Detailed Rationale

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

 

CRISIL Ratings had placed the short-term rating on watch on January 25, 2021, following the announcement by the company board of directors on January 14, 2022, to allocate about Rs 1,000 crore from the proceeds received from sale of its healthcare vertical for a share buyback programme. Besides, the board 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. As per the share exchange ratio finalised, the shareholders of NDL will receive 20 shares of HGS for every 63 NDL shares held. CRISIL Ratings continues to monitor these developments and will resolve the watch after discussion with HGSL management and receipt of necessary approvals.

 

NDL is the media vertical of the Hinduja group and its proposed acquisition is viewed as a strategic fit to enhance the digital share of business and customer experience. NDL delivers services via satellite, digital cable and broadband. It offers 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 brands. NDL reported earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 212 crore and net profit of Rs 1.97 crore on revenue of Rs 1,152 crores in fiscal 2022.

 

On August 16, 2021, CRISIL Ratings had placed the long-term rating of HGSL on watch following the announcement on August 9, 2021, of the sale of its healthcare vertical to Baring Private Equity Asia, 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. The healthcare vertical had over 20,000 employees across four geographies – India, the Philippines, the US and Jamaica – and registered revenue of ~USD 400 million in fiscal 2021 (~55% share of consolidated revenues).

 

The company has crystallised the amount to be utilised for buy-back at Rs 975 crore basis the audited fiscal 2022 results. Also, it paid dividend of Rs 195 per share by February 2022 and announced final dividend of Rs 25 per share (together amounting to Rs 512 crore). Moreover, it increased 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 1,930 crore for various categories of loans and investments as per Section 186 of the Companies Act) from Rs 389.5 crore in September 2021 (maximum limit of Rs 600 crore). A portion of the remaining Rs 5,991 crore as of March 2022 is expected to be deployed for the proposed buyback, expansion needs at NDL and future acquisitions. CRISIL Ratings will continue to monitor the fund deployment.

 

HGSL has also part-funded the acquisition of 100% equity in Diversify Offshore Staffing Solutions (DOSS, based in Brisbane, Australia), which will help gain foothold in the Australian market while increasing its strength in the Philippines. This transaction was completed in the fourth quarter of fiscal 2022.

 

Revenue (excluding healthcare business) at Rs 3,264 crore in fiscal 2022 registered a 25% on-year growth following strong client addition and deal wins. The Ebitda margin improved to 3.5% from 3.0% and has moderated compared with historical levels owing to higher legacy overheads,  manpower and related costs after the sale of the healthcare business. Revenue in the retained business segments (telecom, technology, consumer products, and banking and financial services) is expected to ramp up over the medium term with increased focus on customer acquisition and higher margin digital deals. With the DOSS acquisition, CRISIL Ratings expects HGSL’s revenue (excluding NDL) to grow by 15-16% in fiscal 2023 with Ebitda margin of about 6% supported by cost-optimisation measures.

 

The ratings continue to reflect the above-average business risk profile of HGSL, supported by presence in diverse verticals and geographies; and a strong financial risk profile because of comfortable debt protection metrics and adequate 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

CRISIL Ratings has combined the business and financial risk profiles of HGSL and all its subsidiaries, held directly or indirectly, as these entities have a common management and operate in the same business with significant operational and financial linkages. These entities are considered strategic to HGSL because of their strong integration with parent 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 highlights entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

Above-average business risk profile and presence in diverse verticals: In the retained business too, the company is present across multiple verticals such as technology and telecom (20% share of fiscal 2022 revenue), consumer and retail (19%), banking and financial services (18%), media and entertainment (8%), chemicals and biotech (4%), and public sector and others (31%). Majority of revenue comes from the US (38% share in fiscal 2022), the UK (32%), and Canada (18%) followed by India (10%) and other countries. After divestment of the healthcare vertical, customer concentration has moderated as HGSL will have 200+ core BPM clients and 730+ clients in the payroll business. Adding clients in the telecom, e-commerce and media segments should bolster revenue over the medium term.

 

Healthy financial risk profile, including strong liquidity: Pre-payment of financial bank debt in fiscal 2022 and absence of large, debt-funded capital expenditure in the last few fiscals have helped to sustain a healthy capital structure: the company had nil debt (excluding lease liabilities) as on March 31, 2022, compared with Rs 394 crore in the previous fiscal. With moderation in EBITDA in fiscal 2022, Debt to EBITDA ratio has moderated to 2.72 times from 1.44 times last year despite repayment of debt. Capital spending may increase as HGSL pursues acquisitions and also because the business of NDL is capital intensive (debt of Rs 906 crore as on March 31, 2022; debt to Ebitda ratio of ~5 times). Though consolidated debt metrics are likely to moderate after the acquisition of NDL’s business, these will remain adequate.

 

Liquid surplus was Rs 5,991 crore as on March 31, 2022, bolstered by proceeds from the sale of the healthcare business and residual cash accrual (after interim dividend payout and ICDs to group companies). The actual deployment and balance of funds left after acquisitions, investments in group companies, expansion by NDL and other developments will remain key credit monitorable.

 

Weaknesses

Exposure to intensifying competition that impacts price flexibility and cost management: The information technology-enabled services industry is highly competitive. Quality, price, reliability, range of services and data security technology determine margins. HGSL has to compete with 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 competition, rising employee cost and the ability to transfer any cost increase to customers.

 

High exposure to group companies: In recent years, HGSL has invested Rs 315-492 crore in group companies (Hinduja Group Ltd(HGL), Hinduja Realty Ventures Ltd(HRVL), Hinduja Energy India Ltd and NDL), which generate higher return compared to fixed deposits; the loans are returnable on call. Though exposure to group companies increased substantially to Rs 1,630 crore in January 2022, it reduced to Rs 1,214 crore in June 30, 2022, including lending to HGL, HRVL, and NDL. Any sharp increase in exposure to group companies will be a monitorable.

Liquidity: Strong

Liquid surplus was Rs 5,991 crore as on March 31, 2002, backed by divestment receipts of healthcare vertical, post-payment of dividend and ICDs of Rs 1,125 crore to group companies. Working capital limit of Rs 325 crore was unutilised in the six months through June 2021 and the company fully repaid all its long-term debt obligation by March 2022. 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. Sustenance of adequate liquid surpluses will be a key 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 after acquisition of NDL; and steady state debt to Ebitda of below 1-1.25 times
• Ensuring material liquid surpluses post acquisitions, ICDs to group companies, buyback and dividend

 

Downward Factors:

• Sluggish performance of residual businesses and NDL impacting operating profitability (below 5-6% on a steady-state basis) and cash generation
• Large, debt-funded acquisitions impacting financial risk profile and key debt metrics; steady state debt to Ebitda remaining above 2.5 times
• Sizeable reduction in liquid surplus to fund growth opportunities/share buyback/dividend payout over the medium term
• Substantial increase in exposure to group companies

About the Company

HGSL is a part of the Hinduja group that includes Ashok Leyland Ltd, HLFL, Hinduja Housing Finance Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), Hinduja Renewables Energy Pvt Ltd (‘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, to domestic and international clients. As on March 31, 2022, it had 38 delivery centres in seven countries and ~22, 000 employees.

 

During fiscal 2022, HGSL reported a profit after tax (PAT) of Rs 6,104 crore (Rs 336 crore in fiscal 2021) on revenue of Rs 3,264 crore (Rs 5,638 crore).

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+/Watch Developing
NA	Cash Credit*	NA	NA	NA	280.00	NA	CRISIL A+/Watch Developing
NA	Packing Credit	NA	NA	NA	75.00	NA	CRISIL A1+/Watch Developing
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 working capital financing instruments