Rating Rationale
October 07, 2020 | Mumbai
TATA Sky Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.5150 Crore (Enhanced from Rs.4500 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating 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 of Tata Sky Limited (Tata Sky).

The rating reaffirmation factors in Tata Sky's healthy business risk profile and strong market position, driven by strong subscriber addition in fiscal 2020 post implementation of the new tariff order (NTO 1.0) by the Telecom Regulatory Authority of India (TRAI). As per TRAI's data, the subscriber market share of Tata Sky stands at 32.3% as on March 31, 2020.

Subscriber base is expected to continue to grow in fiscal 2021 as social distancing norms and prolonged work-from-home practices amid the Covid-19 pandemic are likely to keep people indoors. Therefore, CRISIL expects the direct to home (DTH) broadcasting industry to buck the economic downturn and log revenue growth of 400-600 basis points in fiscal 2021.

However, 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 could impact average revenue per user (ARPU) of DTH operators, including Tata Sky, in fiscal 2021 and will be a key monitorable.

Tata Sky has altered its earlier plan of substantial investment in the broadband business. As a result, adjusted net debt to earnings before interest, tax, depreciation, and amortisation (Ebitda) ratio should remain below 1.5 times over the medium term. Any deviation will be a rating sensitivity factor. However, entry into the broadband segment will keep Tata Sky exposed to project risks, until the project stabilises and subscribers 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 its parent, Tata Sons Ltd (Tata Sons; 'CRISIL AAA/FAAA/Stable/CRISIL A1+') during any exigency. The 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 arriving at the ratings, CRISIL has combined the business and financial risk profiles of Tata Sky and its subsidiaries, Tata Sky Broadband Pvt Ltd (TSBB) and Active Digital Services Pvt Ltd (ADSL), because of their strategic importance and significant operational integration. CRISIL has also factored in support from the parent, Tata Sons. CRISIL 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 - Details of Consolidation, 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. Its market position has 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 32.3% as on March 31, 2020.
 
High subscriber addition and improvement in ARPU resulted in a healthy operating profit growth of around 20% in fiscal 2020. While revenue may be impacted by the implementation of NTO 2.0 in fiscal 2021, its impact on operating profit should be negligible and will be a monitorable. Ebitda margin is likely to remain healthy over 30% over the medium term.
 
* Healthy financial risk profile
The financial risk profile has 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 times and over 1 time, respectively, in fiscal 2020 from 3.3 times and 0.2 time, respectively, 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 has 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 capex, as operators need to undertake significant establishment cost (installation service, software and operation support, customer support) and 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 its 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 135 crore and unutilised bank lines of over Rs 1,500 crore as on August 31, 2020. 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

CRISIL believes 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 presently hold 41.49%, 20.0%, 20%, 10%, 7.8% and 0.71%, respectively, of Tata Sky's equity share capital.
 
About TSBB
Founded in 2016, TSBB is a wholly owned subsidiary of Tata Sky. Headquartered in Mumbai, the company's services are available in 17 cities and towns. It plans to build fibre to the home (FTTH) broadband infrastructure in India.

Key Financial Indicators
Particulars Unit 2020 2019
Operating income Rs crore 4691 6113
Profit after tax (PAT) Rs crore -234 364
PAT margin % -5.0 5.9
Adjusted debt /adjusted networth Times (5.5) (6.4)
Interest coverage Times 6.0 6.7
NOTE: The 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

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Bank guarantee NA NA NA 157 NA CRISIL A1+
NA Buyer's credit* NA NA NA 439 NA CRISIL A1+
NA Letter of credit* NA NA NA 2579 NA CRISIL AA/Stable
NA Short-term loan* NA NA NA 768 NA CRISIL A1+
NA Proposed short-term bank loan facility* NA NA NA 1207 NA CRISIL A1+
* Limits interchangeable across Letter of credit, Buyer's credit, and Term loan
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
Tata Sky Broadband Pvt Ltd (TSBB) Full Strategically important, and significant operational integration
Active Digital Services Pvt Ltd (ADSL) Full Strategically important, and significant operational integration
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
Non Convertible Debentures  LT    --  24-04-20  Withdrawal  31-05-19  CRISIL AA/Negative  07-05-18  CRISIL AA/Stable  17-10-17  CRISIL A+/Positive  CRISIL A+/Stable 
                    21-03-17  CRISIL A+/Positive   
Fund-based Bank Facilities  LT/ST  2414.00  CRISIL A1+  24-04-20  CRISIL A1+  31-05-19  CRISIL AA/Negative/ CRISIL A1+  07-05-18  CRISIL AA/Stable/ CRISIL A1+  17-10-17  CRISIL A+/Positive/ CRISIL A1+  CRISIL A+/Stable/ CRISIL A1 
                    21-03-17  CRISIL A+/Positive/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST  2736.00  CRISIL AA/Stable/ CRISIL A1+  24-04-20  CRISIL AA/Stable/ CRISIL A1+  31-05-19  CRISIL A1+    --    --  -- 
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
Bank Guarantee 157 CRISIL A1+ Bank Guarantee 157 CRISIL A1+
Buyer`s Credit* 439 CRISIL A1+ Buyer`s Credit 692 CRISIL A1+
Letter of Credit* 2579 CRISIL AA/Stable Foreign Letter of Credit 2756 CRISIL AA/Stable
Proposed Short Term Bank Loan Facility* 1207 CRISIL A1+ Letter of Credit 237 CRISIL A1+
Short Term Loan* 768 CRISIL A1+ Proposed Short Term Bank Loan Facility 107 CRISIL A1+
-- 0 -- Short Term Loan 551 CRISIL A1+
Total 5150 -- Total 4500 --
* Limits interchangeable across Letter of credit, Buyer's credit, and Term loan
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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