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Rating Action:

Moody's assigns B1 corporate family rating to Sterlite Technologies Limited

Global Credit Research - 20 Sep 2017

Hong Kong, September 20, 2017 -- Moody's Investors Service, (Moody's) has assigned a B1 corporate family rating (CFR) to Sterlite Technologies Limited (Sterlite).

This is the first time that Moody's has assigned a rating to Sterlite.

The outlook is stable.

RATINGS RATIONALE

"The B1 rating reflects Sterlite's position as a leading manufacturer of optic fiber and optic fiber cable in India and its growing presence internationally, primarily China", says Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer.

Rapid growth in demand for data services is driving investment in telecom infrastructure globally, which benefits optical fiber manufactures such as Sterlite.

In particular, growing demand for optic fiber in India reflects (1) the rapid growth in data consumption; (2) the proliferation of low-cost smartphones; (3) network roll-outs and upgrades by telecommunications operators; and (4) a push by the Indian government to digitize the country.

"As the largest manufacture of optic fiber in India - in terms of installed capacity - Sterlite is well positioned to capture increased demand for optic fiber. Moreover, the company manufactures optic fiber out of the basic raw material -- silica - which it sells to other manufactures, but also utilizes for its own production of optic fiber cable. This situation provides a significant cost advantage, which supports a healthy operating margin", adds DiChiara, also Moody's lead analyst for Sterlite.

The company recorded around INR26.0 billion in revenue and INR5.7 billion in adjusted EBITDA at year-end 31 March 2017, giving rise to a 21.9% EBITDA margin. Between 60%-65% of consolidated revenues are generated domestically and 35%-40% internationally, from primarily China, Europe, the Middle East, and US.

However, the company's small scale provides limited ability to absorb revenue shortfalls, lower capacity utilization or increased levels of working-capital intensity.

In particular, the production of optic fiber and optic fiber cable is capital intensive. Therefore, high levels of capacity utilization across the company's manufacturing facilities is critical for maintaining profitability and stable cash flows.

"As a result, any decline or postponement in capital expenditure by India's telecommunications operators or a delay in product orders from the government - for example, because of a slower roll-out of broadband infrastructure projects - could lead to volatility in the company's cash-flow generation capabilities," adds DiChiara.

Sterlite plans to grow its service business on the back of the Indian government's push towards digitization, connectivity and significant expansion of the country's broadband infrastructure. According to management, the company is already developing several network projects, such as a secure network for the armed forces under Network for Spectrum, enabling rural broadband through BharatNet, developing Smart Cities, and establishing high-speed fiber-to-the-home (FTTH).

However, we believe these network roll-out projects are exposed to execution risks - including project delays, project cancellations, or longer receivable cycles - which could also lead to some volatility in the company's cash-flow generation capabilities.

Still, leverage -- expressed as adjusted debt/EBITDA -- has remained at or below 2.4x over the last two years, primarily reflecting the growth in EBITDA and a stable adjusted EBITDA margin of around 22% over the same period. This low leverage is appropriate for the B1 rating level, particularly when considering the company's small revenue size and increasing exposure to working capital volatility.

Over the next 12-18 months, we expect the company's adjusted EBITDA margin to remain above 20% and adjusted leverage to remain between 2.0x and 2.2x. This includes around INR6.8-7.4 billion in debt-funded capex through March 2019, the majority of which will be used to expand capacity to 50mfkm.

As to liquidity, we expect cash and cash from operations to be insufficient to fund Sterlite's debt maturities (including working capital borrowings), capex, and dividends over the next 12 months. That said, the company has access to working capital facilities, and we expect a significant portion of short-term debt will be rolled over.

In addition, management has stated that it will look to fund expansionary capex with additional long-term debt facilities. Failure to line up funding would adversely impact liquidity or hold up the expansion of capacity.

The stable outlook reflects the solid demand for Sterlite's core products. It also reflects the company's low leverage of around 2.0x-2.2x and stable adjusted EBITDA margins of around 21%.

The rating may experience upward pressure after a longer track record of winning government contracts; timely project completions; and timely receipt of payments from the government and telecommunications operators, resulting in an expansion in revenues, cash flow generation and financial flexibility. EBITDA increasing towards $125 million would be another positive for the rating

In addition, we would look for the company to execute longer-term debt facilities to fund the company's capacity expansion as well as the terming out its debt maturity profile to support upward ratings pressure.

Downward rating pressure would occur if market conditions deteriorate, such that demand for optic fiber falls below our expectations, or the company's capacity utilization declines materially.

Credit metrics that will indicate a possible downgrade include debt/EBITDA rising above 3.0x; EBITDA falling below $75 million; or cash on balance sheet falling below $15 million or 5% of sales.

The principal methodology used in this rating was Communications Infrastructure Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Sterlite is a telecom products, services and software company. The company manufactures optical communication products (ie preform, optic fiber, optic fiber cable and copper cables). The services business includes network and system integration for end-to-end project management for building and managing broadband networks. The software business sells operating and business support systems (OSS/BSS), primarily to telecommunications operators.

At 31 March 2017, Volcan Investments, through its 100%-owned subsidiary Twin Star Overseas Ltd, owned 52.6% of Sterlite, while Vedanta Resources plc (B1 Stable) owned a 1.2% direct shareholding. The public float was 45.5%. The company is listed on the Bombay Stock Exchange.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if appli

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Annalisa Di Chiara
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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