AGC Networks Limited - 'CRISIL BBB- / Stable / CRISIL A3' assigned to Bank Debt

CRISIL has assigned its 'CRISIL BBB-/Stable' rating on the long-term bank facilities of AGC Networks Limited (AGC).

The rating reflects AGC's established market position in the IT infrastructure solutions business especially post acquisition of Black Box Corporation, USA (BBX) in January 2019 as well as healthy and diversified revenue profile marked by diverse end user industries and established client base. The rating also factors in the large scale of operations and improved operating profitability of the company in fiscal 2020. These strengths are partially offset by leveraged albeit improving capital structure post acquisition of Black Box, high geographical concentration in revenue and exposure to global competition.

In fiscal 2020, AGC, at a consolidated level, posted revenues of Rs 4979 crore as against Rs 1849 crore in the previous fiscal led by full year contribution from BBX (100% subsidiary of AGC) acquired in January 2019. In fiscal 2020, majority (~76%) revenue was earned in USA while India contributed 7% and rest of the world 17%. The operating profitability also improved substantially to 7.1% in fiscal 2020 from 2.3% in previous fiscal post sustainable cost optimization initiatives undertaken by the company. Covid-19 had a marginal impact in first half with revenues down by 11% on year, the company is expected to post flattish revenues with recovery in the remainder of fiscal. Over medium term, the company is expected to post constant currency organic growth of ~5% while operating profitability is expected to gradually improve to 8-9%.

The acquisition of BBX was a leveraged buyout funded through 79% high yield debt and 21% through unsecured debt from promoters. This resulted in a high external debt of Rs 625 crore as on 31 st March 2019. In fiscal 2020, the company did an off balance sheet non-recourse securitization of BBX's accounts receivables and coupled with the improved internal accruals, the company was able to cut down the external debt to Rs 274 crore in March 2020, the external debt has further reduced to Rs 263 crore as on September 2020. Over medium term, no major acquisition or capex is expected and the external debt levels are expected to reduce further gradually.

In November 2020, the board of directors of the company approved preferential allotment of shares to the promoters (Essar Group entities which hold 69% in the company presently) aggregating to Rs 225 crore, the amount will mainly be utilized to repay the unsecured loans of around Rs 200 crore earlier provided by promoters to finance BBX acquisition. The transaction is expected to be completed in the near term and will boost the net worth levels of the company too. The gearing levels are expected to fall to around 0.5 times by fiscal 2022.

Liquidity levels at consolidated levels remain healthy with cash & equivalents of Rs 432 crore as on September 2020 (with majority of the same kept in BBX, USA in proportion to business). The average utilization of fund based limits in India was high at ~95% for 12 months ended September 30, 2020, however the same is gradually reducing and stood at ~82% in November 2020. Most of the internal accruals in all subsidiaries including BBX can support cash requirements across all geographies including India. Annual cash accrual of over Rs 250-400 crore, expected over the medium term, will support the further debt repayments as well as the capex / acquisition plans of the company. Sustenance of improved financial profile, cash accrual and surplus liquidity will remain a key monitorable over medium term.

Shares of AGC Networks Limited was last trading in BSE at Rs.755 as compared to the previous close of Rs. 770. The total number of shares traded during the day was 1165 in over 60 trades.

The stock hit an intraday high of Rs. 783.9 and intraday low of 731.5. The net turnover during the day was Rs. 866195.

Source : Equity Bulls

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