Rating Rationale

Detailed Rationale

CRISIL Ratings has continued its ratings on the long-term bank facilities, non-convertible debentures and commercial paper programme of Sterlite Technologies Limited (STL) on ‘Rating Watch with Developing Implications’.

The continuation of rating watch factors in the proposed demerger of the company’s global services business into STL Networks Ltd (resulting company). A portion of the rated facilities may move to the demerged entity, subject to requisite approvals. CRISIL Ratings believes that credit risk profile of STL is likely to benefit from the proposed demerger because the services business has lower operating margin and higher working capital requirements relative to the products business staying under STL. On the other hand, the credit profile of the resulting company could be relatively weaker vis-à-vis STL. Thus, CRISIL Ratings will continue to closely monitor the transaction and resolve the rating watch 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 factors in sequential recovery in operating performance after witnessing subdued profitability in the recent quarters. For the second quarter of fiscal 2025, STL reported improvement with revenues of Rs 1,413 crore and operating EBITDA of Rs 145 crore (EBITDA margin of 10.3%) compared to Rs 1,218 crore and Rs 88 crore respectively in the previous quarter. This improvement was driven recovery in volumes resulting in higher capacity utilisation and benefit of operating leverage. CRISIL Ratings estimates a significant uptick in operating performance from the fourth quarter of fiscal 2025 which will be a key monitorable. STL has participated in the bids of large orders like BharatNet phase 3 and recently won a project valued at ~Rs 2600 crore, a part of which will flow into the products business segment and remaining in the services business. While the US BEAD programme has been delayed slightly, a good uptick is expected from the programme starting next fiscal.

The company had raised equity of ~Rs 1,000 crore in April 2024 with the proceeds utilised towards deleveraging resulting in the improvement in the financial risk profile. However, net leverage is likely to remain elevated at 3-3.5 times while interest cover is likely to remain modest for fiscal 2025 due to subdued profitability. Further improvement in operating performance leading to strengthening of financial risk profile going forward will be monitorable.

CRISIL Ratings takes into cognisance the provisional anti-dumping duty of 11.4% levied on STL’s India entities and another domestic competitor by the European Union in June 2024. The company is making representations to the authorities. While Europe is a key market comprising a third of revenues in fiscal 2024, direct exports from India are minimal. Moreover, company has sufficient capacity to cater to the region with its plant in Italy albeit at a relatively higher cost of production.

Additionally, CRISIL Rating notes the $ 96.5 million jury verdict to Prysmian in a lawsuit against STL’s US subsidiary. The allegations include violation of non-compete agreements and unfair use of trade secrets to further the North America business. The matter is sub judice with STL pursuing legal remedies including filing for a petition challenging the verdict which will take time to settle. Currently, there is no impact on the US operations or legal liability. Any adverse impact on the business and/or financial risk profile including any liabilities arising due to this matter will remain key monitorable.

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. These strengths are partially offset by large working capital requirement and exposure to intense competition.