Foxconn-Vedanta JV split credit negative for UK conglomerate, says CreditSights report

Debt research firm CreditSights on Thursday said that Foxconn’s decision to call off the $19.5 billion semiconductor joint venture with Vedanta will be a "credit negative" for the Indian conglomerate's UK parent Vedanta Resources, controlled by mining mogul Anil Agarwal.

Earlier this week, Taiwan-based Hon Hai Technology Group, also known as Foxconn, called off the chipmaking joint venture with Vedanta and said it intends to apply for incentives under the government’s semiconductor production plan separately. Vedanta too on Wednesday said it would still enter the space this year and have already lined up partners.

Just last week, Vedanta said it would acquire semiconductor and display glass units from a group company.

Earlier, CreditSights had noted a "minimal credit impact" on Vedanta Resources based on the old arrangement, as Volcan, Vedanta's holding entity was undertaking the semiconductor investments, Reuters reported.

"Since the semiconductor venture will be now parked directly under Vedanta, we see a higher probability that a good portion of the project funding will come from Vedanta," CreditSights, part of the Fitch Group, wrote in a note.

In today’s note, CreditSights said that it expects further strain on credit metrics and free cash flows for both Vedanta Resources and India's Vedanta Ltd after Foxconn's exit. It will also result in a loss of a partner to split manufacturing costs.

However, CreditSights added the JV split will not increase Vedanta's immediate funding needs as the investment is long-term in nature. A previously announced 5-10-year timeline to build the facilities would help the conglomerate spread the capital expenditure more comfortably,” CreditSights noted.

CreditSights also maintained its "buy" rating on Vedanta Resources' bonds saying its refinancing outlook for some debt maturities have improved, helped by $1.3 billion of fresh loan fundraisings.

It said its bullish rating was for investors with a high risk appetite and a failure to refinance debts would result in a sharp sell-off in already-volatile bond prices.

On Thursday, Agarwal said Vedanta is committed to semiconductor manufacturing. He said the semiconductor chips keys to young India's dreams, as he wrote in Hindi, 'issi chip mein chupi hai yuva bharat ke sapno ki chaabi'.

He even highlighted the challenges the multinational mining company faces as it has forayed into the semiconductor business.

He reiterated his commitment to transforming India into a semiconductor and display glass manufacturing hub. He urged companies all over the world to invest in the sector, citing the huge potential India has.

"We need several ventures to help India become a semiconductor and display glass hub. We welcome Foxconn and the whole world to come and invest in this sector," Agarwal said.

Speaking at Vedanta’s annual shareholder meeting on Wednesday, Agarwal said there was a huge opportunity in the electronics sector as India imports $100 billion worth of electronics every year. This includes $30 billion worth of semiconductor and display glass.

“We have lined up partners for our semiconductor venture,” Agarwal said without mentioning the Foxconn pullout. “This year, subject to government approvals, your company will begin a historic foray into semiconductor fab and display fab.”