Foxconn backing out of semiconductor JV credit negative for Vedanta: CreditSights

New Delhi: Taiwan's Foxconn pulling out of a USD 20 billion semiconductor-making venture with Vedanta Ltd is a "credit negative" for the mining conglomerate's UK parent Vedanta Resources, debt research firm CreditSights said on Thursday.

Hon Hai Technology Group, also known as Foxconn, earlier this week pulled out of the chipmaking joint venture with Vedanta and said it intends to apply for incentives under the government's semiconductor production plan. Vedanta Ltd on Wednesday said it has lined up partners and will begin a foray into chip-making this year.

The chip-making venture was previously parked in units under the parent firm but last week Vedanta Ltd took over the special-purpose vehicles.

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

Foxconn's exit from the joint venture will also result in the loss of a partner for VEDL to split the semiconductor chip manufacturing costs (estimated at USD 8 billion out of the total USD 20 billion cost).

"Consequently, we expect further strain on the credit metrics and free cash flows of both VEDL and Vedanta Resources Ltd (VRL)," CreditSights said.

Separately, Vedanta Ltd told stock exchanges that it "has not received a formal communication from Foxconn stating their intention to withdraw from the joint venture agreement.

The move came to the company's notice only through news articles, it said.

The company was replying to clarifications sought by the BSE on reports of Foxconn withdrawing from the chip joint venture.

"We would like to reiterate that we are fully committed to our semiconductor wafer fab project," it said.

In a Twitter post, company chairman Anil Agarwal said the group is "100 per cent committed to produce semiconductors" and display glass in India and have lined up partners for the same.

He however did not identify the partners.

"India is a land of opportunities with huge potential. 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," he said.

CreditSights said the split does not increase Vedanta's immediate funding needs as the investment is long-term in nature and a previously announced 5-10-year timeline to build the facilities would help the conglomerate spread the capital expenditure more comfortably.

"VEDL previously guided towards a 5-10-year timeline to build the semiconductor chip and display manufacturing facilities. We hold this to be true for now in the absence of fresh updates by management, which would help to spread the capex more comfortably," it said.

The firm, it said, has the flexibility to defer/stagger any semiconductor project spending, as the project is still awaiting government approval with little inked commitments.

S&P shares a similar view and believes the planned semiconductor business does not increase immediate liquidity pressure.

On July 7, Vedanta Limited (VEDL) announced it would fully acquire two SPVs that were established last year for the development of a USD 20 billion semiconductor chip and display manufacturing plant in Gujarat.

The two SPVs are Vedanta Foxconn Semiconductors Ltd (VFSL, to undertake semiconductor chip manufacturing operations, initially operated as a 63-37 joint venture between VEDL and Taiwanese electronics contract manufacturer Foxconn) and Vedanta Displays Ltd (VDL, to undertake display manufacturing operations).

Both SPVs were previously majority owned by Volcan Investments the holding company of bond-issuing entity Vedanta Resources (VRL) and a wholly owned private company owned by the Vedanta founder and chairman Anil Agarwal.

Foxconn cited challenging delays and external issues as the reasons for its exit.

"We believe it could be due to prolonged delays in obtaining government subsidies of up to 50 percent of the total project cost," CreditSights said.

The Government reportedly was not keen to extend subsidies to VFSL owing to misaligned interests. While the government was keen for VFSL's European technology partner STMicroelectronics to have a stake in the joint venture, STMicroelectronics was not interested, resulting in gridlocked discussions.

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