Rating Rationale
April 04, 2019 | Mumbai
Sterlite Technologies Limited
Rated amount enhanced
Rating Action
Total Bank Loan Facilities Rated Rs.4700 Crore (Enhanced from Rs.3038.13 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Rs.450 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and commercial paper of Sterlite Technologies Ltd (STL) at 'CRISIL AA/Stable/CRISIL A1+'.
The ratings continue to reflect healthy operating efficiency, a dominant market position, and an established ability to leverage growth prospects through a presence across the spectrum of broadband infrastructure services such as products, services, and software. The ratings also factor in a healthy financial risk profile. These strengths are partially offset by exposure to intense competition and working capital-intensive operations.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of STL and its subsidiaries and joint ventures (JVs). STL has significant control over the management of these entities, which are in the same business as, and are strategically important to, STL.

Please refer Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
* Leadership position in the Indian telecom cables business: The company has a dominant market share in India's optical fibre (OF) and optic fibre cable (OFC) market. It has also established its footprint abroad in these segments, thus diversifying the client base and reducing customer concentration risk. The market dominance stems from the technological superiority of products, making the company a preferred supplier of OF to OFC manufacturers, and of OFC to telecommunication (telecom) operators, aiding sustenance of a high market share.
Also, a presence across the spectrum of broadband infrastructure services has made it a one-stop solution for clients. For instance, the company can provide products, system integration services, and software services to a smart city project. It is likely to sustain its market leadership in the OF and OFC segments over the medium term, backed by superior technology and a presence across the spectrum of broadband infrastructure services.
* Healthy operating capability and potential benefits from growth prospects with sizeable order book: The company is among the lowest-cost producers of OF and OFC in the industry because of high backward integration. Manufacturing OF from the glass stage offers advantage in terms of cost and quality. Additionally, dual technological capabilities in fibre manufacturing offer flexibility in manufacturing and result in cost saving.
Furthermore, all the segments have strong growth prospects, particularly the services division. With expected increase in the penetration of broadband services, government focus on rural digitisation, and implementation of smart city projects on a large scale, the medium-term demand outlook is healthy. Strong growth prospects have translated into healthy orders. Orders increased to Rs 10,231 crore as on December 31, 2018, from Rs 5,223 crore as on March 31, 2018, providing substantial revenue visibility over the medium term.
* Healthy financial risk profile: The networth was large at around Rs 1,400 crore as on September 30, 2018, and the debt protection metrics sound. Of the ongoing capital expenditure (capex) of around Rs 1,500 crore, Rs 840 crore has already been incurred through a mix of debt and accrual. The remaining would be incurred over the next two fiscals, and is expected to be partly funded by debt. The capex pertains to expansion of OF and OFC manufacturing capacity as well as the acquisition of Mettalurgica Bresciana (MB). The financial risk profile should remain healthy over the medium term, supported by adequate cash accrual, given the expected revenue growth and sustained profitability. CRISIL has noted the promoter's pledge of shares of 96.7% of their stake in July 2018. This pledge was given as one of the securities for a USD 1.1 billion or around Rs 7,600 crore (current outstanding USD 900 million or Rs 6200 crore) loan raised at Volcan Investments Cyprus Ltd (a promoter-held entity). Timely release of this share-pledge will be a key monitorable.
* Exposure to intense competition in the overseas OF and OFC segments: About 50% of revenue from the products segment is derived from exports, and the company faces competition from large global players in the international OF and OFC markets. In the domestic market, 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. In the domestic market, STL is the largest player and the clear market leader despite competition from companies such as Himachal Futuristic Communications Ltd, Vindhya Telelinks Ltd, Aksh Optifibre Ltd, and Finolex Cables Ltd.
* Working capital-intensive operations: Due to the sustained growth in the service segment, working capital requirement is large. Gross current assets, receivables, and inventory improved slightly to 186, 101, and 75 days, respectively, as on March 31, 2018 from 210, 99 and 83 days, respectively as on March 31, 2017. However, working capital intensity is likely to remain high over the medium term given significant revenue contribution from the services businesses, especially from government projects.

Liquidity is healthy. Cash accrual is expected at Rs 500-700 crore, against debt repayment of Rs 150-200 crore, per fiscal over the medium term. Capex requirement is likely to be funded through a healthy mix of debt and cash accrual. Liquidity is further supported by a cash balance of around Rs 300 crore as on September 30, 2018, and bank lines of Rs 1160 crore, which were utilised at an average of 55% during the six months through February 2019.

Outlook: Stable

CRISIL believes the financial risk profile will remain healthy over the medium term, despite the planned capex, supported by healthy operating efficiency and strong growth prospects.

Upside scenario
* Significant and sustainable improvement in the business risk profile through steady growth in revenue or diversification of product mix, and continued healthy operating efficiency
* Considerable improvement in the financial risk profile, most likely because of increase in net cash accrual or significant debt reduction

Downside scenario
Steep decline in operating performance
' Weakening of the financial risk profile due to larger-than-expected, debt-funded capex or acquisitions

About the Company

STL is a leading manufacturer of OF and OFC. It also has a 75:25 JV, Jiangsu Sterlite Tongguang Fiber Co. Limited (JSTFCL), with Jiangsu Tongguang Communication Co Ltd of China. JSTFCL, which has a manufacturing capacity of 7 mfkm of OF in China, commenced operations in April 2013. STL set up a 50:50 JV with Conduspar Condutores Eletricos in July 2013 for manufacturing OFC in Brazil. In fiscal 2015, STL acquired Elitecore Technologies Pvt Ltd, which is a global provider of software products. In fiscal 2018, STL acquired MB, an OFC manufacturer based in Italy.
For the nine months ended December 31, 2018, STL reported a profit after tax (PAT) of Rs 415 crore on net sales of Rs 3,296 crore, against Rs 245 crore on Rs 2,359 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 3205 2594
Profit after tax Rs crore 364 218
PAT margin % 11.4 8.4
Debt/networth Times 0.95 1.24
Interest coverage Times 7.6 4.4

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Rating Assigned with Outlook
NA Commercial Paper Programme NA NA 7-365 days 450.0 CRISIL A1+
NA Cash Credit NA NA NA 910.00 CRISIL AA/Stable
NA Letter of Credit & Bank Guarantee NA NA NA 3,621.87 CRISIL AA/Stable
NA Term Loan NA NA 30-Sep-2018 168.13 CRISIL AA/Stable

Annexure - List of entities consolidated
Name of entities Extent of consolidation Rationale for consolidation
Speedon Network Limited Full Strong managerial, operational and financial linkages
Sterlite Telesystems Limited Full Strong managerial, operational and financial linkages
Elitecore Technologies (Mauritius) Limited Full Strong managerial, operational and financial linkages
Elitecore Technologies Sdn Bhd. Full Strong managerial, operational and financial linkages
Sterlite Global Ventures (Mauritius) Limited Full Strong managerial, operational and financial linkages
Jiangsu Sterlite Tongguang Fiber Co. Limited Full Strong managerial, operational and financial linkages
Sterlite Technologies UK Ventures Limited Full Strong managerial, operational and financial linkages
Sterlite Tech Holding Inc Full Strong managerial, operational and financial linkages
Sterlite Technologies Inc Full Strong managerial, operational and financial linkages
Sterlite Technologies S.p.A. Full Strong managerial, operational and financial linkages
Metallurgica Bresciana Full Strong managerial, operational and financial linkages
Sterlite Innovative Solutions Limited Full Strong managerial, operational and financial linkages
Sterlite Tech Connectivity Solutions Limited Full Strong managerial, operational and financial linkages
Sterlite (Shanghai) Trading Co. Limited Full Strong managerial, operational and financial linkages
Sterlite Conduspar Industrial Ltda Equity method Joint Venture - Proportionate consolidation
Maharashtra Transmission Communication Infrastructure Limited Equity method Joint Venture - Proportionate consolidation
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT    --    --    --    --  23-11-16  Withdrawal  CRISIL A+/Watch Developing 
                    04-07-16  CRISIL A+/Watch Developing   
Commercial Paper  ST  450.00  CRISIL A1+      13-07-18  CRISIL A1+  18-04-17  CRISIL A1+    --  -- 
            24-04-18  CRISIL A1+           
Short Term Debt  ST                  23-11-16  CRISIL A1+  CRISIL A1/Watch Developing 
                    04-07-16  CRISIL A1/Watch Developing   
Fund-based Bank Facilities  LT/ST  1078.13  CRISIL AA/Stable      13-07-18  CRISIL AA/Stable  18-04-17  CRISIL AA-/Positive  23-11-16  CRISIL AA-/Stable  CRISIL A+/Watch Developing 
            24-04-18  CRISIL AA/Stable      04-07-16  CRISIL A+/Watch Developing   
Non Fund-based Bank Facilities  LT/ST  3621.87  CRISIL AA/Stable      13-07-18  CRISIL AA/Stable  18-04-17  CRISIL AA-/Positive  23-11-16  CRISIL AA-/Stable  CRISIL A+/Watch Developing 
            24-04-18  CRISIL AA/Stable      04-07-16  CRISIL A+/Watch Developing   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 910 CRISIL AA/Stable Cash Credit 560 CRISIL AA/Stable
Letter of credit & Bank Guarantee 3621.87 CRISIL AA/Stable Letter of credit & Bank Guarantee 2310 CRISIL AA/Stable
Term Loan 168.13 CRISIL AA/Stable Term Loan 168.13 CRISIL AA/Stable
Total 4700 -- Total 3038.13 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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