Detailed Rationale

CRISIL Ratings has revised its watch on the long-term bank facilities and non-convertible debentures of Sterlite Technologies Ltd (STL) to ‘Rating Watch with Negative Implications’ from ‘Rating Watch with Developing Implications’ and has continued its rating on the commercial paper programme on ‘Rating Watch with Developing Implications’.

 

On May 26, 2023, CRISIL Ratings placed its ratings on the bank facilities and debt instruments of STL on ‘Watch with Developing Implications’. This rating action followed the announcement by the company on May 17, 2023, regarding receipt of board approval to restructure the business, whereby the company’s global services business would be demerged into STL Networks Ltd (resulting company) on a going concern basis, subject to receipt of required approvals.

 

The revision in watch factors in the risk of weaker-than-expected operating performance, resulting in financial leverage remaining elevated. Revenue declined to Rs 4,338 crore in the first nine months of fiscal 2024 from Rs 5,053 crore in the corresponding period of the previous fiscal owing to weak demand in North America market, which contributes majorly to the sales and has the highest realisation relative to other markets. Furthermore, earnings before interest, tax, depreciation and amortisation (Ebitda) and Ebitda margin stood at Rs 517 crore and ~12% in the first nine months of fiscal 2024, against Rs 634 crore and ~13% in the corresponding period of fiscal 2023, because of negative operating leverage and overall lower capacity utilisation. The Ebitda is expected at Rs 700-750 crore in fiscal 2024. Consequently, net leverage (net debt to Ebitda ratio) is expected around 4 times.

 

Sequential turnaround in performance from the fourth quarter of fiscal 2024 with demand likely to improve in the North America market. While improvement in revenue and profitability remains a key monitorable, improvement in net leverage remains dependent on the ability to raise fresh capital and approval of scheme of demerger by the National Company Law Tribunal (NCLT). The board of STL has approved fund raise through equity in May 2023. Improvement in deleveraging as a result of recovery in operating performance and ability to raise equity would remain key to sustenance of ratings.

 

The continuation of rating watch factors in the proposed demerger of the company’s global services business into STL Networks Ltd, for which the company received board approval on May 17, 2023. The demerger is intended to simplify business structure, unlock growth opportunities and allocate efficient capital structure. The company is in process of getting requisite approvals for the proposed transaction.

 

CRISIL Ratings understands that a portion of the rated facilities (including a portion of the enhanced facilities) may move under the resulting company, subject to requisite approvals. CRISIL Ratings continue to believe that credit risk profile of STL is likely to benefit from the proposed demerger because of expectation of improvement in business as well as financial risk profiles. This is so because the businesses that would remain under STL are expected to have high operating margins and low working capital requirements. On the other hand, the credit profile of the resulting company could be relatively weaker vis-à-vis STL. Thus, CRISIL Ratings will continue to closely monitor the transaction and take a final rating action once there is clarity on the resulting business and financial risk profiles of both entities and on the movement of the rated facilities.

 

The ratings continue to reflect the dominant market position of STL in the telecommunication (telecom) cables business, its strong order book providing healthy revenue visibility and a comfortable 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:

• Leading position in Indian telecom cables business and increasing market share in global markets: STL has strong reputation in the optical fibre (OF) and optical fibre cable (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 shop for most clients because of its wide system integration and software services offerings. Its global ex-China OFC market share was strong at 9% in the first half of fiscal 2024. The market share is expected to improve over the medium term aided by long-term contracts. STL aims to be among the top three optical fibre makers globally with full utilisation at its global factories and ongoing expansion at the US manufacturing factory. High-quality products, extensive clientele and diversified presence across the broadband infrastructure value chain should help the company sustain strong foothold in the telecom cable 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 OFs 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. With increase in penetration of broadband services, ongoing rollout of 5G services, massive investments towards data centres, focus of the government on rural digitisation, approval of phase 3 of BharatNet project and implementation of Smart City projects, the medium-term demand outlook is healthy.

 

Orders of Rs 9,849 crore as on December 31, 2023, and improving OF realisations assure substantial revenue visibility over the medium term. Of the total orders, ~54% are from the optical networking and digital and technology businesses. This indicates healthy business prospects for STL post the demerger of its global services business.

 

• Comfortable financial risk profile: Large capital expenditure (capex), acquisitions and stretched working capital cycle in the services business resulted in net debt elevating to Rs 3,400 crore as on December 31, 2022, from Rs 2,782 crore as on March 31, 2022. However, debt reduced to Rs 2,947 crore as on December 31, 2023, because of low capex intensity and is expected to reduce further to Rs 2,900 crore in fiscal 2024. However, the overall net debt to Ebitda ratio (leverage) has increased resulting from from lower capacity utilization in fiscal 2024. The company’s board has approved fund raising by way of equity, which further paves way for deleveraging. CRISIL Ratings understands that leverage will reduce significantly once the global services business is carved out from STL and will remain a monitorable.

 

Weaknesses:

• Exposure to intense competition in the overseas markets: The company derives a large part of its revenue from overseas markets and faces intense competition in the international OF and OFC markets. In the domestic market as well, these segments are susceptible to the 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.

 

Based on recommendations from the Directorate General of Trade Remedies (DGTR), the Ministry of Finance imposed definitive anti-dumping duty in August 2023 for a period of five years on specific OF imports from China, South Korea and Indonesia. Import data suggests that this move has mitigated the negative impact of low-priced and low-quality imports on domestic players and will continue to benefit them. Similarly, the UK and European Union (EU) have imposed anti-dumping duty on specific OF imports from China, which is benefitting the domestic players engaged in export to the UK and the EU.

 

• Large working capital requirement: Working capital requirement has risen over the past few fiscals and remains elevated because of the higher proportion of services business, leading to stretched receivables as counterparties are majorly Indian public sector undertakings (PSUs). The working capital cycle will improve significantly once the global services business is carved out from STL.

Liquidity: Strong

Liquidity will be strong, supported by expected net cash accrual of Rs 400-500 crore per annum over the medium term, cash balance of around Rs 412 crore as on December 31, 2023, and healthy cushion in bank lines. Against this, the company has term debt obligation of around Rs 65 crore in fiscal 2024 and around Rs 250 crore in fiscal 2025. Annual capex of Rs 150-200 crore will be funded largely through internal accrual.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the ESG profile of STL supports its already strong credit risk profile.

 

The telecom equipment sector is exposed to material impact on the environment as waste associated with end-of-life network equipment and hardware can pollute land resources. Optical fibres are vital for ensuring uninterrupted telecom services to society and the economy. STL is continuously focused on mitigating its environmental and social impact.

 

Key ESG highlights:

• The company is committed to achieve net zero emissions by 2030. Also, by 2030, STL aims to become water-positive across all its manufacturing locations globally. To achieve this target, STL implemented water-recycling models. All its manufacturing plants in Aurangabad are zero liquid discharge certified. Around 1.45 lakh cubic m of water recycled in the manufacturing process and over 7,500 tonne of carbon dioxide emissions avoided through energy efficiency measures.
• All plants are zero waste to landfill certified.
• The company has started using co-processing in partnership with cement companies as one of the disposal and management solutions, which helps convert waste to energy.
• Female employees constitute 16.7% of the workforce, which is higher than all its peers.
• Its governance structure is characterised by 57% of the board comprising independent directors, split in chairman and CEO positions, healthy investor grievance redressal and extensive disclosures.

There is growing importance of ESG among investors and lenders. STL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its moderate share of market borrowings in overall debt and access to both domestic and foreign capital markets.

Rating Sensitivity factors

Upward factors:

• Significant improvement in the business risk profile resulting in better Ebitda
• Strengthening of the financial risk profile, driven by increase in cash accrual or other deleveraging measures, with net debt to Ebitda ratio below 2.5 times.

 

Downward factors:

• Continued pressure on operating margin leading to subdued cash accrual.
• Net debt to Ebitda ratio sustaining above 3.0 times owing to weak operating performance.

About the Company

STL is a leading manufacturer of OFs and OFCs. The company set up a 50:50 joint venture with Conduspar Condutores Eletricos in July 2013 to manufacture OFCs in Brazil. In 2018, STL acquired Mettalurgica Bresciana, an OFC manufacturer based in Italy.

Key financial indicators (Consolidated)

Particulars	Unit	2023	2022
Revenue	Rs.Crore	6,950	5,495
PAT	Rs.Crore	127	47
PAT margin	%	1.8	0.8
Debt/adjusted networth	Times	2.2	2.1
Interest coverage	Times	3.2	2.5

Note: These are CRISIL Ratings adjusted numbers

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Commercial paper programme	NA	NA	7-365 days	150	Simple	CRISIL A1+/Watch Developing
NA	Commercial paper programme	NA	NA	7-365 days	650	Simple	CRISIL A1+/Watch Developing
NA	Cash credit	NA	NA	NA	1904	NA	CRISIL AA/Watch Negative
NA	Letter of credit and bank guarantee	NA	NA	NA	3663	NA	CRISIL AA/Watch Negative
NA	Proposed long term bank loan facility	NA	NA	NA	200	NA	CRISIL AA/Watch Negative
NA	Term loan	NA	NA	Mar-2025	250	NA	CRISIL AA/Watch Negative
INE089C07109	Non-convertible debentures	25-Mar-2021	8.25	25-Mar-2031	290	Complex	CRISIL AA/Watch Negative
INE089C07117	Non-convertible debentures	31-Mar-2021	7.3	29-Mar-2024	150	Complex	CRISIL AA/Watch Negative
INE089C07125	Non-convertible debentures	22-Feb-2023	9.1	20-Feb-2026	100	Complex	CRISIL AA/Watch Negative
NA	Non-convertible debentures*	NA	NA	NA	100	Complex	CRISIL AA/Watch Negative

*Yet to be issued