Detailed Rationale

CRISIL Ratings on the long-term bank facilities of Hinduja Global Solutions Limited (HGSL) continues on ‘Rating Watch with Developing Implications’; the ratings on HGSL’s bank loan facilities and commercial paper programme have been reaffirmed at ‘CRISIL A+/CRISIL A1+’.

 

Earlier on August 16, 2021, CRISIL Ratings had placed the ratings of HGSL on ‘Rating Watch with Developing Implications’ 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.

 

The transaction is subject to approvals from regulatory bodies in India, US, Jamaica & Philippines and from customers of the healthcare vertical. In October 2021,The Competition Commission of India (CCI) has approved the acquisition of the worldwide healthcare BPO services of HGSL by Betaine BV, a company set up in Netherlands by Baring Private Equity Asia to complete the Transaction. The buyer and HGSL are in the process of getting further approvals and hence the transaction is yet to close .CRISIL ratings will continue to monitor the transaction and the rating watch will be resolved on successful completion of the transaction and receipt of clarity from management regarding the deployment of funds, prospects of the residual businesses, as well as assessment of financial risk.

 

HGSL’s healthcare services vertical comprises over ~20,000 employees across four geographies – India, the Philippines, the US, and Jamaica – and registered revenues of ~USD 400 million in fiscal 2021 (~53% of consolidated revenues). Besides, the vertical accounts for substantial portion of the company’s operating profits, with margins higher compared with the 8 other business verticals of HGSL. Post completion of the transaction which is expected over the next 3-4 months, HGSL will transfer all client contracts, employees, and assets, including infrastructure related to the healthcare services vertical to BPEA. Its product offerings will be lower while revenues and operating profits will also significantly reduce, from current levels.

 

The healthcare vertical will remain with HGSL for 7-8 months in fiscal 2022. Also, 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 at Rs.2800-3000 crore and operating profitability at 10-11%.

 

In fiscal 2021, As Reported HGSL’s revenues registered a growth of 12% to Rs.5,589 crores, driven by additional business from key healthcare clients and new contracts won including those from UK public sector enterprises. Besides, its operating profitability improved marginally to 13.8% from 13.7% in the previous fiscal primarily due to better employee efficiency after stabilization of work-from-home operations, cost rationalization efforts and exit from unprofitable contracts.

 

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 moderate 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 - List of entities consolidated, 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 about 55% of its revenues (of which businesses which contributed 53% of revenues would be part of sale of healthcare business) 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 still remain at average levels relative to peers, while operating profitability is 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 are 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 post divestment of the healthcare vertical.

 

• 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 0.19 time (excluding lease liabilities) on March 31, 2021, compared with 0.35 time on March 31, 2020. Debt levels stood at Rs.344.7 crore on September 30, 2021 and have reduced Rs. 35 Crores from Rs.379 crores on June 30,2021. Despite a couple of acquisitions in fiscals 2018 and 2019, debt protection metrics remain strong, due to healthy annual cash generation. Liquid surpluses were over ~Rs.845crores at end September 2021, are likely to be bolstered by proceeds from the sale of healthcare business and residual cash accruals. However, a larger liquid surplus will also permit HGSL to acquire larger targets than done in the recent past. Besides, the payout to shareholders may also be increased by way of buyback or dividends. These will be key 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.

 

• Moderate exposure to group companies: HGSL in recent years has invested in form of inter-corporate deposits (ICDs) in Hinduja group companies - Hinduja Group Ltd, Hinduja Realty Ventures Ltd, Hinduja Energy India Ltd, and NXTDIGITAL Ltd - 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. HGSL has also given loans of Rs.163 crore to other entities which are not classified as related party transactions. The loans are returnable on call. Any significant increase in exposure to group companies will be a monitorable.

Liquidity: Strong

Residual cash accrual, post divestment of healthcare vertical is estimated at over Rs.250 crore annually. Cash and cash equivalents were ~Rs 845 crore as on September 30th, 2021 (excluding exposure to group companies). The working capital bank limit of Rs 325 crore was unutilized in the 6 months through June 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 may be prepaid with the proceeds from sale of healthcare vertical. Liquidity will be bolstered substantially by the sale proceeds from sale of healthcare vertical.

Rating Sensitivity factors

Upward factors:

• Sustained healthy revenue growth post divestment of the healthcare vertical, and double digit operating profitability
• Maintenance of strong financial risk profile and debt metrics, while pursuing organic and inorganic growth
• Ensuring material liquid surpluses (over Rs.800-1000 crores)

 

Downward factors:

• Weak business performance of residual businesses impacting operating profitability (below 7-8%), and cash generation
• Large debt-funded acquisitions, impacting the financial risk profile and key debt metrics
• Sizeable reduction in liquid surpluses (below Rs.500 crores) to fund growth opportunities/share buyback/dividend payout over the near to medium term
• Material increases in exposure to group companies

About the Company

HGSL is part of the Hinduja group, which includes Ashok Leyland Ltd, IndusInd Media and Communications Ltd, 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 September 30, 2021 it had 52 delivery centres in seven countries, and 46,698 employees.

 

HGSL reported a profit after tax (PAT) of Rs.253.5 crores(Rs.131 crores in the H1’21) on revenues of Rs.3133 crores in the first half of fiscal 2022 (Rs. 2568.5 crores in H1’21)

Key Financial Indicators

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 networth	Times	0.19	0.35

*- 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	125.00	Simple	CRISIL A1+
NA	Cash Credit*	NA	NA	NA	280.00	NA	CRISIL A+/Watch Developing
NA	Packing Credit	NA	NA	NA	75.00	NA	CRISIL A1+
NA	Proposed Working Capital Facility	NA	NA	NA	20.00	NA	CRISIL A+/Watch Developing
NA	Proposed Term Loan	NA	NA	NA	125.00	NA	CRISIL A+/Watch Developing

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

Annexure – List of entities consolidated

Names of Entities Consolidated	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 Health LLC	Full	Co-Subsidiary
Falcon Health Solutions Puerto Rico Holding LLC	Full	Co-Subsidiary
Falcon Health Solutions Puerto Rico LLC	Full	Co-Subsidiary