Vedanta's acquisition of Electrosteel credit positive: Moody's

Moody's Investors Service termed mining giant Vedanta's acquisition of bankrupt Electrosteel Steels through insolvency process as "credit positive", saying the move would augment the former's business profile and revenue generation.

The Kolkata bench of NCLT on April 17 had approved the resolution plan submitted by Vedanta Ltd for Electrosteel Steels, making it first among the 12 large stressed accounts identified by the RBI last year to get resolved under the Insolvency and Bankruptcy Code (IBC).

Vedanta's acquisition of 90 per cent Electrosteel Steels' stake is credit positive, the ratings agency said in a statement.

"Vedanta Resources announced National Company Law Tribunal (NCLT) approved its subsidiary's acquisition of Electrosteel Steels Ltd for USD 813 million. The transaction, although most likely funded with debt, is credit positive for Vedanta because it will enhance the company's business profile and revenue generation, while having a marginal effect on credit quality," the statement said.

Vedanta expects the Electrosteel transaction to close by the middle of 2018.

As per the plan, Vedanta will take more than 90 per cent stake in Electrosteel, while the remaining 10 per cent stake will be held by minority shareholders and lenders.

The Anil Agarwal-led mining company will subscribe to Electrosteel shares for USD 275.7 million and infuse USD 536.9 million to settle Electrosteel debt owed to its financial creditors.

"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 tonne," the statement said.

Electrosteel owns and operates an integrated steel manufacturing facility near Vedanta's Jharkhand iron-ore deposits. The plant has current capacity of 1.5 million tonnes per annum (MTPA), with an option to increase capacity to 2.5 MTPA. "To ramp up Electrosteel's capacity to 2.5 MTPA, we estimate that Vedanta will incur capital spending of USD 100-USD 150 million in fiscal 2019 and 2020," Moody's said.

Vedanta's foray into steelmaking is backed by strong demand growth in India's steel market and Moody's expects steel consumption to grow 5.5 per cent-6 per cent in 2018, which is one of the highest growth rates in Asia.

Increasing urbanisation, large infrastructure projects and rising steel consumption in the automotive sector are major drivers for rising steel demand, Moody's said.

Electrosteel was among the 12 non-performing assets the Reserve Bank had referred for insolvency proceedings. It owes to its lenders over Rs 10,500 crore.