India Ratings and Research (Ind-Ra) has affirmed Subex's long-term bank facilities at 'IND BBB'. The outlook is stable. The agency has upgraded Subex's bank facilities in June 2015.
The upgrade reflects the reduction in the conversion price of the company's foreign currency convertible bonds (FCCB), which increases the likelihood of their conversion into equity shares in the short term. The Reserve Bank of India approved the reset of the conversion price of the bonds in April 2015, following which the reduction in the conversion price to INR13 per share from Rs 22.79 was approved by both the company's board and shareholders, it said.
The continued existence of the FCCBs, however, continues to be a rating constraint, as they lead to a high net adjusted leverage (FY15: 9.18x; FY14: 12.22x) and also due to the likelihood that Subex would not be in a position to repay FCCBs when they fall due in 2017. The ratings could be upgraded further once the FCCBs are converted.
The upgrade also reflects Subex's improving credit profile resulting from steady revenue growth, improving margins and a reduction in debt. Net adjusted leverage (excluding FCCBs) improved to 1.78x in FY15 (FY14: 2.88x; FY13: 4.31x), as Subex reduced working capital debt to Rs 1.25 billion at FYE15 from Rs 1.48 billion in FY14 and Rs 1.75 billion in FY13.The company aims to reduce working capital debt by further Rs 150 million-Rs 200 million every year. The company’s revenue increased steadily to Rs 3.60 billion in FY15 from Rs 3.40 billion in FY14 and Rs 3.07 billion in FY13, with repeat revenue from many of its customers. In addition, EBITDA margins steadily increased to 23.6% in FY15 from 19.9% in FY14 and 14.8% in FY13, due to the rationalisation of employee costs.
The ratings continue to reflect the demonstrated support from Subex's FCCB holders. FCCB holders deferred two semi-annual interest payments during FY15 (July 2014 and January 2015), providing the company adequate liquidity and financial flexibility to service its bank loans. This was because a majority of the FCCB holders also own equity in the company, which makes the investor group’s behaviour different from that of a pure debt holder, the agency said.
