Rating Rationale

Detailed Rationale

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

The continuation of rating watch factors in the proposed demerger of the company’s global service business (GSB) into STL Networks Limited (resulting entity) for which company had received board approval on May 17, 2023. The demerger is intended to simplify business structure, unlock more growth opportunities and to allocate efficient capital structure. The company is in process of getting requisite approvals for the proposed transaction.

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 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 are expected to have high operating margins and low working capital requirements. 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 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 (including the enhanced facilities) meanwhile.

STL’s consolidated operating revenue was lower by 19% q-o-q at Rs 1,522 crore in Q1 FY24 as there was a impact on the North American business of the company. The same was mostly because of slow rollouts resulting in high inventory build-up in the region. The operating margins, however, continued to expand in Q1 FY24 by 40 bps to 14.1% on the back of lower raw material costs and optimization in the raw material consumption.

The company continues to have a strong order book of Rs 10,938 crore as on June 30, 2023. STL should also benefit from the anti-dumping duty on optical fiber imported from China, Korea and Indonesia imposed by the government of India recently for a period of five years.

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 3,119 crore as on June 30, 2023. The consideration received from selling stakes in some of the unprofitable businesses recently also helped in reduction of net debt. Furthermore, STL’s board had 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 comfortable financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition.