Rating Rationale
March 05, 2020 | Mumbai
Sterlite Technologies Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.4950 Crore (Enhanced from Rs.4700 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 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Sterlite Technologies Limited (STL).
 
The ratings continue to reflect the company's healthy operating efficiency, a dominant market position, and diversified presence across 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 and are strategically important to STL.

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 the Indian telecom cables business: The company has a dominant market share in India's optical fibre (OF) and optic fibre cable (OFC) markets. It has also established its footprint abroad in these segments, thus diversifying the client base and reducing customer concentration risk. The company's market dominance stems from the technological superiority of the products, making STL the preferred supplier of OF to OFC manufacturers, and of OFC to telecommunication (telecom) operators.
 
Also, its presence across various 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. Therefore, STL is likely to sustain its market leadership position in the OF and OFC segments over the medium term.
 
* 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 advantages in terms of cost and quality. Additionally, dual technological capabilities in fibre manufacturing offer flexibility in manufacturing and results 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. Order book of Rs 8,535 crore as on December 31, 2019, provides substantial revenue visibility over the medium term.
 
* Healthy financial risk profile: The networth was large at Rs 1,793 crore as on September 30, 2019, and the debt protection metrics were adequate. Around Rs 1,000 crore of the ongoing capital expenditure (capex) of Rs 2,100 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 capacities. The financial risk profile should remain healthy, over the medium term, supported by adequate cash accrual, given the expected revenue growth and sustained profitability.
 
Weaknesses:
* 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: Large working capital is required because of sustained growth in the services segment. Gross current assets, receivables, and inventory were high at 263, 99, and 155 days, respectively, as on March 31, 2019 against 186, 101 and 75 days respectively, as on March 31, 2018. To balance the working capital cycle, the company has been able to negotiate favourable terms with its suppliers, leading to an increase in payable days as well. Working capital intensity is likely to remain high over the medium term, given significant revenue contribution from the services business and from government projects.
Liquidity Strong

Expected cash accrual of Rs 700-1,100 crore should amply cover debt repayment of Rs 300-500 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, 2019, and bank lines of over Rs 1,000 crore, which were utilised at an average of 61% during the nine months through December 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.

Rating Sensitivity factors
Upward factors
* Significant and sustainable improvement in the business risk profile through steady growth in revenue or diversification of the product mix, and continued healthy operating margin of over 20%
* Considerable improvement in the financial risk profile, most likely because of increase in net cash accrual or significant debt reduction
 
Downward factors
* Net debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) ratio increasing to over 2 times on a sustained basis, on account of steep decline in operating performance
* Weakening of the financial risk profile because of 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. Ltd (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 Mettalurgica Bresciana, an OFC manufacturer based in Italy.
 
For the nine months ended December 31, 2019, STL reported a profit after tax (PAT) of Rs 351 crore on net sales of Rs 3,994 crore, against PAT of Rs 415 crore on net sales of Rs 3,296 crore, for the corresponding period of the previous fiscal.

Key Financial Indicators - (CRISIL-adjusted numbers)
Particulars Unit 2019 2018
Revenue Rs crore 5101 3221
PAT Rs crore 578 364
PAT margin % 11.3 11.3
Debt/networth Times 1.2 1.0
Interest coverage Times 11.0 7.8

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 crore)
Rating Assigned
with Outlook
NA Commercial Paper Programme NA NA 7-365 days 450.00 CRISIL A1+
NA Cash Credit NA NA NA 910.00 CRISIL AA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 3,674.00 CRISIL AA/Stable
NA Term Loan NA NA Oct-24 80.00 CRISIL AA/Stable
NA Term Loan* NA NA NA 170.00 CRISIL AA/Stable
NA Proposed Long Term
Bank Loan Facility
NA NA NA 116.00 CRISIL AA/Stable
*Yet to be drawn-down
 
Annexure - List of entities consolidated
Name of entities Extent of consolidation Rationale for consolidation
Speedon Network Ltd Full Strong managerial, operational, and financial linkages
Sterlite Telesystems Ltd Full Strong managerial, operational, and financial linkages
Elitecore Technologies (Mauritius) Ltd Full Strong managerial, operational, and financial linkages
Elitecore Technologies Sdn Bhd. Full Strong managerial, operational, and financial linkages
Sterlite Global Ventures (Mauritius) Ltd Full Strong managerial, operational, and financial linkages
Jiangsu Sterlite Tongguang Fiber Co. Ltd Full Strong managerial, operational, and financial linkages
Sterlite Technologies UK Ventures Ltd 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 Ltd Full Strong managerial, operational, and financial linkages
Sterlite Tech Connectivity Solutions Ltd Full Strong managerial, operational, and financial linkages
Sterlite (Shanghai) Trading Co. Ltd Full Strong managerial, operational, and financial linkages
Sterlite Conduspar Industrial Ltd Equity method Joint Venture - Proportionate consolidation
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  450.00  CRISIL A1+      04-04-19  CRISIL A1+  13-07-18  CRISIL A1+  18-04-17  CRISIL A1+  -- 
                24-04-18  CRISIL A1+       
Short Term Debt  ST                      CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  1276.00  CRISIL AA/Stable      04-04-19  CRISIL AA/Stable  13-07-18  CRISIL AA/Stable  18-04-17  CRISIL AA-/Positive  CRISIL AA-/Stable 
                24-04-18  CRISIL AA/Stable       
Non Fund-based Bank Facilities  LT/ST  3674.00  CRISIL AA/Stable      04-04-19  CRISIL AA/Stable  13-07-18  CRISIL AA/Stable  18-04-17  CRISIL AA-/Positive  CRISIL AA-/Stable 
                24-04-18  CRISIL AA/Stable       
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 910 CRISIL AA/Stable
Letter of credit & Bank Guarantee 3674 CRISIL AA/Stable Letter of credit & Bank Guarantee 3621.87 CRISIL AA/Stable
Proposed Long Term Bank Loan Facility 116 CRISIL AA/Stable Term Loan 168.13 CRISIL AA/Stable
Term Loan 250 CRISIL AA/Stable -- 0 --
Total 4950 -- Total 4700 --
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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