agency reduced Vedanta Resources' EBITDA estimates over 2019-20, 2020-21 and 2021-22 by 7 percent, 7 percent and 9 percent respectively, with a large part stemming from lower long-term mid-cycle metals and mining price assumptions.