Ratings agency Fitch Ratings today lowered the credit rating outlook of Shyam Telecom Ltd (STL) to negative from stable on the back of cancellation of 21 telecom licences of its joint venture firm, Sistema Shyam TeleServices Ltd (SSTL).
The move could make borrowing more expensive for the company.
However, it affirmed STL’s long-term rating at ’Fitch BBB—(ind)’, Fitch said in a statement.
The outlook revision reflects Fitch’s expectation of an “adverse and indirect impact” on STL’s business of the recent cancellation of telecom licences of SSTL in 21 telecom circles (all except Rajasthan circle), it added.
“STL’s financial performance is tied to SSTL’s operational performance; hence, any operational setback to the SSTL could lead to a negative impact on its financial performance,” Fitch said.
Fitch said the outlook will be revised back to stable on continuation of SSTL’s operations at a reasonable scale or successful implementation of an alternate business strategy by STL to reduce risk emanating from its complete dependence on SSTL.
As per the agency, for the year ended March 2012, STL generated 89 per cent of its revenue and 84 per cent operating profits by selling CDMA mobile devices to SSTL’s subscribers through a dealer network.
“In case, SSTL fails to win back most of these cancelled licenses, STL’s revenue and profit will fall down significantly. However, some comfort is drawn from STL’s established dealer network, which can be leveraged to quickly launch new products in the market,” Fitch said.
Fitch said the ratings factored in STL’s comfortable liquidity position, as reflected by the moderate utilisation of its working capital facilities and continued support from founders through interest bearing unsecured loans.
“The ratings are, however, constrained by STL’s low margins, its presence in a highly competitive Indian mobile handset market, and the overcrowded nature of the local handset trading business. The latter can lead to margin erosion or lower-than-expected sales,” it added.