Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term rating on the debt instruments of Sterlite Technologies Ltd (STL) to 'Negative' from 'Stable' and reaffirmed the rating at 'CRISIL AA’; the rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook reflects a belief that the credit risk profile of STL may weaken if cash accrual take longer than expected to rebound and debt remains elevated in the near to medium term. Leverage ratio (marked by net debt to Ebitda [earnings before interest, taxes, depreciation, and amortisation]) is likely to remain over 3 times for fiscal 2022 due to weaker cash accruals and elevated debt. However, leverage ratio should improve to 2.0-2.5 times over the medium term, as cash accrual rebounds and debt levels reduce. Improvement in cash accrual and reduction in debt over the next 2-3 quarters will be key rating sensitivity factors.

 

STL reported operating loss of ~Rs 51 crore in the third quarter of fiscal 2022 as compared to operating profit of ~Rs 263 crore in the preceding quarter. The operating losses were partially because of one-time provisions following the prudence on long receivables relating to ongoing and completed projects. However, even after adjusting for provisions the operating profit is estimated at Rs 160-170 crore, which is significantly lower than previous expectations. Moderation in operating profit during the third quarter was also largely due to change in system integration project mix and temporary impact of investments towards projects, which should support revenue growth over the medium term. CRISIL Ratings also understands that the provisions being made during the last quarter is one time phenomenon and no such provisions are envisaged going forward. Improvement in the operating margin will remain key monitorable.

 

Strong order book and increase in optic fibre (OF) prices, as seen in recent quarters, should support revenue growth in the coming quarters. STL received new multi-million dollar deals with large service providers in Europe and North American markets, taking the cumulative order book to around Rs 11,700 crore as on December 31, 2021. Moreover, on January 25, 2022, STL announced ~ Rs 170 crore deal through a partnership with India’s largest power distribution company, Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) for building its Unified Network Management System.

 

Large capital expenditure (capex), acquisitions and stretched working capital cycle on the services side of the business resulted in net debt elevating to Rs 2,815 crore as on September 30, 2021, from Rs 2,448 crore as on March 31, 2020. Net debt is estimated to remain stable as on December 31, 2021.

 

The ratings continue to reflect the dominant market position of STL in the telecommunication (telecom) cables business, strong order book providing healthy revenue visibility, and adequate financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of STL and its subsidiaries and joint ventures. STL has significant management control over these entities, which are in the same business and are strategically important to the company.

 

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

Leadership position in Indian telecom cables business

STL has strong reputation in the OF and OFC segments in India and abroad, driven by its technically superior products. The company is preferred by OFC manufacturers (for OF) and telecom operators and telecom infrastructure providers (for OFC). Furthermore, it is a one-stop solution for most clients due to its wide range of system integration and software services offerings. High quality of products, a widespread clientele, and diversified presence across the broadband infrastructure value chain, including products, services and software, should help the company sustain its strong foothold in the Indian telecom cables industry over the medium term.

 

Healthy capability and growth prospects with sizeable order book

STL is among the lowest-cost producers of OF and OFC because of extensive backward integration. Manufacturing OF from the preform stage offers advantages in terms of cost and quality. The company has plants for power, nitrogen, and electrolysis to meet its hydrogen and oxygen requirements. Moreover, it has facilities to produce silicon tetrachloride, the basic raw material for quartz glass manufacturing.

 

Furthermore, all the segments have strong growth prospects, particularly the services division. With expected increase in the penetration of broadband services, rollout of 5G and FTTx, focus of the government on rural digitisation and implementation of smart-city projects on a large scale, the medium-term demand outlook is healthy. Orders of over Rs 11,700 crore as on December 31, 2021 and rising OF prices assure substantial revenue visibility over the medium term.

 

Adequate financial risk profile

Large capex, acquisitions and stretched working capital cycle on the services side of the business resulted in net debt elevating to Rs 2,815 crore as on September 30, 2021, from Rs 2,448 crore as on March 31, 2020. Net debt to Ebitda (annualised) ratio (leverage) is expected to remain high at over 3 times for fiscal 2022. However, debt protection metrics should be comfortable, with interest coverage ratio projected at 3-4 times for fiscal 2022. Adjusted networth was robust at Rs 1,867 crore as on March 31, 2021.

 

While operating performance was impacted in the third quarter of fiscal 2022, its gradual improvement should support debt protection metrics. STL completed capex of Rs 3,000 crore in the past four years to expand its OF capacity and plans to incur moderate capex over the medium term, which will also support the financial risk profile.

 

Weaknesses

Exposure to intense competition in the overseas market

The company derived almost 46% of revenue from exports during fiscal 2021 and faces intense competition in the international OF and OFC markets. In the domestic market as well, these segments are susceptible to capex cycles of telecom service providers. Globally, most contracts are finalised through an intensely competitive bidding process, which limits the pricing power of players. However, STL is the largest player and market leader in the domestic market, despite competitive pressure from peers such as Himachal Futuristic Communications Ltd, Vindhya Telelinks Ltd, Aksh Optifibre Ltd and Finolex Cables Ltd (‘CRISIL AA+/Stable/CRISIL A1+’).

 

Large working capital requirement

Gross current assets, receivables and inventory (including contract assets) were over 307 days, 111 days and 177 days, respectively, as on March 31, 2021. However, the company is able to negotiate favourable terms with suppliers, leading to payables of around 272 days. Receivable days for STL increased to 120 days (annualised) as on September 30, 2021 (from 111 days as on March 31, 2021) due to delay in execution during the first quarter. However, the situation is expected to improve as the company is expected to achieve some major execution milestones in fiscal 2023, which should lower receivables. While it has enough wherewithal to manage short-term cash flow mismatches, correction in the working capital cycle will remain a monitorable.

Liquidity: Strong

Liquidity will be supported by expected net cash accrual of over Rs 600-700 crore annually over the medium term, cash balance of over Rs 500 crore as on December 31, 2021, and healthy cushion in bank lines. Against this, the company has term debt repayment obligation of around Rs 309 crore in fiscal 2023. Annual capex of Rs 300-350 crore is expected over the medium term and should be funded largely through internal accrual.

Outlook Negative

STL’s credit risk profile may remain weak in the near term due to moderation in the operating margin of the services segment and large working capital requirement.

Rating Sensitivity factors

Upward factors

• Significant and sustainable improvement in business owing to steady growth in revenue or diversification of product mix
• Considerable improvement in financial risk profile, driven by increase in cash accrual resulting in net debt to Ebitda ratio and TOL/TNW (total outside liabilities to tangible networth) sustaining below 1.5 times

 

Downward factors

• Net debt to Ebitda ratio sustaining above 2.5 times in fiscal 2023 due to sustained high working capital requirement or debt-funded capex or acquisitions or steep decline in operating performance
• Weakening of revenue and operating margin leading to sustained decline in net cash accrual

About the Company

STL is a leading manufacturer of OF and OFC. It has a 75:25 joint venture, Jiangsu Sterlite Tongguang Fiber Co Ltd (JSTFCL), with Jiangsu Tongguang Communication Co Ltd of China. JSTFCL, commenced operations in April 2013. STL set up a 50:50 joint venture with Conduspar Condutores Eletricos in July 2013 to manufacture OFC in Brazil. In 2015, STL acquired Elitecore Technologies Pvt Ltd, which is a global provider of software products. In 2018, STL acquired Mettalurgica Bresciana, an OFC manufacturer based in Italy.

 

For the nine months ended December 31, 2021, the company reported profit after tax (PAT) of Rs 72 crore and operating income of Rs 4,172 crore, against Rs 143 crore and Rs 3,350 crore, respectively, for the corresponding period of the previous fiscal

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	4849	5177
PAT	Rs crore	265	424
PAT margin	%	5.5	8.2
Debt/networth	Times	1.68	1.36
Interest coverage	Times	4.24	4.99

These are CRISIL Ratings adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

*The outstanding letter of credit facility can be converted to term loan on the maturity date