Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Tata Sky Ltd (Tata Sky).

 

The ratings continue to reflect the healthy business risk profile and strong market position of Tata Sky, driven by its industry-leading subscriber base. As per the Telecom Regulatory Authority of India data, the subscriber market share of Tata Sky stands at 33.3% as on March 31, 2021.

 

Company’s active subscriber base has moderated over March 2020 to June 2021 after having added record subscribers during fiscal 2020, supported by implementation of National Tariff Order 1.0 (NTO 1.0) Subscriber growth is expected to remain moderate in fiscal 2022 as well due to the Covid-19 pandemic-induced challenges.

 

Moreover, direct-to-home (DTH) operators have implemented NTO 2.0 from March 2020, which caps network capacity fees (NCF) charged from subscribers and discounts NCF for multi-TV subscribers. This has impacted average revenue per user (ARPU) of DTH operators, including Tata Sky, in fiscal 2021 and is expected to stabilise over fiscal 2022.

 

Tata Sky remained prudent with its investment plans in the broadband business. Hence, adjusted net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio was 1.2 times for fiscal 2021 and should remain below 1.5 times over the medium term. While the company is witnessing healthy growth in the broadband business, its broadband segment however will keep Tata Sky exposed to project risks, until the project stabilises and subscribers see a significant ramp up.

 

The ratings continue to reflect Tata Sky’s robust market positon and operating margin in the DTH business, healthy financial risk profile and strong support from the parent, Tata Sons Ltd (Tata Sons; 'CRISIL AAA/FAAA/Stable/CRISIL A1+') during any exigency. These strengths are partially offset by exposure to risks inherent in the DTH industry, such as the evolving regulatory landscape and viewership patterns, and project risks in the broadband segment.

Analytical Approach

For this rating action, CRISIL Ratings has combined the business and financial risk profiles of Tata Sky and its subsidiaries, Tata Sky Broadband Pvt Ltd (TSBB) and Actve Digital Services Pvt Ltd (ADSL), because of their strategic importance and significant operational integration. CRISIL Ratings has also factored in support from the parent, Tata Sons.

 

CRISIL Ratings believes Tata Sky will, during any exigency, receive distress support from Tata Sons for timely servicing of debt, considering its strategic importance to the parent. Tata Sky also receives operational and managerial support from the parent.

 

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 

Strong market position and operating margin in the DTH business

Tata Sky is a leader in the DTH industry, in terms of revenue and subscribers market share. Its market position strengthened with the implementation of NTO 1.0, resulting in a sharp addition of subscribers, and is supported by the largest high-definition subscriber base in the industry. As per TRAI’s data, Tata Sky had a subscriber market share of 33.3% as on March 31, 2021.

 

ARPU was impacted in fiscal 2021 due to implementation of NTO 2.0, but the company maintained a healthy operating margin of about 47% during the fiscal. During fiscal 2021, the company changed its accounting policy pertaining to customer premise equipment cost recognition from entrustment model (capital expenditure [capex] model) to sale model (operating expenditure model). While the change in policy will impact reported EBITDA margins but it is still expected to remain at comfortable at over 30-35% over the medium term. Furthermore, the change in policy is more tax efficient for the company and is expected to have a neutral to positive impact over cash flows of the company.

 

Healthy financial risk profile

The financial risk profile improved significantly over the past five fiscals because of reduction in debt (net of cash) and consistent increase in cash accrual. Interest coverage and net cash accrual to adjusted debt ratio improved to around 6.0 times and over 1.0 time, respectively, in fiscal 2021 from 3.8 times and 0.4 time five years ago.

 

The company plans to invest in the broadband segment gradually, such that adjusted net debt to EBITDA ratio remains under 1.5 times'any deviation will be a rating sensitivity factor. Capital payables have been included in adjusted debt as the liability has characteristics similar to external debt. The financial risk profile, however, is constrained by negative networth, which is likely to improve over the medium term.

 

Support from Tata Sons

Tata Sky received regular and timely funds from its parent to support capex in the past. Improved cash accrual since fiscal 2016 lowered dependence on equity infusion (there has been no equity infusion since fiscal 2016 because of improved accrual). Tata Sons views Tata Sky as a strategic subsidiary, and has articulated strong support to, and will maintain majority stake, in the latter. Tata Sky will continue to benefit from its association with the Tata brand and its management control will remain with Tata Sons.

 

Weaknesses

Exposure to risks inherent in the DTH business

The DTH industry involves large investments as operators need to undertake significant establishment cost (installation service, software and operation support, customer support) and other operating expenses (for advertising and acquiring subscribers) to ensure sustained ramp-up in scale. Tata Sky faces intense competition from other operators and local cable television providers. Moreover, DTH operators face the risk of technological obsolescence and change in consumer behaviour, such as acceptance of over-the-top platforms.

 

Exposure to project risks in the broadband segment

Tata Sky launched its broadband business through its wholly owned subsidiary TSBB, which enabled it to make bundled offerings to subscribers in a few large cities. While the broadband business is likely to complement the DTH business, it will remain in the investment phase and is likely to face competition over the medium term. Tata Sky will be exposed to demand and implementation risks until the project stabilises.

Liquidity: Strong

Tata Sky has strong liquidity, driven by healthy cash accrual, cash and equivalent of Rs 952 crore as on March 31, 2021 and unutilised bank lines of over Rs 2,000 crore as on June 30, 2021. Internal accrual, cash and equivalent, and unutilised bank lines will be sufficient to meet debt obligation and working capital requirement over the medium term. The company has sufficient headroom to raise debt to meet capex and investment requirement of subsidiaries. Moreover, Tata Sons will provide support in case of exigencies.

Outlook: Stable

Tata Sky’s leverage will remain comfortable over the medium term, driven by curtailed investment in the broadband segment and healthy accrual from the DTH business.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in operating performance, leading to significantly improved cash accrual
• Lower-than-expected capex or investment in the broadband business leading to adjusted debt to EBITDA ratio sustaining below 1 time

 

Downward Factors

• Weakening in the credit risk profile of Tata Sons, or any change in the stance of support from the parent
• Increased competition, resulting in lower-than-expected cash accrual
• Larger-than-expected capex or investment in the broadband business, leading to adjusted debt to EBITDA ratio above 2 times

About the Company

Tata Sky commenced operations in 2004 as an 80:20 joint venture between Tata Sons and Network Digital Distribution Services FZ-LLC (NDDS). DTH operations commenced in August 2006. In fiscal 2008, Baytree Investments (Mauritius) Pte Ltd (Bay Tree), an affiliate of Temasek Capital Pvt Ltd acquired 10% of Tata Sky's equity shares. In fiscal 2010, TS Investments Ltd (TSIL) acquired 20% equity stake in Tata Sky. In fiscal 2013, Tata Opportunities Fund, through Omega FII Investments Pte Ltd (Omega), and Tata Capital Ltd acquired equity stake in Tata Sky.

 

Tata Sons, NDDS, TSIL, Baytree, Omega, and Tata Capital Ltd hold 41.49%, 20.00%, 20.00%, 10.00%, 7.80% and 0.71%, respectively, of Tata Sky’s equity share capital.

About TSBB

Founded in 2015, TSBB is a wholly owned subsidiary of Tata Sky. Headquartered in Mumbai, the company’s services are available in 15 cities and towns. It plans to build fibre to the home (FTTH) broadband infrastructure in India.

Key Financial Indicators (Consolidated)

Particulars	Unit	2021	2020
Operating income	Rs.Crore	4684	4691
Profit After Tax (PAT)	Rs.Crore	69	-234
PAT Margin	%	1.5	-5.0
Adjusted debt/adjusted networth	Times	-2.18	-1.92

 NOTE: Revenue for FY20 is lower than in the previous fiscal due to netting off of broadcaster payout since content cost is a pass-through under NTO 1.0, and hence will not be comparable to FY19

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Foreign Exchange Forward#&	NA	NA	NA	128	NA	CRISIL A1+
NA	Letter of Credit#&	NA	NA	NA	5190	NA	CRISIL A1+
NA	Long Term Loan#&	NA	NA	Jul-2022	200	NA	CRISIL AA/Stable
NA	Long Term Loan #&	NA	NA	Mar-2023	300	NA	CRISIL AA/Stable
NA	Long Term Loan#&	NA	NA	Apr-2023	450	NA	CRISIL AA/Stable
NA	Purchase Bill Discounting#&	NA	NA	NA	60	NA	CRISIL A1+
NA	Short Term Loan#&	NA	NA	NA	1450	NA	CRISIL A1+
NA	Proposed Short Term Bank Loan Facility#&	NA	NA	NA	222	NA	CRISIL A1+

#Limits interchangeable across Letter of credit, Buyer's credit, bank guarantee, vendor finance programs, purchase bill discounting and Term loans

&Limits are interchangable between Non fund based and fund based limits