Rating Rationale
September 25, 2020 | Mumbai
Vindhya Telelinks Limited
Rating Reaffirmed 
 
Rating Action
Rs.200 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Vindhya Telelinks Limited (VTL; a part of the VTL group).
 
The rating continues to reflect the group's strong market position in the optical fibre cables (OFC) industry. The rating also factors in the group's sizeable orders and diversified revenue portfolio and healthy financial risk profile. These strengths are partially offset by large working capital requirement, vulnerability to volatile raw material prices and foreign exchange (forex) rates, and exposure to risks related to tender-based nature of business.
 
CRISIL has also noted the Calcutta High Court order dated September 18, 2020, restraining Mr. HV Lodha from holding all the positions within the M P Birla Group of Companies. However, CRISIL believes that this judgement does not materially impact the business or day to day operations of the company and also does not have a bearing on the credit profile. CRISIL will remain in discussions with the management to understand the further implications of the same, if any.

Analytical Approach

CRISIL has combined the business and financial risk profiles of VTL and its wholly owned subsidiaries: August Agents Ltd (AAL), Insilco Agents Ltd (IAL), and Laneseda Agents Ltd (LAL). The companies, collectively referred to as the VTL group, have significant financial linkages and are wholly owned subsidiaries of VTL.

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 in the OFC industry
VTL is the flagship company of the cables division of the MP Birla group. It manufactures OFC and undertakes engineering, procurement, and construction (EPC) projects primarily in the telecom sector. The VTL group has a strong business risk profile as it is among the top three OFC manufacturers in India. It started the cables division in 1983 and currently has an estimated OFC manufacturing capacity of 48 lakh fiber kilometre per annum. Operating income remained high at Rs 1,883.19 crore in fiscal 2020, driven by the strong market position.
 
* Sizeable orders and diversified revenue profile
The EPC segment has grown in the past few years, driven by the management's policy to move up the value chain in the OFC division. Apart from supplying cables to telecommunication (telecom) operators, the VTL group also undertakes turnkey projects and has set up distribution lines for state power distribution companies. Revenue is expected to improve over the medium term owing to healthy demand prospects in the OFC and EPC segments. Orders worth Rs 1,310 crore awaiting execution as on June 30, 2020, assure healthy revenue visibility for the medium term.
 
* Comfortable financial risk profile
Financial risk profile may continue to be healthy. Networth was Rs 1411 crore as on March 31, 2020, against debt of around Rs 892 crore. Gearing, therefore, remained comfortable at 0.63 time. Debt protection metrics were also adequate, with interest coverage and net cash accrual to total debt ratios of 2.68 times and 0.27 time, respectively, in fiscal 2020.
 
Weaknesses
* Large working capital requirement
The working capital cycle may remain stretched over the medium term and hence will be closely monitored. Gross current assets were sizeable at 428 days as on March 31, 2020, driven by debtors and inventory of 222 days and 232 days, respectively. Debtors have increased in the past couple of years because of subsequent rise in revenue derived from the EPC segment (around 76% in fiscal 2020), where the bill is raised on time but payment is made as per contract terms.
 
* Vulnerability to volatile raw material prices and forex rates, and exposure to risks related to tender-based nature of business
The price of the main raw material (optical fibre) is volatile. In the absence of any price escalation clause, increase in input costs could impinge on profitability. Furthermore, as a significant proportion of raw material requirement is imported and the transaction is not fully hedged, susceptibility to variations in forex rates persists. Operating margin has, therefore, fluctuated between 12.3% and 16.9 % during the four fiscals through 2020, and is likely to remain so over the medium term.
Liquidity Superior

Bank limit utilisation was moderate at 81% during the 10 months through July 2020. Cash accrual is expected at Rs 145 crore in fiscal 2021 and Rs 225 crore in fiscal 2022, against yearly maturing debt of Rs 60.82-103.95 crore. Liquidity is also supported by investment in mutual funds and group companies (which are listed) with market value of around Rs 42.86 crore and Rs 1,119.96 crore, respectively as on March 31, 2020. Current ratio was strong at 1.89 times as on March 31, 2020.

Rating Sensitivity factors
Downward factors
* Decline in operating margin by 300 basis points and cash accrual dropping by 30%
* Further sizeable stretch in the working capital cycle by 50 days
About the Company

VTL, incorporated in 1983, is the flagship company of the cables business of the MP Birla group. It manufactures OFC at its plant in Rewa (Madhya Pradesh) and undertakes EPC projects in the power and telecom sectors. It is listed on the Bombay Stock Exchange and National Stock Exchange.
 
The MP Birla group has presence in diverse businesses (such as cement manufacturing, guar gum, and cables and wires) and also operates educational and medical trusts and institutes.
 
AAL, IAL, and LAL are non-operational and act as holding companies for VTL's investments.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs.Crore 1883.19 2095.37
Profit After Tax (PAT) Rs.Crore 237.4 275.61
PAT Margin % 12.6 13.2
Adjusted debt/adjusted networth Times 0.63 0.38
Interest coverage Times 2.68 4.48

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 level Rating assigned with outlook
NA Commercial paper NA NA NA 200 Simple CRISIL A1+
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
VTL 100% consolidation The companies, collectively referred to as the VTL group, have significant financial linkages and are wholly owned subsidiaries of VTL.
AAL 100% consolidation The companies, collectively referred to as the VTL group, have significant financial linkages and are wholly owned subsidiaries of VTL.
IAL 100% consolidation The companies, collectively referred to as the VTL group, have significant financial linkages and are wholly owned subsidiaries of VTL.
LAL 100% consolidation The companies, collectively referred to as the VTL group, have significant financial linkages and are wholly owned subsidiaries of VTL.
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  200.00  CRISIL A1+      30-09-19  CRISIL A1+  29-09-18  CRISIL A1+  28-09-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
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 Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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