Rating Rationale
August 25, 2020 | Mumbai
Coforge Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.405 Crore (Enhanced from Rs.300 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities of Coforge Limited (Coforge; erstwhile NIIT Technologies Ltd).
 
Following the lockdown announcement in March 2020 to contain the spread of Covid-19, the company has successfully implemented work-from-home facility for all its employees with minimal impact on operations.
 
Revenue and profitability will moderate slightly in fiscal 2021 due to the impact of the pandemic. Clients are expected to defer their discretionary spends, which will restrict new contracts and customers; thereby impacting growth for players in the information technology (IT) industry. In addition, Coforge derives around 13% of revenue from airlines, which is expected to decline significantly due to global travel restrictions. However, with a healthy order book of around Rs 3,510 crore, longstanding relationships with existing clients and criticality of software services rendered to clients in verticals such as banking, financial services and insurance (BFSI), the extent of decline in revenue in fiscal 2021 is expected to be limited. Pricing pressure from clients could moderate operating margin despite rationalisation of employee and selling costs.
 
Growth over the medium term is expected to restore with recovery in business verticals and Coforge's strong relationships with customers.
 
Liquidity is strong with funds of Rs 546 crore (equivalent to around 3 months of employee costs) and Rs 170 crore (including limits of USD 8 million & GBP 3 million in US and UK respectively) of unutilised bank limit as on June 30, 2020.
 
The ratings continue to reflect Coforge's healthy business risk profile with diversified revenue mix across geographies and verticals, and robust financial risk profile because of strong capital structure and debt protection metrics. These strengths are partially offset by a modest scale of operations and exposure to intense competition in the IT industry.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Coforge and all its subsidiaries in which the company holds a direct or indirect majority stake. This is because Coforge.

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
* Diversified revenue mix across geographies and industry verticals: Revenue profile is diverse with focus on application development and maintenance services in BFSI (46% of turnover in fiscal 2020), travel, transport and logistics (28%), manufacturing, media and others (26%). In May 2019, the company divested its entire stake of around 89% held in its subsidiary, ESRI India Technologies Ltd (EITL), to the other existing shareholder, Environmental System Research Institute (ESRI), at a price of Rs 89 crore. EITL provides global information systems and application integration services. Furthermore, in June 2019, Coforge acquired a 58% stake in Whishworks IT Consulting, which is into digital integration business, for Rs 149 crore. This has helped to enhance digital capabilities of Coforge. Acquisitions strengthen market position in existing verticals or support entry into new ones, apart from expanding the client base and reducing client concentration. Furthermore, Coforge has a geographically diverse revenue profile, which insulates it from downturn in any single region. For fiscal 2020, Coforge derived only 48% of its revenue from Americas (against the industry average of over 60%), while 37% revenue came from Europe, the Middle East, and Asia, and the remaining from other geographies.

* Robust financial risk profile: Gearing remained negligible with low debt level and robust networth of Rs 2,351 crore as on March 31, 2020 against Rs 2,051 crore in the previous fiscal. Debt protection metrics were comfortable, with net cash accrual to total debt ratio of 14.0 times in fiscal 2020. Financial risk profile is also supported by a comfortable liquidity of Rs 830 crore as on May 30, 2020. Moderate capital expenditure (capex) and steady accrual should keep financial risk profile robust over the medium term.

Weaknesses
* Average scale of operations: Coforge is a modest tier-II player in the Indian software industry with an operating income of Rs 4,184 crore in fiscal 2020. The company has a disadvantage vis-a-vis larger players as scale of operations largely determines ability to bid for large orders successfully. Furthermore, large scale limits the impact on revenue or profitability of shocks to particular clients, verticals, or geographies. Big IT players are relatively 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 the US 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.
Liquidity Strong

Coforge had a liquid surplus of Rs 546 crore as on June 30, 2020, against negligible debt. The fund-based limits of around Rs 170 crore were largely unutilised in the 12 months through June 2020. Annual cash accrual of over Rs 440 crore, expected in the near term, will support yearly capex of around Rs 240 crore.

Outlook: Stable

CRISIL believes Coforge will maintain a healthy financial risk profile over the medium term, supported by negligible debt, high liquid surplus, and conservative financial policies despite some near-term headwinds, including due to Covid-19. Business risk profile will continue to be supported by long-term relationships with clients in diverse verticals and growth in the company's digital services.

Rating Sensitivity Factors
Upward Factors
* Substantial and sustained growth in revenue and EBITDA margin of over 20%
* Further strengthening of financial risk profile, especially liquidity

Downward Factors
* Slowdown in key verticals leading to significant pressure on revenue and decline in EBITDA margin below 14%
* Any large, debt-funded acquisition impacting financial risk profile, especially liquidity.

About the Company

Coforge is an IT services 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 its founder's family members sold their stakes totaling 30.2% in Coforge to Hulst B.V (Hulst; affiliate of Baring Private Equity Asia). In August 2019, Hulst also made an open offer and acquired 39.85% stake from the public, increasing its total stake in Coforge to 70.05%.
 
Coforge is an established software engineering solution capability maturity model level 5 player in the software services industry. It is among the top-20 Indian software exporters. Its prominent global customers include British Airways, the ING group, SEI Investments, Sabre, and SITA. Over the years, Coforge has set up subsidiaries in the US, Singapore, Japan, the UK, and the Netherlands, 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 82.9 crore in the quarter ended June 30, 2020 (net profit of Rs 89.8 crore in the corresponding period of the previous year) on revenue of Rs 1,057 crore (Rs 962.7 crore).

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 4193 3686
Profit After Tax (PAT)# Rs crore 468 422
PAT Margin % 11.2 11.5
Adjusted debt/adjusted networth Times 0.01 0.01
Interest coverage Times 48.00 71.22
#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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Cr)
Complexity level Rating assigned with outlook
NA Cash Credit NA NA NA 207 NA CRISIL AA/Stable
NA Letter of Credit* NA NA NA 198 NA CRISIL A1+
*Interchangeable with bank guarantee
 
Annexure - List of Entities Consolidated
Entity Consolidated Extent of consolidation Rationale for consolidation
Coforge Ltd Full Parent company
ESRI India Technologies Ltd Full Strong business and financial linkages
Incessant Technologies Pvt Ltd Full Strong business and financial linkages
NIIT Airline Technologies GmbH, Germany Full Strong business and financial linkages
NIIT Insurance Technologies Ltd, UK Full Strong business and financial linkages
NIIT Media Technologies LLC, USA Full Strong business and financial linkages
NIIT Smart Serve Ltd Full Strong business and financial linkages
NIIT Technologies Brazil Ltda, Brazil Full Strong business and financial linkages
NIIT Technologies BV, Netherlands Full Strong business and financial linkages
NIIT Technologies FZ LLC, Dubai Full Strong business and financial linkages
NIIT Technologies GmbH, Germany Full Strong business and financial linkages
NIIT Technologies Inc., USA Full Strong business and financial linkages
NIIT Technologies Ltd, Thailand Full Strong business and financial linkages
NIIT Technologies Ltd, UK Full Strong business and financial linkages
NIIT Technologies Philippines Inc, Philippines Full Strong business and financial linkages
NIIT Technologies Pte Ltd, Singapore Full Strong business and financial linkages
NIIT Technologies Pty Ltd, Australia Full Strong business and financial linkages
NIIT Technologies S.A., Spain Full Strong business and financial linkages
NIIT Technologies Services Ltd Full Strong business and financial linkages
NIIT Technologies Spolka Z Ograniczona Odpowiedzialnoscia Full Strong business and financial linkages
RuleTek LLC Full Strong business and financial linkages
Wishworks IT Consulting Pvt Ltd Full Strong business and financial linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  207.00  CRISIL AA/Stable  30-07-20  CRISIL AA/Stable  09-04-19  CRISIL AA/Stable      22-12-17  CRISIL AA/Stable  CRISIL AA/Stable 
        03-01-20  CRISIL AA/Stable  29-03-19  CRISIL AA/Stable           
Non Fund-based Bank Facilities  LT/ST  198.00  CRISIL A1+  30-07-20  CRISIL A1+  09-04-19  CRISIL A1+      22-12-17  CRISIL A1+  CRISIL A1+ 
        03-01-20  CRISIL A1+  29-03-19  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 207 CRISIL AA/Stable Cash Credit 82 CRISIL AA/Stable
Letter of Credit* 198 CRISIL A1+ Letter of Credit* 198 CRISIL A1+
-- 0 -- Proposed Long Term Bank Loan Facility 20 CRISIL AA/Stable
Total 405 -- Total 300 --
*Interchangeable with bank guarantee
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation

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