| Sterlite Technologies Limited | ||||
| Rated amount enhanced | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Sterlite Technologies Limited (STL). |
| Analytical Approach |
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For arriving at its ratings, CRISIL has combined the business and financial risk profiles of STL and its subsidiaries and joint ventures (JVs). STL has significant control over the management of these entities, which are in the same business and are strategically important to STL. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Leadership position in the Indian telecom cables business: The company has a dominant market share in India's optical fibre (OF) and optic fibre cable (OFC) markets. It has also established its footprint abroad in these segments, thus diversifying the client base and reducing customer concentration risk. The company's market dominance stems from the technological superiority of the products, making STL the preferred supplier of OF to OFC manufacturers, and of OFC to telecommunication (telecom) operators. Also, its presence across various broadband infrastructure services has made it a one-stop solution for clients. For instance, the company can provide products, system integration services, and software services to a smart city project. Therefore, STL is likely to sustain its market leadership position in the OF and OFC segments over the medium term. * Healthy operating capability and potential benefits from growth prospects with sizeable order book: The company is among the lowest-cost producers of OF and OFC in the industry because of high backward integration. Manufacturing OF from the glass stage offers advantages in terms of cost and quality. Additionally, dual technological capabilities in fibre manufacturing offer flexibility in manufacturing and results in cost saving. Furthermore, all the segments have strong growth prospects, particularly the services division. With expected increase in the penetration of broadband services, government focus on rural digitisation, and implementation of smart city projects on a large scale, the medium-term demand outlook is healthy. Strong growth prospects have translated into healthy orders. Order book of Rs 8,535 crore as on December 31, 2019, provides substantial revenue visibility over the medium term. * Healthy financial risk profile: The networth was large at Rs 1,793 crore as on September 30, 2019, and the debt protection metrics were adequate. Around Rs 1,000 crore of the ongoing capital expenditure (capex) of Rs 2,100 crore, has already been incurred through a mix of debt and accrual. The remaining would be incurred over the next two fiscals, and is expected to be partly funded by debt. The capex pertains to expansion of OF and OFC manufacturing capacities. The financial risk profile should remain healthy, over the medium term, supported by adequate cash accrual, given the expected revenue growth and sustained profitability. Weaknesses: * Exposure to intense competition in the overseas OF and OFC segments: About 50% of revenue from the products segment is derived from exports, and the company faces competition from large global players in the international OF and OFC markets. In the domestic market, 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. In the domestic market, STL is the largest player and the clear market leader despite competition from companies such as Himachal Futuristic Communications Ltd, Vindhya Telelinks Ltd, Aksh Optifibre Ltd, and Finolex Cables Ltd. * Working capital-intensive operations: Large working capital is required because of sustained growth in the services segment. Gross current assets, receivables, and inventory were high at 263, 99, and 155 days, respectively, as on March 31, 2019 against 186, 101 and 75 days respectively, as on March 31, 2018. To balance the working capital cycle, the company has been able to negotiate favourable terms with its suppliers, leading to an increase in payable days as well. Working capital intensity is likely to remain high over the medium term, given significant revenue contribution from the services business and from government projects. |
| Liquidity Strong |
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Expected cash accrual of Rs 700-1,100 crore should amply cover debt repayment of Rs 300-500 crore, per fiscal, over the medium term. Capex requirement is likely to be funded through a healthy mix of debt and cash accrual. Liquidity is further supported by a cash balance of around Rs 300 crore as on September 30, 2019, and bank lines of over Rs 1,000 crore, which were utilised at an average of 61% during the nine months through December 2019. |
| Outlook: Stable |
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CRISIL believes the financial risk profile will remain healthy over the medium term, despite the planned capex, supported by healthy operating efficiency and strong growth prospects. |
| Rating Sensitivity factors |
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Upward factors * Significant and sustainable improvement in the business risk profile through steady growth in revenue or diversification of the product mix, and continued healthy operating margin of over 20% * Considerable improvement in the financial risk profile, most likely because of increase in net cash accrual or significant debt reduction Downward factors * Net debt to earnings before interest, tax, depreciation, and amortisation (EBITDA) ratio increasing to over 2 times on a sustained basis, on account of steep decline in operating performance * Weakening of the financial risk profile because of larger-than-expected, debt-funded capex or acquisitions |
| About the Company |
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STL is a leading manufacturer of OF and OFC. It also has a 75:25 JV, Jiangsu Sterlite Tongguang Fiber Co. Ltd (JSTFCL), with Jiangsu Tongguang Communication Co Ltd of China. JSTFCL, which has a manufacturing capacity of 7 mfkm of OF in China, commenced operations in April 2013. STL set up a 50:50 JV with Conduspar Condutores Eletricos in July 2013 for manufacturing OFC in Brazil. In fiscal 2015, STL acquired Elitecore Technologies Pvt Ltd, which is a global provider of software products. In fiscal 2018, STL acquired Mettalurgica Bresciana, an OFC manufacturer based in Italy. |
| Key Financial Indicators - (CRISIL-adjusted numbers) | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||
*Yet to be drawn-down | |||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of entities consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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