Detailed Rationale

CRISIL Ratings' ratings on the long-term bank facilities and non-convertible debentures of Sterlite Technologies Ltd (STL) continue on 'Rating Watch with Negative Implications’. The rating on the commercial paper programme continues on ‘Rating Watch with Developing Implications’.

 

CRISIL Ratings has also withdrawn its rating on the non-convertible debentures of Rs 150 crore (see 'Annexure - Details of Rating Withdrawn') on receipt of independent confirmation that these instruments are fully redeemed, in line with its withdrawal policy. Also, CRISIL Ratings has withdrawn its rating on the bank facilities of Rs 250 crore, out of the previously rated limit of Rs 6,017 crore, at the request of the company and on receiving a no dues certificate from lenders. This rating action is in line with the withdrawal policy of CRISIL Ratings.

 

The ratings factor in the proposed demerger of the company’s global services business into STL Networks Ltd (resulting company), for which the company received board approval on May 17, 2023. The demerger is intended to simplify the business structure, unlock growth opportunities and set up an efficient capital structure. The company is in the process of getting requisite approvals for the proposed transaction.

 

On February 15, 2024, CRISIL Ratings revised its watch on the long-term bank facilities and non-convertible debentures of STL to negative watch from developing watch on account of weaker-than-expected operating performance, resulting in financial leverage remaining elevated.

 

The rating on the long-term bank facilities and non-convertible debentures continues to be on negative watch because of continued weak operating performance leading to subpar capacity utilisation rates. Operating performance for the fourth quarter of fiscal 2024 was weaker than expected and revenue declined to Rs 1,140 crore from Rs 1,322 crore in the previous quarter while EBITDA moderated to Rs 67 crore from Rs 109 crore, mainly due to delay in recovery in demand. For the full year, revenue declined to Rs 5,478 crore in fiscal 2024 from Rs 6,925 crore in the previous fiscal owing to weak demand in the North America market, which has majority contribution to sales, as well as the highest realisation relative to other markets. Furthermore, earnings before interest, tax, depreciation and amortisation (Ebitda) and Ebitda margin stood at Rs 627 crore and ~11.4%, respectively, in fiscal 2024, against Rs 931 crore and ~13.4%, respectively, in fiscal 2023, because of negative operating leverage and overall lower capacity utilisation. Consequently, net leverage (net debt to Ebitda ratio) for fiscal 2024 is 4.4 times which remains higher than estimates by CRISIL Ratings.

 

However, the company has raised equity of ~Rs 1,000 crores in the month of April 2024, the proceeds of which were fully utilized towards deleveraging which has improved the overall debt coverage metrics though the improvement in profitability remains key for STL’s net leverage to remain below 3x. The operating performance for the company is expected to improve over next 3 to 6 months due to build up in the order book from fresh inflow of orders under Bharat Net Phase 3 program, post general elections. Similarly, BEAD program in USA which has a similar purpose of expanding high-speed internet connectivity in the country is expected to contribute to the recovery in demand. Turnaround in operating performance remains a key monitorable and would remain key to sustenance of ratings.

 

CRISIL Ratings understands that a portion of the rated facilities (including a portion of the enhanced facilities) may move under the resulting company, subject to requisite approvals. CRISIL Ratings continues to believe that the credit risk profile of STL is likely to benefit from the proposed demerger because of expectation of improvement in business as well as financial risk profiles. This is so because the businesses that would remain under STL are expected to have high operating margin and low working capital requirement. On the other hand, the credit profile of the resulting company could be relatively weaker. Thus, CRISIL Ratings will continue to closely monitor the transaction and take a final rating action once there is clarity on the resulting business and financial risk profiles of both entities and on the movement of the rated facilities.

 

The ratings continue to reflect the dominant market position of STL in the telecommunication (telecom) cables business, its strong order book providing healthy revenue visibility and comfortable 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:

• Leading position in the Indian telecom cables business and increasing market share in global markets: STL has strong reputation in the optical fibre (OF) and optical fibre cable (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 shop for most clients because of its wide system integration and software services offerings. Its global ex-China OFC market share was strong at 8% as of fiscal 2024. The market share is expected to improve over the medium term, aided by long-term contracts. STL aims to be among the top three OF makers globally with full utilisation at its global factories and ongoing expansion at the US manufacturing facility. High-quality products, extensive clientele and diversified presence across the broadband infrastructure value chain should help the company sustain strong foothold in the telecom cable 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 OFs 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 increase in penetration of broadband services, ongoing rollout of 5G services, massive investments for data centres, focus of the government on rural digitisation, approval of phase 3 of BharatNet project and implementation of Smart City projects, the medium-term demand outlook is healthy.

 

Orders of Rs 10,290 crore, as on March 31, 2024, and improving OF realisations assure substantial revenue visibility over the medium term. Of the total orders, ~54% are from the optical networking and digital and technology businesses. This indicates healthy business prospects for STL post the demerger of its global services business. Despite the healthy order book throughout the fiscal 2024, capacity utilization have remained lower, mainly due to weak demand in the North America market. Execution of the existing order book along with new orders leading to improvement in capacity utilization rates will remain a key monitorable.

 

• Financial risk profile remains comfortable despite moderation in profitability owing to recent equity raise and expectation of demerger in the near term: Large capital expenditure (capex), acquisitions and stretched working capital cycle in 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 leverage consequently has increased to 4.4 times as of March 2024 from 3.2 times as of fiscal 2023 further escalated by moderation in operating profits due to weak demand scenario. However, net debt stands reduced because of  equity-raisessss and internal accruals and is expected to reduce further to ~Rs 1,700 crore by the end of fiscal 2025 owing to internal accruals. The overall net debt to Ebitda ratio (leverage) which was around 4.4 times for fiscal 2024 is expected to reduce commensurately owing to reduction in debt from proceeds of fund raise and expected turnaround in operating performance of the company in fiscal 2025. CRISIL Ratings understands that leverage will reduce significantly once the global services business is carved out from STL and will remain monitorable.

 

Weaknesses:

• Exposure to intense competition in the overseas market: The company derives a large part of its revenue from overseas markets and faces intense competition in the international OF and OFC markets. In the domestic market as well, these segments are susceptible to the 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 and Finolex Cables Ltd.

 

Based on recommendations from the Directorate General of Trade Remedies (DGTR), the Ministry of Finance imposed definitive anti-dumping duty in August 2023 for a period of five years on specific OF imports from China, South Korea and Indonesia. Import data suggests that this move has mitigated the negative impact of low-priced and low-quality imports on domestic players and will continue to benefit them. Similarly, the UK and European Union (EU) have imposed anti-dumping duty on specific OF imports from China, which is benefitting the domestic players engaged in exports to the UK and EU.

 

• Large working capital requirement: Working capital requirement has risen over the past few fiscals and remains elevated because of the higher proportion of services business, leading to stretched receivables as counterparties are majorly Indian public sector undertakings (PSUs). The working capital cycle will improve significantly once the global services business is carved out from STL.

Liquidity: Strong

Liquidity is supported by expected net cash accrual of Rs 400-500 crore per annum over the medium term, cash balance of around Rs 467 crore as on April 30, 2024, and healthy cushion in bank lines. Against this, the company has term debt obligation of around Rs 177 crore in fiscal 2025. Annual capex of Rs 150-200 crore will 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. Optical fibres are vital for ensuring uninterrupted telecom services to society and the economy. STL is continuously focused on mitigating its environmental and social impact.

 

Key ESG highlights:

• The company is committed to achieve net zero emissions by 2030. Also, by 2030, STL aims to become water-positive across all its manufacturing locations globally. To achieve this target, STL implemented water-recycling models. All its manufacturing plants in Aurangabad are zero liquid discharge certified. Around 1.45 lakh cubic metres of water recycled in the manufacturing process and over 7,500 tonne of carbon dioxide emissions were avoided through energy efficiency measures.
• All plants are zero waste to landfill certified.
• The company has started using co-processing in partnership with cement companies as one of the disposal and management solutions, which helps convert waste to energy.
• Female employees constitute 16.7% of the workforce, which is higher than all its peers.
• Its governance structure is characterised by 57% of the board comprising independent directors, split in chairman and CEO positions, 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 overall debt and access to both domestic and foreign capital markets.

Rating Sensitivity factors

Upward factors

• Significant improvement in the business risk profile resulting in better Ebitda
• Strengthening of the financial risk profile, driven by increase in cash accrual or other deleveraging measures, with net debt to Ebitda ratio below 2.5 times

 

Downward factors

• Continued pressure on operating margin leading to subdued cash accrual
• Net debt to Ebitda ratio sustaining above 3.0 times owing to weak operating performance

About the Company

STL is a leading manufacturer of OFs and OFCs. The company set up a 50:50 joint venture with Conduspar Condutores Eletricos in July 2013 to manufacture OFCs in Brazil. In 2018, STL acquired Mettalurgica Bresciana, an OFC manufacturer based in Italy.

Key Financial Indicators (Consolidated)

Particulars	Unit	2024	2023
Revenue	Rs.Crore	5,478	6,950
Profit After Tax (PAT)	Rs.Crore	-51	127
PAT margin	%	-0.9	1.8
Debt/adjusted networth	Times	1.6	2.2
Interest coverage	Times	1.7	3.2

Note: These are CRISIL-adjusted numbers

Any other information: Not Applicable