Rating Rationale

Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities and debt instruments of Sterlite Technologies Limited (STL) on ‘Rating Watch with Developing Implications’.

The rating action follows the announcement made by the company on May 17, 2023, regarding receipt of board approval to restructure the business of the company whereby company’s global service business (GSB) will be demerged into STL Networks Limited (“Resulting Company”), on a going concern basis, subject to receipt of required approvals. Pursuant to the scheme, the resulting company’s shareholding will mirror STL, and its shares will be publicly listed. The demerger is intended to simplify business structure, unlock more growth opportunities and to allocate efficient capital structure.

CRISIL Ratings therefore believes that 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 is expected to have high operating margins and low working capital requirements. On the other hand, the credit profile of the resulting company is expected to be relatively weaker vis-à-vis STL. Same would however continue to be monitored. CRISIL Ratings understands that a portion of the rated facilities may move under the resulting company, subject to requisite approvals. Thus, CRISIL Ratings will continue to closely monitor the said transaction and will remove the ratings from watch and take a final rating action once there is clarity on movement of these rated facilities and/ or when transaction is concluded. That said, STL will continue to meet the debt servicing obligations on all the rated instruments meanwhile.

STL’s consolidated operating revenue and EBITDA from continued operations increased sharply by ~27% and ~29% on-year respectively, in fiscal 2023. The improvement was largely aided by strong uptick in optical fibre cable (OFC) volume and OFC realizations in second half of fiscal 2023. Improvement in EBITDA was driven by product mix shift towards higher margin products and reduction in logistics costs. The overall EBITDA margin remained flattish because of the low profitability of GSB, however, the operating profitability of optical networking business improved sharply by ~460 bps to ~19.2% in fiscal 2023. Strong order book of ~Rs 11,052 crore as on March 31, 2023, indicates healthy revenue visibility in the coming quarters.

The credit profile of STL should also benefit from expected improvement in EBITDA 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. However, it has reduced to ~Rs 3,121 crore as on March 31, 2023. The consideration received from selling stakes in some of the unprofitable businesses also helped in reduction of net debt. Furthermore, STL’s board has approved fund raise through equity, which also pave way for further deleveraging although the timing and the quantum is currently uncertain. CRISIL Ratings expects company’s net debt to annualized EBITDA to come around/ below 2.5 times in near term. 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 improving financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition.