Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Negative’ rating to the Rs 200 crore non-convertible debentures of Sterlite Technologies Limited (STL). The ratings on the remaining debt instruments and bank facilities has been reaffirmed at 'CRISIL AA/Negative/CRISIL A1+’.

 

During the first nine months of fiscal 2023, STL reported ~28% increase in operating revenue (on a consolidated basis) as compared to the corresponding period of fiscal 2022. Strong order book of over Rs 12,000 crore as on December 31, 2022, and increase in optic fibre (OF) prices, as seen in recent quarters, should support revenue growth in the coming quarters.

 

During the first half of fiscal 2023, company reported weak operating margin of 8.6% owing to inflationary headwinds and high logistics cost. Company’s services, digital and technological businesses continued to drag overall profitability resulting in decline in operating margin from steady state of 20-22%. But there has been a sequential improvement in operating margins to 13.4% during the third quarter of fiscal 2023 as compared to 11.4% in the second quarter, largely aided by product mix shift towards higher margin products, increase in OFC realisations, and reduction in logistics cost.

 

Operating profitability should improve further over next few quarters aided by cost control measures (including sale of non-core assets & loss-making businesses) and focus on high margin products business. Any significant deviation against this expectation will remain key monitorable.

 

The negative outlook on the ratings indicates that the credit profile of the company may weaken further if the financial risk profile doesn’t improve over near term. Large capital expenditure (capex), acquisitions done in the past and stretched working capital cycle on the services side of the business resulted in net debt elevating to around Rs 3,400 crore as on December 31, 2022, from Rs 2,782 crore as on March 31, 2022. While net debt is expected to reduce in line with expected improvement in profitability and moderate capex plan, STL’s board has also approved fund raise of Rs 500 crore through rights issue, which should further aid in debt reduction in near term. CRISIL Ratings expects company’s net debt to annualized EBITDA to come around/ below 2.5 times over next 6-9 months. Improvement in leverage will remain key rating sensitivity factor.

 

The ratings continue to reflect the dominant market position of STL in the telecommunication (telecom) cables business, strong order book providing healthy revenue visibility, and adequate financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition.

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:

Leadership position in Indian telecom cables business and increasing market share in global markets

STL has strong reputation in the OF and OFC segments in India and abroad, driven by its technically superior products. The company is preferred by OFC manufacturers (for OF) 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. STL’s market share in North American market is estimated to have been doubled to 14% during first half months of fiscal 2023 as compared to ~7% in fiscal 2022. Similarly, global ex-China OFC market share has improved to 12% during first nine months of fiscal 2023 from ~9% in fiscal 2022. The market share is expected to improve further going forward aided by various long-term contracts. 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 telecom cables industry over the medium term.

 

Healthy capability and growth prospects with sizeable order book

STL is among the lowest-cost producers of OF and OFC because of extensive backward integration. Manufacturing OF 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. With expected increase in the penetration of broadband services, rollout of 5G and FTTx, massive investments towards data centres, 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 12,000 crore (as on December 31, 2022) and improving OF realisations assure substantial revenue visibility over the medium term.

 

Adequate financial risk profile

Large capex, acquisitions and stretched working capital cycle on the services business resulted in net debt elevating to Rs 3,400 crore as on December 31, 2022, from Rs 2,782 crore as on March 31, 2022. Net debt to Ebitda (annualised) ratio (leverage) is expected to remain high for fiscal 2023 but is expected to improve sharply to around/ below 2.5 times over next 6-9 months in line with expected improvement in profitability and modest capital outlay plans. Interest coverage ratio should remain comfortable at 4-6 times for fiscal 2024. Adjusted networth was robust at Rs 1,560 crore as on March 31, 2022. STL completed capex of over Rs 3,000 crore in the past five years to expand its OF capacity and plans to incur moderate capex over the medium term, which will also support the financial risk profile.

 

Weaknesses:

Exposure to intense competition in the overseas market

The company derived almost 58% of revenue from exports during fiscal 2022 and faces intense competition in the international OF 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 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.

 

Large working capital requirement

Working capital intensity have risen over past few years and remain elevated because of increased proportion of services business. Gross current assets, receivables (including contract assets) and inventory were over 308 days, 188 days and 58 days, respectively, as on March 31, 2022. However, the company is able to negotiate favourable terms with suppliers, leading to payables of around 194 days. Working capital requirement is expected to remain elevated in near term owing to delayed execution milestones although the situation is expected to improve over medium term as the company would be making cautious calls on services contracts to be taken going forward. While STL 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 net cash accrual of over Rs 700-800 crore annually over the medium term, cash balance of over Rs 450 crore as on December 31, 2022, and healthy cushion in bank lines. Against this, the company has term debt repayment obligation of around Rs 700 crore in fiscal 2024. Annual capex of Rs 150-200 crore is expected over the medium term and should be funded largely through internal accrual.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes the ESG profile of STL supports its already strong credit risk profile.

 

The telecom equipment sector is exposed to material impact on the environment as waste associated with end-of-life network equipment and hardware can pollute land resources. Moreover, optical fibres are vital for ensuring uninterrupted telecom services to society and the economy. STL has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• Company is committed to achieve net zero emissions by 2030. Also, by 2030, STL aim to become water positive across all of their manufacturing locations globally. To achieve this target, STL implemented water-recycling models. All their manufacturing plants in Aurangabad are Zero Liquid Discharge certified. About 1.45 lakh+ m3 of water recycled in manufacturing process and 7,500+ tons of CO2 emissions avoided through energy efficiency measures.
• Five of their six manufacturing units in India are Zero Waste to Landfill certified. Shendra, Waluj cable plant, Rakholi and Dadra plants are level 1 certified for diverting over 99% waste from landfills, Waluj plant has a level 2 certification for diverting over 97% of waste.
• In FY22, STL released sustainable sourcing policy that focusses on not just green, but responsible procurement. It lays emphasis on adherence to human rights, fair labour practices, gender equality, and other such social elements in addition to environment-related aspects. The company’s efforts increased local procurement of supplies in cable manufacturing from 55% in FY21 to 61% in FY22.
• At STL, via leadership, employees and talent management initiatives, 44,500 learning hours were clocked in FY22
• Its governance structure is characterized by 57% of its board comprising independent directors, split in chairman and CEO position, healthy investor grievance redressal and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. STL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its moderate share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook: Negative

STL’s credit risk profile may remain weak in the near term due to moderation in the operating margin of the services segment and large working capital requirement.

Rating Sensitivity Factors

Upward Factors

• Significant and sustainable improvement in business resulting in significant and sustained improvement in quarterly EBITDA
• Considerable improvement in financial risk profile, driven by increase in cash accrual resulting in net debt to Ebitda ratio sustaining below 2.5 times may lead to outlook being revised back to stable

 

Downward Factors

• Continued pressure on operating margin leading to weak cash accrual
• Net debt to Ebitda ratio sustaining above 2.5 times due to sustained weak operating performance or high working capital requirement

About the Company

STL is a leading manufacturer of OF and OFC. 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.

 

Net profit was Rs 74 crore and revenue was Rs 5,050 crore over the nine months ended December 31, 2022, against net profit of Rs 83 crore and revenue of Rs 3,936 crore in the corresponding period previous fiscal.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue	Rs crore	5771	4849
PAT	Rs crore	47	265
PAT margin	%	0.8	5.5
Debt/networth	Times	2.1	1.5
Interest coverage	Times	2.5	4.24

These are CRISIL Ratings adjusted numbers

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 level	Rating assigned with outlook
NA	Commercial paper programme	NA	NA	7-365 days	800	Simple	CRISIL A1+
NA	Cash Credit	NA	NA	NA	1879	NA	CRISIL AA/Negative
NA	Letter of credit & Bank Guarantee	NA	NA	NA	3463	NA	CRISIL AA/Negative
NA	Term Loan	NA	NA	Sep-24	200	NA	CRISIL AA/Negative
NA	Term Loan	NA	NA	Mar-25	250	NA	CRISIL AA/Negative
INE089C07109	Non-convertible debentures	25-Mar-21	8.25	25-Mar-31	290	Complex	CRISIL AA/Negative
INE089C07117	Non-convertible debentures	31-Mar-21	7.3	29-Mar-24	150	Complex	CRISIL AA/Negative
NA	Non-convertible debentures*	NA	NA	NA	200	Simple	CRISIL AA/Negative

*Yet to be issued