| NELCO Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities NELCO Limited (Nelco). CRISIL Ratings has withdrawn its ratings on Rs 31.56 crore of bank facilities on receipt of no-dues certificate from the bankers. The withdrawal is in line with CRISIL Rating’s policy on withdrawal of bank loan ratings.
The rating reflects the strong market position of the company in the niche very small aperture terminal (VSAT) industry, high revenue visibility and the improving operational and financial profile. The ratings also factor in support from the Tata group, from which Nelco derives financial flexibility.
Despite the challenges posed by the Covid-19 pandemic during first half of fiscal 2022, the company reported operating revenues and earnings before interest, taxes, depreciation, and amortisation (EBITDA) of Rs 260 crore and Rs 55 crore in fiscal 2022, as against Rs 226 crore and Rs 45 crore, respectively in fiscal 2021. This was supported by recurring nature of business.
The strengths are partially offset by high working capital intensive nature of business and inherent regulatory and technological risks. |
Analytical Approach CRISIL Ratings has combined the business risk profiles of its wholly owned subsidiaries, Tatanet Services Ltd. (TNSL) & Nelco Network Products Ltd (NNPL), while assessing NELCO. For arriving at the rating, CRISIL Ratings has applied its group notch-up framework to factor in the extent of support available from the Tata 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 Strong market position in niche VSAT industry; well positioned to tap the mobility space Nelco is one of the leading players in the niche Rs 1400 crore VSAT industry with about 26% market share (in terms of cumulative VSAT installations). VSAT licenses in India are offered under license from Department of Telecom, Government of India (DoT). Once the VSAT license is obtained, operators require satellite transponder space, which is provided by Antrix Corporation Ltd. (“Antrix”), a part of ISRO (a Govt. of India Company under Dept. of Space). VSAT scores over terrestrial telecom in applications where connectivity needs to more reliable or where locations are remote.
Nelco provides B2B VSAT services in banking, oil & gas exploration, renewable energy, telemedicine, mining & construction and rural education. It enjoys strong market share especially in the oil & gas and banking (ATM) segments. In December 2018, the government introduced the Inflight & Maritime Communication (IFMC) policy, where voice and internet services could be provided on aircraft while flying over Indian skies and ships while sailing in Indian waters, through VSAT. Revenue contribution from the IFMC business improved from 15% in FY2021 to about 20% in FY2022. The air and maritime mobility space is expected to substantially increase the industry size in the medium term. With its partnerships with technology vendors like Panasonic Avionics Corporation, Nelco is well positioned to benefit from growth in mobility.
High revenue visibility Nelco has two key revenue streams: (a) VSAT hardware sales, which pertains to one-time hardware installations, and (b) bandwidth and service usage, which is largely recurring revenue. About 75-80% of the revenues is from bandwidth and services usage with repeat customer profile with low customer churn rate at 3-5%. This ensures high revenue visibility for the company. The terms with its customers are largely contractual in nature, with contract lengths varying from 1 to 3 years.
Additionally, Nelco has also entered into 3-5 year non-cancellable lease agreements with oil retailers such as IOCL, BPCL and HPCL, which provides stable lease rentals at attractive IRRs.
Improving operational and financial profile, though moderately high leverage The financial profile has been improving, due to the shift in focus on its VSAT services from automation and controls segment. The automation and controls segment, which contributed about 25% revenue in 2014, has been discontinued since 2017.
The operating income of the company has increased modestly from Rs 219 crore in FY2020 to Rs 226 crore in FY2021. Operating income further registered a growth of 15% on-year, reaching Rs 260 crore in FY2022. This was largely owing to increase in uptake in VSAT sales (which remained depressed in FY2021 owing to pandemic) and complimented by higher bandwidth revenues. The number of VSAT installations for the company has increased from about 48,000 in FY2017 to about 76,000 in March 2022. Operating margins also improved from 13% in FY2017 to about 21% in FY2022. As revenues and operating costs are largely recurring and contractual in nature, the operating margins are expected to remain stable going forward.
While leverage has been moderately high, it has been witnessing improvement over the past few years, with TOL/TNW and gearing for the company at 2.2x and 1.2x respectively in FY2021 (3.2x and 1.7x respectively in FY2020). This has been supported by improved accruals and debt prepayments. Further, with stable margins, cash accruals are expected to be robust against limited capex outlay. This should support further improvement in financial profile in FY2022 with TOL/TNW and gearing expected to remain comfortable over the medium term. Additionally, lease rentals from oil retailers largely cover scheduled long term repayments, which provides comfort.
Financial flexibility enjoyed by being a part of the Tata group As on March 31, 2022, the Tata group through Tata Power and its subsidiaries, holds 50.09% equity stake in Nelco. The company has board representatives from Tata Power. Mr. Ratan Tata is Chairman Emeritus in Nelco. As a part of Tata Group, the company will continue to enjoy financial flexibility.
Weaknesses Working capital intensive business Working capital is fairly intensive with gross current assets (GCA) at about 170 days as on March 2022 (from 130 days in March 2021), driven by receivable position of about 100 days. Clients are majorly billed on quarterly basis. However, this is partly offset by credit period provided by suppliers (hardware providers) of about 3-4 months.
Technology and regulatory risk Nelco is dependent on technologies for VSAT hardware from other third-party global players such as VT iDirect and Gilat Satellite Networks, with proprietary technologies. Nelco is also solely dependent on satellite transponder space from ISRO. Any change in terms with these players poses a risk. Further, the VSAT services are regulated by DoT. Any major change in policy pertaining to VSAT remains a key risk factor. Nelco also faces competition from terrestrial telecom providers which are cheaper and are increasing their connectivity to remote locations over time. |
Liquidity: Strong Liquidity is strong, marked by cash and cash equivalents of about Rs 16 crore as on March 31, 2022. Cash accrual of about Rs 40-45 crore in FY2022 and FY2023 will be sufficient to meet long-term debt repayment obligation of Rs 18 crore each, for FY2022 and FY2023. Utilisation of the fund-based limit averaged 50% in the 12 months through December 2021. The company also enjoys financial flexibility being a part of Tata Group. |
Outlook: Stable CRISIL Ratings believes outlook on Nelco would remain stable given the recurring nature of revenues. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company Nelco, established in 1940, is a subsidiary of Tata Power. The Company is engaged in business of providing systems and solutions in the areas of VSAT connectivity. The Company offers a range of innovative and customised solutions for businesses and government institutions. |
Key Financial Indicators- Consolidated
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Cash Credit | 5 | Bank of India | CRISIL A/Stable |
| Cash Credit | 10 | The South Indian Bank Limited | Withdrawn |
| Cash Credit | 3.14 | Union Bank of India | CRISIL A/Stable |
| Fund-Based Facilities | 20 | ICICI Bank Limited | CRISIL A1 |
| Long Term Loan | 48 | IDFC FIRST Bank Limited | CRISIL A/Stable |
| Long Term Loan | 7.5 | The South Indian Bank Limited | Withdrawn |
| Non-Fund Based Limit | 34 | Axis Bank Limited | CRISIL A1 |
| Non-Fund Based Limit | 10 | Bank of India | CRISIL A1 |
| Non-Fund Based Limit | 15 | ICICI Bank Limited | CRISIL A1 |
| Non-Fund Based Limit | 5.3 | Union Bank of India | CRISIL A1 |
| Overdraft Facility | 4 | Axis Bank Limited | CRISIL A1 |
| Proposed Long Term Bank Loan Facility | 14.06 | Not Applicable | Withdrawn |
| Proposed Long Term Bank Loan Facility | 139 | Not Applicable | CRISIL A/Stable |
| Short Term Loan | 15 | Shinhan Bank | CRISIL A1 |
This Annexure has been updated on 24-Mar-2023 in line with the lender-wise facility details as on 20-Mar-2023 received from the rated entity.
Criteria Details
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