Fitch rates Videocon Industries’ outstanding bank lines

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Fitch rates Videocon Industries’ outstanding bank lines

This article was posted on May 23, 2008 and is filed under Press Releases

Fitch Ratings has today assigned ratings of ‘A-(ind)’ (A minus (ind)) to India-based Videocon Industries Ltd’s (VIL) long-term bank lines totaling INR41,623.5 million. The agency has also assigned ratings of ‘A-(ind)’ (A minus (ind))/’F1(ind)’ to its fund-based limits of INR875m, non-fund based limits of INR2,375m and to its fungible working capital limits (fund-based and non-fund based) of INR9,675m. Simultaneously, the agency has assigned VIL an Issuer Rating of ‘A-(ind)’ (A minus(ind)), with a Negative Outlook and affirmed the ‘F1(ind)’ rating of its INR6,000m short-term debt programme.

The ratings factor in the company’s substantial operating scale, the added stability of its operating cash flows from its oil and gas business and its geographically diversified presence. The ratings also take into account VIL’s leadership position in the Indian consumer durables industry, its backward integration into the high margin glass shells business which has helped support the declining margin scenario faced in the domestic market. The ratings also acknowledge the company’s proven ability to successfully integrate and turn around large acquisitions; its international operations and the Electrolux India business have started to generate positive EBITDA.

While VIL’s oil and gas business (through its 25% interest in the Ravva fields in Andhra Pradesh) provides it with stable cash flows, the earlier anticipated extension of the plateau period from FY09-FY13 has not taken place. Current data indicates that production is likely to decline over FY08-FY10 with the plateau period coming to an end, although with prevailing crude prices, cash generation from the business will remain strong over the short-to-medium-term.

VIL aims to become a global player in oil and gas exploration with a view to replicate its success with Ravva, although its role is that of a financial investor. In addition to its ongoing exploration in four blocks in Oman, Australia and East Timor, VIL has acquired a 16.5% interest in 10 blocks in Brazil from Encana Canada. The transaction is likely to be finalised over the next few months, at a cost of around USD210m (including exploration). Most of these activities are still in the early stages, with concrete results available only by Q1FY09. Fitch will closely monitor the progress of these initiatives. VIL’s investment in initial exploration is estimated at USD225m over FY08-FY12.

VIL’s ratings remain constrained by the competitive pressures faced in the domestic consumer durables market and the rapid obsolescence in the sector. While VIL’s margins continue to benefit from its glass shells business, these margins will also come under pressure as global sales of curved screen televisions continue to decline. The ratings are also constrained by the company’s high leverage, partly due to the support provided to other group companies by way of guarantees. With its acquisition-led growth strategy, any major debt-led acquisition remains a risk for the rating.

The Negative Outlook reflects the company’s large investments planned in new areas including a new LCD production facility, a 1,200MW coal fired power plant, its pan-India telecom license and the investments for its rollout. The total investment is estimated at INR180bn-INR200bn. VIL is still finalising these plans, and is in discussions with third parties to reduce its equity holding. Fitch will closely monitor the progress of these projects and their holding structures. A consolidated net debt/EBITDAR greater than 5.0x will act as a negative trigger.

In FY07, VIL reported revenues of INR121.7 billion, with EBITDA margins of around 12.8%, and net income of INR7.1bn. Leverage levels have remained high due to the company’s ongoing capex plans, with a net debt/EBITDA of 4.7x for FY07. Fitch expects the company’s leverage to remain high going forward in light of its large investments and the expectation of a moderation in margins.

Sourced From: Sampark Public Relations Pvt Ltd

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