| Sterlite Technologies Limited | ||||||
| Rated amount enhanced for Commercial Paper | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the existing bank and debt instrument of Sterlite Technologies Limited (STL).
The ratings continue to reflect the dominant market position of STL in the telecom cables business, its strong order book providing healthy revenue visibility, and the adequate financial risk profile. These strengths are partially offset by the large working capital requirement and exposure to intense competition.
Operating performance was impacted in the first quarter of fiscal 2022, amidst the second wave of the Covid-19 pandemic and the resultant disruption in operations. As a result, revenue declined around 12% quarter-on-quarter. Operations have improved significantly thereon with revenue of Rs 1,508 crore in the second quarter of fiscal 2022, against Rs 1,309 crore in the first quarter and Rs 1,475 crore in the last quarter of fiscal 2021. This has helped the company report healthy earnings before interest, tax, depreciation, and amortisation (Ebitda) of Rs 263 crore in the second quarter of fiscal 2022, vis-à-vis Rs 232 crore in the first quarter and Rs 256 crore in the last quarter of fiscal 2021.
Net debt rose to Rs 2,815 crore as of September 30, 2021, from Rs 2,448 crore as of March 31, 2020, due to large capital expenditure (capex), acquisitions and stretched working capital cycle on the services side of the business. Thus, the net debt to Ebitda (annualised) ratio (leverage) stands at 2.7 times for the quarter ended September 30, 2021.
In the second quarter of fiscal 2022, the company announced new multi-million dollar deals with large service providers in UK to connect homes to broadband, and a strategic partnership with a leading public enterprise in India, taking its cumulative order book to around Rs 11,500 crore as on September 30, 2021. The strong order book and increase in optic fibre (OF) prices, as seen in recent quarters, provides confidence on improvement in cash flows in coming quarters.
Healthy cash flows, expected low capex and improvement in working capital cycle should take the net debt to Ebitda ratio below 2 times in fiscal 2023. The same will remain a key rating sensitivity factor. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of STL and its subsidiaries and joint ventures. STL has significant management control over these entities, which are in the same business and are strategically important to the company.
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:
STL has a strong reputation in the optical fibre and OFC segments in India and abroad, driven by its technically superior products. The company is preferred by OFC manufacturers (for optical fibre) and telecom operators and telecom infrastructure providers (for OFC). Furthermore, it is a one-stop solution for most clients due to its wide range of system integration and software services offerings. High quality of products, a widespread clientele, and diversified presence across the broadband infrastructure value chain, including products, services, and software, should help the company sustain its strong foothold in the Indian telecom cables industry over the medium term.
STL is among the lowest-cost producers of optical fibre and OFC because of extensive backward integration. Manufacturing optical fibre from the preform stage offers advantages in terms of cost and quality. The company has plants for power, nitrogen, and electrolysis to meet its hydrogen and oxygen requirements. Moreover, it has facilities to produce silicon tetrachloride, the basic raw material for quartz glass manufacturing.
Furthermore, all the segments have strong growth prospects, particularly the services division. With expected increase in the penetration of broadband services, rollout of 5G and FTTx, focus of the government on rural digitisation and implementation of smart-city projects on a large scale, the medium-term demand outlook is healthy. Orders of over Rs 11,500 crore as on September 30, 2021, and rising OF prices assure substantial revenue visibility over the medium term.
Despite the impact of the second wave of the pandemic in the first quarter of fiscal 2022, STL is expected to generate healthy accruals in fiscal 2022 and witness further improvement over the medium term supported by company’s strong market leadership, healthy order book and higher execution of the services business over the medium term. Hence, net debt to Ebitda ratio should sustain below 2 times, despite temporarily increasing to over 2 times in fiscal 2022. Adjusted Networth was robust at Rs 1,867 crore as on March 31, 2021, while debt protection metrics were adequate. STL completed capex of Rs 3,000 crore over the past four years to expand its optical fibre capacity and plans to incur moderate capex over the medium term, which will support the financial risk profile.
Weaknesses:
The company derived almost 46% of revenue from exports during fiscal 2021, and faces intense competition in the international optical fibre and OFC markets. In the domestic market as well, 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. However, STL is the largest player and a clear market leader in the domestic market, despite competitive pressure from peers such as Himachal Futuristic Communications Ltd, Vindhya Telelinks Ltd, Aksh Optifibre Ltd, and Finolex Cables Ltd (‘CRISIL AA+/Stable/CRISIL A1+’).
Gross current assets, receivables and inventory (including contract assets) were over 307 days, 111 days and 177 days, respectively, as on March 31, 2021. However, the company is able to negotiate favourable terms with suppliers, leading to stretched payables of around 272 days. Receivable days for STL increased to 120 days (annualised) as on September 30, 2021 (from 111 days as of March 31, 2021) due to delay in execution during the first quarter. However, the situation is expected to improve as the company is expected to achieve some major execution milestones in the second half of fiscal 2022 and fiscal 2023, which should lower receivables. While it has enough wherewithal to manage short-term cash flow mismatches, correction in the working capital cycle will remain a monitorable. |
Liquidity: Strong Liquidity will be supported by expected cash accrual of over Rs 600-700 crore annually over the medium term, cash balance of over Rs 555 crore as on September 30, 2021, and healthy cushion in bank lines of over Rs 500 crore (utilised at 50% on average during the six months through June 2021). The company has term debt repayment obligation of around Rs 138 crore in H2 fiscal 2022 and Rs 309 crore in fiscal 2023. Capex is expected at Rs 300-350 crore in fiscal 2022 and is likely to be funded largely through internal accrual. |
Outlook: Stable CRISIL Ratings believes the financial risk profile of STL will remain healthy over the medium term, supported by high operating efficiency and strong growth prospects. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company STL is a leading manufacturer of optical fibre and OFC. It has a 75:25 joint venture, Jiangsu Sterlite Tongguang Fiber Co Ltd (JSTFCL), with Jiangsu Tongguang Communication Co Ltd of China. JSTFCL, which has a manufacturing capacity of 7 million fibre kilometre (mfkm) of optical fibre in China, commenced operations in April 2013. STL set up a 50:50 joint venture with Conduspar Condutores Eletricos in July 2013 to manufacture OFC in Brazil. In 2015, STL acquired Elitecore Technologies Pvt Ltd, which is a global provider of software products. In 2018, STL acquired Mettalurgica Bresciana, an OFC manufacturer based in Italy.
For the six months ended September 30, 2021, the company reported a profit after tax (PAT) of Rs 213 crore and operating income of Rs 2,817 crore, against Rs 124 crore and Rs 2,036 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators (CRISIL Ratings-adjusted numbers)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*The outstanding letter of credit facility can be converted to term loan on the maturity date |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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& - The outstanding letter of credit facility can be converted to term loan on the maturity date
Criteria Details
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