India Ratings & Research (Ind-Ra) has revised Shyam Telecom (STL) outlook to negative from stable while affirming the long-term issuer rating at 'BBB-'. The agency has also affirmed the company's Rs 650 million non-fund based working capital limits (reduced from Rs 960 million) at long-term 'BBB-' and short-term 'A3'.
The negative outlook reflects Ind-Ra's expectation that STL's overall revenue will remain stressed in FY15 and will need to be monitored. Even though the revenue is supported by the rise in demand for data cards (dongles), it declined 18% yoy to Rs 3,485 million in FY14. Due to trading nature of the business and the overall market condition in the CDMA landscape, the EBIDTA margins are low and stood at 0.20% in FY14. However, profitability is likely to improve with increasing overall volumes.
The affirmation reflects STL’s identification of data as a growth driver. The company has been giving high impetus to the dongles business and realised 49% of the total trading sales from them in 1HFY15 (FY14: 38%). Ind-Ra expects the contribution of dongles to further increase to over 52% in FY15.
Despite further weakening of its business profile in FY14, STL's credit profile continues to improve owing to better payment terms and sustaining operations on internal accruals. This is primarily attributable to the unique support from Insitel Services Private Limited, the Indian associate of STL’s associate company Sistema Shyam Teleservices (SSTL). STL does not avail any fund-based working capital limits and has used minimally its non-fund-based limits in the last one year. STL does not face any forex risk as its supply arrangement with Insitel Services allows it to make payments in India rupee.
STL has minimal working capital requirements, primarily due to established credit terms with its suppliers. The company now procures all its trading equipment through Insitel Services, which in turn mainly procures supplies from ZTE Corporation, and sells to STL on high-seas basis. Thus, STL does not need letters of credit to procure trading equipment. The company’s net cash conversion cycle was negative 20 days in FY14.
STL continues to generate over 95% of its revenue by selling CDMA handsets/dongles to SSTL's dealers. Even though STL has its own established distribution and service networks, its sales are completely dependent on performance of SSTL. If SSTL's performance deteriorates, it could affect STL's cash flow.
Shares of the company declined Rs 1.05, or 3.33%, to settle at Rs 30.45. The total volume of shares traded was 827 at the BSE (Thursday).
