| Coforge Limited | ||||||
| 'CRISIL AA/Stable' assigned to Non Convertible Debentures | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the proposed non-convertible debentures (NCDs) of up to Rs 415 crore of Coforge Ltd (Coforge; erstwhile NIIT Technologies Ltd). Also, CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of the company.
On April 12, 2021, Coforge entered into an agreement to acquire 60% stake in SLK Global Solutions Pvt Ltd (SLK) for Rs 918 crore. SLK is a business process transformation company, offering business process management (BPM) and digital solutions for the financial services sector. Coforge paid the first tranche of Rs 536 crore from liquid funds on April 12, 2021, and will pay the second tranche of Rs 382 crore by mid-May 2021, partly funded by the proposed NCDs. The company will acquire additional 20% stake over two years, for which the acquisition price will depend on the financial performance of SLK.
Coforge is expected to benefit by cross-selling its services to SLK’s customers, strengthening the former’s presence in the financial services vertical (accounted for 17% of revenue in the first nine months of fiscal 2021) and the US market (48%). The acquisition will also provide impetus to pitch for larger deals with the business process outsourcing (BPO)/BPM operations component. The company’s healthy balance sheet and estimated cash balance of Rs 300 crore (post payment of the first tranche of Rs 536 crore as on April 12, 2021) can accommodate debt-raising without materially impacting the debt protection metrics.
Revenue grew by 11% between April and December 2020 over the corresponding period of the previous fiscal, supported by client additions, increasing shift towards digital contracts (contributed more than 37% of revenue) and modest rupee depreciation. Longstanding relationships with existing clients and criticality of software services in the banking, financial services and insurance (BFSI) vertical helped offset the impact of slowdown in revenue from the travel vertical. Despite intense negotiations from clients who wanted to optimize costs at the onset of the Covid-19 pandemic, proactive measures by the company to cut employee, selling and travel costs, resulted in sustenance of operating profitability at 16-17% in the first nine months of fiscal 2021. Robust orders of around Rs 4,000 crore are expected to aid revenue growth of 10-12% over the medium term though operating profitability may be marginally impacted as the employee base is sizeable and increments are restored.
Balance sheet was healthy, driven by low debt and robust debt protection metrics. Cash surplus moderated to some extent because of share buy-back of Rs 337 crore in fiscal 2021, but is estimated to be healthy at around Rs 840 crore as on March 31, 2021.
The ratings reflect the company’s diversified revenue mix across geographies and verticals and healthy financial risk profile. These strengths are partially offset by modest scale of operations and exposure to intense competition in the information technology (IT) industry. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Coforge and its subsidiaries, in which it holds direct or indirect majority stake, because the entities have common management and strong business and financial linkages. Additionally, CRISIL Ratings has amortised goodwill on acquisitions for 10 years.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The financial risk profile was also supported by liquidity of Rs 536 crore as on December 31, 2020. Moderate capital expenditure (capex) and healthy cash accrual should keep the financial risk profile healthy over the medium term, though the debt protection metrics may weaken temporarily during sizeable debt-funded acquisitions.
Weaknesses
|
Liquidity: Strong Liquid surplus is estimated at around Rs 840 crore as on March 31, 2021, against negligible debt. However, Rs 536 crore was used for the acquisition, leading to moderation in liquidity. Cash accrual is expected at around Rs 600 crore per annum over the medium term. Fund-based limit of Rs 495 crore (including limit of USD 15 million in the US) remained largely unutilised in the 12 months through January 2021. Annual capex of around Rs 250 crore will be funded through internal accrual. |
Outlook Stable CRISIL Ratings believes Coforge will continue to benefit from longstanding relationships with clients in diverse verticals and growth in the digital services segment. While being open to acquisitions, the company is also expected to maintain healthy financial risk profile over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company Coforge is an IT company providing end-to-end software solutions and services. It was formerly known as NIIT Technologies Ltd, and was incorporated in April 2003 when NIIT Ltd (NIIT) spun off its software solutions business (excluding knowledge solutions) into a separate legal entity. In May 2019, NIIT and the founder's family members sold total stake of 30.2% in Coforge to Hulst BV (Hulst; affiliate of Baring Private Equity Asia). In August 2019, Hulst acquired 39.85% stake through an open offer, increasing its total stake in Coforge to 70.05%.
Coforge is a capability maturity model level 5 player in the software services industry. It is among the top 20 Indian software exporters. Prominent global customers include British Airways, the ING group, SEI Investments Company, Sabre Corporation and SITA. Over the years, Coforge has set up subsidiaries in the US, Singapore, Australia, the UK, Germany and Thailand, mainly to market and mobilise projects for the software division. The company has business partnerships with large IT companies across the world.
On a consolidated basis, net profit was Rs 329 crore in the nine months ended December 31, 2020 (Rs 343 crore in the corresponding period of the previous fiscal), on revenue of Rs 3,401 crore (Rs 3,075 crore). |
Key Financial Indicators
# adjusted |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
& Interchangeable with bank guarantee ^Yet to be issued |
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||
Criteria Details
|