Detailed Rationale

CRISIL Ratings’ rating on the bank facilities and commercial paper programme of Hinduja Global Solutions Limited (HGSL) continue on ‘Rating Watch with Developing Implications’.

 

CRISIL Ratings had placed the short term ratings on ‘RWDI’ on January 25, 2021, following the announcement by HGSL’s Board of Directors on January 14, 2022, to allocate a sum of approximately Rs. 1,000 crores from the proceeds received from sale of its healthcare vertical for a share buyback programme. The exact quantum will be decided post the availability of audited balance sheet for fiscal 2022. Besides, the company’s board has also approved in principle the acquisition of the digital business of NXTDIGITAL Ltd (‘NDL’), an associate company of the Hinduja group, through a share swap arrangement, subject to regulatory and requisite approvals. Accordingly, the shareholders of NDL will receive shares of HGSL as per swap valuation.

 

NDL is the media vertical of the Hinduja Group. As per the management of HGSL, the proposed acquisition of the digital business of NDL is viewed as a strategic fit to HGSL’s stated strategy of enhancing the digital share of business and enhancing customer experience. HGSL will appoint intermediaries and independent valuers to carry out the valuation exercise, which will submit its report, including proposed share exchange ratio.

 

NDL delivers services via satellite, digital cable and broadband. It delivers television services through a dual delivery platform consisting of digital cable and India’s only Headend-In-The-Sky (HITS) satellite platform, under the INDigital and NXTDIGITAL brand names. NDL reported earnings before interest, tax, depreciation and amortization (EBITDA) of Rs.238 crore and net loss of Rs.115 crore on net revenues of Rs.1008 crores in fiscal 2021.

 

In addition, HGSL is in the process of deploying part of the funds from the sale of the healthcare business through acquisitions, some of which at different stages of evaluation in various jurisdictions. CRISIL Ratings will continue to monitor these developments and will resolve the rating watch, post discussion with HGSL’s management and once more details are available on the impact of the above transactions, as well as necessary regulatory and other approvals are received.

 

Earlier on August 16, 2021, CRISIL Ratings had placed the long-term ratings of HGSL on ‘RWDI’ following the announcement by HGSL on August 9, 2021, regarding the sale of its healthcare vertical to Baring Private Equity Asia (BPEA), a private alternate investment firm, for an enterprise value of USD 1.2 billion (~Rs. 8900 crore), subject to adjustments. This transaction was completed in early January 2022, with transfer of all assets and infrastructure of the healthcare vertical HGSL’s healthcare services vertical had over 20,000 employees across four geographies – India, the Philippines, the US and Jamaica – and registered revenues of ~USD 400 million in fiscal 2021 (~55% of consolidated revenues). Liquidity still remains robust.  

 

The company has already paid dividends of Rs 195 per share amounting Rs.407 crores to shareholders, besides, increasing its lending to group companies in the form of Inter Corporate Deposits (ICDs) to Rs 1,125 crore in March-2022 (maximum limit of Rs.1,925 crores for various categories of loans and investments as per Section 186 of the Companies Act) from ~Rs.389.50 crores in September 2021 (maximum limit of Rs.600 crores). A sizeable portion of the balance, currently estimated at about Rs.7,000 crores as of March 2022, is expected to be deployed for proposed buyback, expansion needs at NDL and possible future acquisitions. CRISIL Ratings will continue to monitor the process of deployment of funds.

 

The company has also part-funded the acquisition of 100% equity in Diversify Offshore Staffing Solutions (DOSS, based in Brisbane, Australia) which will help HGS gain foothold in the Australian market while increasing its strength in Phillipnes. This transaction is expected to complete in couple of months.

 

Revenue in fiscal 2022 is expected to be close to fiscal 2021 levels of more than ~Rs.5000 crore since the healthcare vertical remained with HGSL for 9 months during the fiscal. The healthcare vertical accounted for substantial portion of the company’s revenue (~55% during fiscal 2021) and operating profits, with margins higher compared with other business verticals of HGSL. The existing business verticals (telecom, technology, consumer products, and banking and financial services) are expected to be ramped up with increased focus on customer acquisition and higher-margin digital deals. In fiscal 2023, CRISIL Ratings expects HGSL’s revenues (without acquisition of NDL) at Rs.3000-3500 crore and operating profitability at 10-11%.

 

HGSL’s revenue grew 21% on-year to Rs 4,881 crore during the first nine months of fiscal 2022 supported by 30.4% growth in the retained business while the outgoing healthcare business grew by 13.4% on-year. Earnings before interest, tax, depreciation and amortisation (Ebitda) grew 27% on-year to Rs 685 crore as margins improved slightly to 14.0% during the period, compared with 13.4% a year earlier.

 

The ratings continue to reflect HGSL’s average business risk profile supported by presence in diverse verticals and geographies, and a strong financial risk profile driven by comfortable debt protection metrics, and good liquidity. These strengths are partially offset by exposure to intense competition in the business process management (BPM) industry, and high exposure to group companies.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HGSL and all its subsidiaries, held directly or indirectly, as all the entities share a common management, and operate in a similar line of business with significant operational and financial linkages. CRISIL Ratings considers these entities as being strategic to HGSL in view of their strong integration with the parent’s operations. The goodwill arising from acquisitions has been amortised over 10 years, and software and commercial rights, in line with company policy, over 3-6 years and 10 years, respectively.

 

Please refer Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Average business risk profile with presence in diverse verticals and various countries: The company is present across multiple verticals such as healthcare, telecommunication (telecom), consumer products, and banking and financial services, to cater to flexible client requirements. HGSL generated ~55% of its revenues from the healthcare vertical in fiscal 2021, which also enjoys higher operating profitability compared with other verticals. With the sale of healthcare vertical, the company’s revenues are expected to reduce materially, but HGSL will still remain a mid-sized player with operating profitability expected to decline to 10-11% over the medium term (compared to 13.8% in fiscal 2021). Three of the five largest clients for HGSL in fiscal 2021 were from healthcare. Post divestment of the healthcare vertical, customer concentration risks will moderate as HGSL will have 230 core business process management (BPM) clients and 708 clients in the payroll business. On-boarding of new clients in chemicals, biotech, e-commerce, and media segments should bolster revenue over the medium term. Revenue is expected to be over Rs.3000 crore over the medium term.

 

• Healthy financial risk profile and strong liquidity: Debt repayment and absence of large, debt-funded capex have helped to sustain a healthy capital structure, indicated by gearing of 0.23 time (excluding lease liabilities) on March 31, 2021, compared with 0.35 time on March 31, 2020. Debt levels (excluding lease liabilities) stood at ~Rs.208 crore at December 31, 2021 which will be pre-paid. Despite a couple of acquisitions in fiscals 2018 and 2019, debt protection metrics remain strong, due to healthy annual cash generation. Capital spending may increase as HGSL pursues acquisitions and also as NDL’s business is capital intensive. HGSL’s consolidated debt metrics are likely to moderate post acquisition of NDL’s business, but still remain comfortable. NDL had debt of Rs.967 crores at March 31, 2021 (debt/EBITDA of ~4 times), which is expected to reduce to under Rs.700 crores by March 2022, using proceeds from a recent rights issue of equity.

 

Liquid surpluses are expected about ~Rs.7,000 crores as on March 2022, bolstered by proceeds from the sale of healthcare business and residual cash accruals, and post dividend payout, and ICDs to group companies. Although, a larger liquid surplus permits HGSL to acquire larger targets than done in the recent past, the actual deployment and balance of funds left post acquisitions, investments in group companies, for expansion by NDL, and other developments will remain a key credit monitorable.

 

Weaknesses

• Exposure to intensifying competition, impacting price flexibility and cost management: The information technology-enabled services industry is highly competitive. Service quality, price, reliability, breadth of services, and data security technology determine margins. Competition comes from other established players such as Genpact, WNS (Holding) Ltd, and Firstsource Solutions Ltd (‘CRISIL A+/Stable/CRISIL A1’). Also, increasing wages and costs associated with hiring, training, and retaining talent pose challenges for adequate staffing and seat utilisation. Profitability will remain susceptible to intensifying competition, rising employee cost, and the ability to transfer any cost increase to customers.

 

• High exposure to group companies: HGSL in recent years has invested in form of ICDs) in Hinduja group companies - Hinduja Group Ltd, Hinduja Realty Ventures Ltd, Hinduja Energy India Ltd, and NDL - as permitted by its Board of Directors. These exposures have ranged between Rs.315-492 crores in recent years (Rs.390 crore on September 30, 2021) and generate higher return compared to fixed deposits. Besides, HGSL has also loaned Rs.163 crore to other entities which are not classified as related party transactions. The loans are returnable on call. During January 2022, the company materially increased exposure to group companies to Rs.1630 crore which has subsequently reduced to Rs 1,125crore in March-2022, including lending to Hinduja Leyland Finance Ltd (HLFL, ‘CRISIL AA-/Stable/CRISIL A1+’) and Aasia Corporation. Further significant increase in exposure to group companies will be a monitorable.

Liquidity Strong

Residual cash accrual, post divestment of healthcare vertical, payment of dividend and factoring in higher exposure to group companies, is estimated at about Rs.7,000 crores in March 2022. The working capital bank limit of Rs 325 crore was unutilized in the 6 months through December 2021. Annual accruals and cash surpluses will more than suffice to meet long-term debt repayment obligations of Rs 95-105 crore each in fiscals 2022 and 2023. The long-term debt will be prepaid with the proceeds from sale of healthcare vertical. If the merger of the digital business of NDL goes through, part of the surpluses may be deployed for organic growth at NDL. Besides, HGSL will also continue to pursue inorganic growth opportunities to grow its businesses. Sustenance of large liquid surpluses will be a monitorable.

Rating Sensitivity factors

Upward factors:

• Sustained healthy revenue growth for existing business, and double-digit operating profitability
• Maintenance of strong financial risk profile and debt metrics, while pursuing organic and inorganic growth, and post-acquisition of NDL; steady state debt to EBITDA of below 1-1.25 time.
• Ensuring material liquid surpluses post acquisitions, ICDs to group companies, buyback, and dividend

 

Downward factors:

• Sluggish business performance of residual businesses and NDL, impacting operating profitability (below 7-8%), and cash generation
• Large debt-funded acquisitions, impacting the financial risk profile and key debt metrics; steady state debt to EBITDA remaining above 2-2.25 times.
• Sizeable reduction in liquid surpluses (below Rs.1500 crores) to fund growth opportunities/share buyback/dividend payout over the near to medium term
• Further material increase in exposure to group companies

About the Company

HGSL is part of the Hinduja group, which includes Ashok Leyland Ltd, HLFL, Hinduja Housing Finance Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), Hinduja Renewables Energy Private Limited (‘CRISIL AA-/Stable/CRISIL A1+’) and IndusInd Bank Ltd ('CRISIL AA+/CRISIL AA/Stable/CRISIL A1+'). The company provides BPM services, primarily back-office processing and contact centre services, to domestic and international clients. As on June 30, 2021, it had 56 delivery centres in seven countries, and 42,769 employees.

 

During the first nine months of fiscal 2022, HGSL reported a profit after tax (PAT) of Rs.417 crores (Rs.206 crores in the corresponding period of fiscal 2021) on revenues of Rs.4,881 crores (Rs.4,025 crores in the corresponding period of fiscal 2021).

Key Financial Indicators(CRISIL Ratings Adjusted)

Particulars	Unit	2021	2020*
Revenue	Rs crore	5,589	5,235
PAT	Rs crore	336	206
PAT margin	%	6.0	3.9
Interest coverage#	Times	8.76	7.43
Adjusted debt (excluding lease liabilities) /adjusted net worth	Times	0.23	0.35
Adjusted debt /adjusted net worth	Times	0.70	0.84

*- Revenues and profits from discontinued operations were included

#- Includes interest expense on lease liabilities

Any other information: Not applicable

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	Commercial Paper	NA	NA	7-365 days	125	Simple	CRISIL A1+/Watch developing
NA	Cash credit*	NA	NA	NA	280	NA	CRISIL A+/Watch developing
NA	Packing credit	NA	NA	NA	75	NA	CRISIL A1+/Watch developing
NA	Proposed working capital facility	NA	NA	NA	20	NA	CRISIL A+/Watch developing
NA	Proposed term loan	NA	NA	NA	125	NA	CRISIL A+/Watch developing

*Interchangeable with post-shipment credit and other WC financing instruments

Name of the entity	Extent of consolidation	Rationale for consolidation
Hinduja Global Solutions Limited	Full	Holding
HGS International	Full	Co-Subsidiary
Hinduja Global Solutions Inc.	Full	Co-Subsidiary
HGS Properties LLC	Full	Co-Subsidiary
HGS Canada Holdings LLC	Full	Co-Subsidiary
HGS Canada Inc.	Full	Co-Subsidiary
HGS EBOS LLC	Full	Co-Subsidiary
HGS (USA) LLC	Full	Co-Subsidiary
HGS Healthcare LLC	Full	Co-Subsidiary
Affina Company	Full	Co-Subsidiary
Hinduja Global Solutions Europe Limited	Full	Co-Subsidiary
Hinduja Global Solutions UK Limited	Full	Co-Subsidiary
HGS France S.A.R.L	Full	Co-Subsidiary
C-Cubed N.V	Full	Co-Subsidiary
C-Cubed B.V	Full	Co-Subsidiary
Customer Contact Centre Inc.	Full	Co-Subsidiary
HGS St. Lucia Limited	Full	Co-Subsidiary
Team HGS Limited	Full	Co-Subsidiary
Hinduja Global Solutions MENA FZ LLC	Full	Co-Subsidiary
HGS Colibrium Inc	Full	Co-Subsidiary
HGS Digital Solutions LLC	Full	Co-Subsidiary
HGS Axis Point Helath LLC	Full	Co-Subsidiary
Falcon Health Solutions Puerto Rico Holding LLC	Full	Co-Subsidiary
Falcon Health Solutions Puerto Rico LLC	Full	Co-Subsidiary