Rating Rationale
August 04, 2020 | Mumbai
Exicom Tele-Systems Limited
Ratings downgraded to 'CRISIL BBB-/Negative/CRISIL A3'
 
Rating Action
Total Bank Loan Facilities Rated Rs.140 Crore
Long Term Rating CRISIL BBB-/Negative (Downgraded from 'CRISIL BBB+/Stable')
Short Term Rating CRISIL A3 (Downgraded from 'CRISIL A2')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Exicom Tele-Systems Limited (ETSL; part of the Exicom group) to 'CRISIL BBB-/Negative/CRISIL A3' from 'CRISIL BBB+/Stable/CRISIL A2'.
 
The downgrade reflects significant weakening of business risk profile and liquidity, as seen in a sharp drop in operating performance. Revenue declined by 50% year-on-year in fiscal 2020 due to rescheduling of delivery of orders by counterparties in the energy storage solutions and electric vehicles (EV) mobility segments. Besides delivery issues, disruption in supply chains from China due to Covid-19 in the fourth quarter of fiscal 2020 further impacted operating performance. Consequently, the group recorded EBITDA (earnings before interest, taxes, depreciation, and amortisation) losses of around 7.8% in fiscal 2020. Besides, unencumbered cash and bank balance reduced to Rs 0.70 crore as of March 2020 from Rs 64.95 crore as of March 2019 owing to setting-off vendor liability and funding losses incurred in the fiscal.
 
The group's operations in India have resumed post-Covid-19 and registered moderate revenue, although operations in Singapore are yet to resume. It has an unexecuted order book of Rs 589 crore as of July 2020 and inventory of around Rs 121 crore. Timely execution of the high-value orders in hand during the second and third quarters of fiscal 2021 will be critical for improvement in operating margin and reduction in inventory. Furthermore, the promoters have infused unsecured loans of Rs 4 crore in the first quarter of fiscal 2020. They will continue to provide timely support to liquidity over the medium term.
 
The ratings reflect the extensive experience of the Exicom group's promoter in manufacturing telecom equipment, and diversified product portfolio. These strengths are partially offset by the group's declining operating margin, working capital-intensive operations, and exposure to customer concentration in revenue with more than 70% of income coming from the top three clients.

Analytical Approach

To arrive at its ratings, CRISIL has combined the business and financial risk profiles of ETSL and all its subsidiary and step-down subsidiaries as there are operational synergies and financial fungibility among them. The subsidiaries include Exicom Tele-Systems (Singapore) Pte Ltd, Energywin Technologies Pvt Ltd, and Horizon Telesystems Sdn Bhd. All these entities are together referred to as the Exicom group.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Extensive industry experience of the management, strong client base, and wide range of service offerings in the telecom segment:
Key managerial personnel have experience of over three decades in the industry. The group's diversified product portfolio and established relationships with customers and suppliers will continue to support business risk profile. The group forayed into the new segment of EV chargers and batteries in fiscal 2018 and has been continuously diversifying portfolio to reduce dependence on the telecom equipment sector. It also entered into energy storage solutions during fiscal 2017 in which ETSL supplies lithium-ion batteries to various companies in the telecom sector. The diversified product portfolio helps ETSL maintain growth in revenue and profit even in case of a drop in demand from a particular segment, and will benefit the group's business risk profile over the medium term.
 
* Healthy financial risk profile:
Lower reliance on external funds yielded a strong total outside liabilities to tangible networth ratio in the three fiscals ended March 31, 2020 (1 time as on March 31, 2020, against 1.22 times as on March 31, 2019). Networth was estimated to be large at Rs 215 crore as on March 31, 2020. However, increased high reliance on working capital debt is likely to moderate financial risk profile over the medium term. In the absence of any major capital expenditure (capex) over the medium term, debt is expected to remain stable. Improvement in debt protection metrics is a monitorable.

Weaknesses:
* Declining operating margin:
Operating profitability dropped to -7.8% in fiscal 2020 from 11.42% in fiscal 2019 due to large fixed overheads and high research and development cost. However, with available high-margin orders in hand and cost-saving measures to curtail fixed overhead expenditure (employee and selling costs, among others), EBITDA margin is expected to improve significantly in fiscal 2021 compared to fiscal 2020. Better profitability remains critical and a key monitorable.
 
* High customer concentration:
The Exicom group is an established player in the domestic telecom equipment sector and has longstanding relationships with customers. However, revenue is highly concentrated with more than 70% of it coming from three customers in the three fiscals through 2020. Though concentration has reduced over the years backed by continuous addition of new clients, the group still remains susceptible to any change in the purchasing policy or slowdown in demand from its top customers.
 
* Working capital-intensive operations:
Gross current assets (GCAs) were estimated at around 245 days as on March 31, 2020 (166 days as on March 31, 2019), because of inventory (both raw material and work-in-progress) and receivables of 89 days and 126 days, respectively (56 days and 84 days, respectively). Working capital management was aided by credit of 115-120 days from suppliers. Working capital requirement will remain large over the medium term considering healthy growth prospects.
Liquidity Adequate

Cash accrual was negative at around Rs 20.2 crore in fiscal 2020, and is expected at around Rs 7.0 crore and more than Rs 30.0 crore in fiscals 2021 and 2022, respectively; against annual debt obligation of Rs 1.1-1.20 crore. Cash and cash equivalent stood at Rs 0.70 crore as of June 2020 (against Rs 64.95 crore as on March 31, 2019). Average utilisation of fund-based limit was 85% over the 12 months through June 2020. Any large, debt-funded capex or acquisition affecting credit metrics will remain a key rating sensitivity factor. Current ratio was 1.67 times as on March 31, 2020.

Outlook: Negative

CRISIL believes the Exicom group's revenue, profitability, and cash accrual will remain constrained by turbulence in the telecom industry, leading to stretched liquidity.

Rating Sensitivity factors
Upward factors
* Improvement in operating income by more than 20% on group level and EBITDA margin of around 4%
* Equity infusion or unsecured loan from the promoters to aid liquidity
* Improvement in working capital cycle with GCAs less than 200 days
 
Downward factors
* Decline in operating income to below Rs 450.0 crore and continuation of EBITDA losses
* Any large, debt-funded capex or lower-than-expected cash accrual
* Further stretch in working capital cycle impacting liquidity
* Interest coverage ratio less than 1.50 times
About the Company

Incorporated in 1994, ETSL manufactures telecom power equipment, lithium-ion batteries, EV chargers and batteries. It was incorporated on May 9, 1994, as Himachal Exicom Communications Ltd to manufacture telecom power equipment (converters, battery modules, controllers, and rectifiers). It was a joint venture of Himachal Futuristic Communication Ltd and Exicom Australia. However, after the liquidation of Exicom Australia in 1995, the company carried on manufacturing switch mode power supply and other telecom power supplies on its own; in August 2008, the name was changed to the current one. Operations are managed by Mr Anant Nahata.

Key Financial Indicators - Combined
As on / for the period ended March 31   2019 2018
Operating income Rs crore 1,007.47 699.65
Reported profit after tax Rs crore 69.15 42.31
PAT margin % 6.86 6.05
Adjusted debt/adjusted networth Times 0.24 0.24
Interest coverage Times 10.98 9.72

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs crore)		 Complexity levels Rating Assigned
with Outlook
NA Cash Credit NA NA NA 37.0 NA CRISIL BBB-/Negative
NA Proposed Cash Credit Limit NA NA NA 23.0 NA CRISIL BBB-/Negative
NA Bank Guarantee NA NA NA 22.0 NA CRISIL A3
NA Inland/Import Letter of Credit NA NA NA 19.0 NA CRISIL A3
NA Letter of Credit NA NA NA 10.0 NA CRISIL A3
NA Inland Guarantees NA NA NA 14.0 NA CRISIL A3
NA Proposed Bank Guarantee NA NA NA 8.0 NA CRISIL A3
NA Proposed Letter of Credit NA NA NA 7.0 NA CRISIL A3
 
Annexure - Details of Instrument(s)
Name of the company Extent of consolidation Rationale for Consolidation
Exicom Tele-Systems Ltd Full -
Exicom Tele-systems (Singapore) Pte Ltd Full 100% subsidiary and strong business and financial linkages
Horizon Tele-Systems SDN Bhd Full 100% step down subsidiary and strong business and financial linkages
Energywin Technologies Pvt Ltd Full 100% subsidiary and strong business and financial linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  60.00  CRISIL BBB-/Negative  30-01-20  CRISIL BBB+/Stable              Suspended 
Non Fund-based Bank Facilities  LT/ST  80.00  CRISIL A3  30-01-20  CRISIL A2              Suspended 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 22 CRISIL A3 Bank Guarantee 22 CRISIL A2
Cash Credit 37 CRISIL BBB-/Negative Cash Credit 41 CRISIL BBB+/Stable
Inland Guarantees 14 CRISIL A3 Inland Guarantees 16 CRISIL A2
Inland/Import Letter of Credit 19 CRISIL A3 Inland/Import Letter of Credit 21 CRISIL A2
Letter of Credit 10 CRISIL A3 Letter of Credit 10 CRISIL A2
Proposed Bank Guarantee 8 CRISIL A3 Proposed Bank Guarantee 8 CRISIL A2
Proposed Cash Credit Limit 23 CRISIL BBB-/Negative Proposed Cash Credit Limit 15 CRISIL BBB+/Stable
Proposed Letter of Credit 7 CRISIL A3 Proposed Letter of Credit 7 CRISIL A2
Total 140 -- Total 140 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Mapping global scale ratings onto CRISIL scale

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