| NELCO Limited | ||||||
| Ratings reaffirmed at 'CRISIL A/Stable/CRISIL A1' | ||||||
| Rating Action | ||||||
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| 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 Ltd (Nelco).
The ratings 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 post the discontinuation of the automation and controls segment. The ratings also factor in support from the Tata group, from which Nelco derives financial flexibility.
These strengths are partially offset by high working capital intensive nature of business and inherent regulatory and technological risks.
Despite the Covid-19 pandemic, CRISIL Ratings expects the company's profitability to be largely stable in fiscal 2021, given the recurring nature of business. Company reported revenue and earnings before interest, taxes, depreciation, and amortisation (EBITDA) of Rs 161 crore and Rs 34 crore in nine month ended fiscal 2021, as against Rs 159 crore and Rs 36 crore, respectively corresponding period of the previous fiscal.
CRISIL Ratings had assigned its 'CRISIL A/Stable/CRISIL A1' ratings to the bank facilities Nelco on October 29, 2020. |
Analytical Approach CRISIL Ratings has combined the business risk profiles 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 700cr VSAT industry with about 24% market share. 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. 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 revenue streams: VSAT hardware sales, which is one-time hardware installation, and bandwidth and service usage, which is largely recurring. About 77% of the revenue is from bandwidth and services usage. Further, these are repeat customers, which inturn provides high revenue visibility. The customer churn rate in bandwidth and services usage is as low as 3-5%. Few major customers are Hitachi, AGS and Tata Communications. The terms with its customers are largely contractual in nature, with contract lengths varying from 1 to 3 years.
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 increase from Rs 144 crore in FY2017 to Rs 220 crore in FY2020, largely owing to increase in its penetration in VSAT segment. The number of VSAT installations has increased from about 48,000 in FY2017 to 76,000 in FY2020. Operating margins have also improved from 13% in FY2017 to 21% in FY2020. Since the revenues and costs are largely recurring and contractual in nature, the operating margins are expected to remain stable going forward. Further, due to the recurring nature of business, revenues are expected to be relatively less impacted due to the ongoing Covid-19 pandemic. During nine month ended fiscal 2021, Nelco's EBITDA margin was 20%, as against 23% in the corresponding period of the previous fiscal.
While leverage has improved over the past few years, it is still moderately high with TOL/TNW and gearing of 3.2x and 1.7x respectively in FY2020. Nevertheless, the lease rentals from oil retailers largely cover the long term repayments, which provides comfort.
* Financial flexibility enjoyed by being a part of the Tata group As on March 31, 2020, 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 153 days as on March 31, 2020, driven by receivables of 117 days. Clients are mostly 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 services is a risk factor. Nelco also faces competition from terrestrial telecom providers which are cheaper and which increase their connectivity to remote locations over time. |
Liquidity: Strong Liquidity is strong, marked by cash and cash equivalents of Rs 10.2 crore as on September 30, 2020 and undrawn lines. Cash accrual is expected to be around Rs 32 crore and Rs 48 crore in FY2021 and FY2022; sufficient to meet long-term debt repayment obligation of Rs 12 crore each, for FY2021 and FY2022. Utilisation of the fund-based limit averaged 50% in the 12 months through September 2020. 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 * Substantial increase in scale of operations, leading to improvement in operating risk profile * Substantial reduction in TOL, leading to material reduction in TOL/TNW below 2x
Downward factors * Debt funded capex resulting in gearing above 2x * Change in ownership from Tata Group |
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: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeable with non-fund based facilities |
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 various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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