| Sterlite Technologies Limited | ||||||
| 'CRISIL AA / Stable' assigned to Non Convertible Debentures | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its 'CRISIL AA/Stable' rating to the Rs 90 crore non-convertible debentures (NCDs) of Sterlite Technologies Ltd (STL) and has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the existing bank and debt facilities.
The ratings continue to reflect the dominant market position of STL in the telecom cables business, its strong order book providing healthy revenue visibility, and adequate financial risk profile. These strengths are partially offset by exposure to intense competition and large working capital requirement.
Operating performance was impacted in the first quarter of fiscal 2021 because of Covid-19 and the resultant disruption in operations. As a result, operating income declined around 40% year-on-year in the quarter. Operations have improved gradually thereafter, helping maintain healthy earnings before interest, tax, depreciation, and amortisation (Ebitda) margin around 17% for the nine months ended December 31, 2020 (21% in the corresponding period of the previous fiscal).
On January 19, 2021, STL acquired Optotec SpA at an enterprise value of EUR 29 million (or around Rs 250 crore), which forms around 5% of the company’s capital employed. Optotec SpA is an Italian company providing optical interconnect products for the telecom and fibre-to-the-home (FTTH) networks across Europe. The acquisition has been funded through accrual and debt, resulting in a temporary increase in debt for STL. As a result, net debt to Ebitda ratio is expected above 2 times in fiscal 2021.
STL recently announced new and extended deals worth more than $100 million with leading telecom companies in the Middle East and Africa, taking its cumulative order book to around Rs 11,300 crore as on February 28, 2021. The strong order book provides healthy revenue visibility over the medium term. Healthy cash accrual and expected low capital expenditure (capex) should take the net debt to Ebitda ratio below 2 times in fiscal 2022. |
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 - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Leadership position in the Indian telecom cables business STL has a strong reputation in the optical fibre and optical fibre cables (OFC) segments in India and abroad, driven by its technically superior products. The company is preferred by OFC manufacturers (for optical fibre) 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. 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 optical fibre and OFC because of extensive backward integration. Manufacturing optical fibre 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, the government’s focus on rural digitisation, and implementation of smart-city projects on a large scale, the medium-term demand outlook is healthy. Orders of over Rs 11,000 crore as on February 28, 2021, assure substantial revenue visibility over the medium term.
Adequate financial risk profile Despite the impact of Covid-19 in fiscal 2021, accrual should benefit over the medium term from the company’s market leadership and strong order book. Hence, net debt to Ebitda ratio should sustain below 2 times over the medium term, despite temporarily increasing to more than 2 times in fiscal 2021. Networth was robust at Rs 1,804 crore as on March 31, 2020, while debt protection metrics remained adequate. STL completed capex of Rs 2,500 crore over the past three years for increasing its optical fibre capacity and plans moderate capex over the medium term, which will support the financial risk profile.
Weaknesses Exposure to intense competition in the overseas market The company derives one-third of revenue from exports and faces intense competition in the international optical fibre 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 a clear market leader in the domestic market, despite competitive pressure from peers such as Himachal Futuristic Communications Ltd, Vindhya Telelinks Ltd (‘CRISIL A1+’), Aksh Optifibre Ltd, and Finolex Cables Ltd (‘CRISIL AA+/Stable/CRISIL A1+’).
Large working capital requirement Gross current assets, receivables and inventory were over 200 days, 110 days and 100 days, respectively, as on March 31, 2020. However, the company is able to negotiate favourable terms with suppliers, leading to stretched payables of around 200 days. Working capital cycle may remain stretched over the medium term, given the significant revenue contribution of the services business and government projects. While the company 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 cash accrual of over Rs 600 crore annually over the medium term, cash balance of over Rs 350 crore as on February 28, 2021, and bank lines of over Rs 1,300 crore (utilised 87% on average during the six months through February 2021). The company has term debt obligation of around Rs 350 crore in fiscal 2022. Capex is expected at Rs 300-350 crore in fiscal 2022 and is likely to be funded largely through internal accrual. |
Outlook Stable Despite the short-term impact of Covid-19, CRISIL Ratings believes STL’s financial risk profile will remain healthy over the medium term, supported by high operating efficiency and strong growth prospects. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company STL is a leading manufacturer of optical fibre 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, which has a manufacturing capacity of 7 million fibre kilometre (mfkm) of optical fibre in China, 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, 2020, the company reported a profit after tax (PAT) of Rs 147 crore and operating income of Rs 3,350 crore, against a PAT of Rs 351 crore and operating income of Rs 3,995 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators(CRISIL Ratings-adjusted numbers)
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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)
*Not yet issued |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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