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
