Key Rating Drivers & Detailed Description

Strengths:

• Diversified revenue mix across geographies and industry verticals: Revenue is diverse with focus on application development and maintenance services in BFSI (50% of turnover in the nine months of fiscal 2021), travel, transport and logistics (20%), manufacturing, media and others (30%). In June 2020, the company acquired an additional 25% stake in Whishworks IT Consulting (which undertakes digital integration business) increasing its total stake to 81% and total investment to around Rs 220 crore. This has helped to enhance digital capabilities. Acquisitions strengthen market position in existing verticals or support entry into new ones, apart from expanding the client base and reducing client concentration. Furthermore, the company has a geographically diverse revenue profile, which insulates it from a downturn in any single region. During the first nine months of fiscal 2021, around 49% of revenue was derived from the Americas (against the industry average of over 60%), while 36% revenue came from Europe, the Middle East, and Asia, and the remaining from other geographies.

• Healthy financial risk profile: Debt was low and the networth sizeable at Rs 2,350 crore (March 31, 2020). While the company has been acquisitive, the size of such entities has been modest, and have not necessitated material raising of debt. This, and the strong cash generating ability, have ensured debt metrics remain at robust. For instance, the net cash accrual to total debt ratio was a high 14 times in fiscal 2020.

The financial risk profile is also supported by healthy 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 debt metrics may moderate temporarily in the event of sizeable debt-funded acquisitions.

Weaknesses:

• Average though improving scale of operations: The company is a modest tier-II player in the Indian software industry with revenue of Rs 4,184 crore in fiscal 2020. It has a lower advantage vis-à-vis larger players as scale of operations is one of the factors that determines the ability to bid for large orders successfully. Furthermore, the large scale limits the impact on revenue or profitability of shocks to particular clients, verticals, or geographies. Big IT players are better placed to offset such risks vis-a-vis mid-tier players.

• Exposure to intense competition: The business environment remains challenging. Indian IT players will need to scale up operations, primarily due to intense competition among themselves and from multinational corporations that are continuously expanding their offshore operations in India. Other key success factors include acquiring and retaining customers, maintaining an efficient cost structure, and ensuring effective labour retention and utilisation. Protectionist measures adopted by governments across the world remain yet another business challenge for Indian IT companies. However, players are likely to effectively counter challenges backed by the Indian IT industry's inherent strengths.

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