Detailed Rationale

CRISIL Ratings has reaffirmed the ratings at 'CRISIL A+/Stable/CRISIL A1+’ on the bank facilities and commercial paper programme of Hinduja Global Solutions Ltd (HGS).

 

The ratings continue to reflect the above-average business risk profile of HGS, supported by presence in diverse verticals and geographies; and a strong financial risk profile marked by low gearing, comfortable debt protection metrics, strong financial flexibility and liquidity. These strengths are partially offset by exposure to intense competition in the business process management (BPM) business under the larger information technology-enabled services (ITES) sector, broadband and digital television (TV) media industry, moderate but improving margins, amicable settlement among the Hinduja family promoters and high exposure to group companies.

 

Operating income during the first nine months of fiscal 2024 grew marginally by ~2% on-year to Rs 3,517 crore with adjusted EBITDA (adjusted for media business operating lease expenses of Rs 83 crore) of Rs 207 crore at 5.9% margins as compared to 2.8% margins in fiscal 2023. The improvement in margins was mainly led by BPM business with media margins remaining subdued as the company continued its cost restructuring initiatives. Operating performance over the medium term is expected to be driven by ramp-up in BPM business, customer acquisition philosophy in NXTDIGITAL Limited (NDL) and cost re-structuring efforts. CRISIL Ratings expects HGS’s revenue to see a modest growth in fiscal 2024 which should improve to 5-10% thereafter with improving business conditions in the key markets served by BPM segment with continued subscriber additions in the media business given increased focus on the broadband. Adjusted EBITDA margin is expected to sustain at 5-6% this fiscal with improvement of 50-75 basis points (bps) expected for next fiscal supported by continued cost-optimization measures and improved fixed cost absorption.

 

The company completed share buy-back (including taxes) of Rs 1,248 crore during the nine months of fiscal 2024 utilising its surplus funds which continued to remain strong at Rs 5,814 crore as of December 31, 2023. Company has also raised debt during the nine months of this fiscal to fund Teklinks acquisition payments and working capital needs leading to increase in gross debt (including leases of Rs 764 crore) to Rs 1,684 crore as of December 31, 2023 from Rs 998 crore (leases: Rs 677 crore) as of March 31, 2023. Over the medium term, capex needs of Rs 400-500 crore annually for both media and BPM businesses together are expected to be met using a mix of cash accruals and interest earned on funds with limited reliance on new debt. Strong networth and liquid surplus will continue to support the overall financial and credit risk profile.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HGS, and all its subsidiaries, including those operating the media business, and newly acquired business of Teklinks and Diversify, 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 HGS in view of their strong integration with the parent’s operations.

 

Media business-related leases expenses which are operating in nature (Rs 128 crore in fiscal 2023 and Rs 83 crore in nine months of fiscal 2024) are classified as an operating expense while arriving at adjusted EBITDA.

 

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:

• Above-average business risk profile: The legacy BPM business continues to maintain its healthy market position with presence in diverse verticals such as technology and telecom (12% share of total fiscal 2023 aggregate operating income), consumer and retail (20%), banking and financial services (15%), public sector (12%), and others (10%). However, higher share of deliveries from key customer locations (viz. the US, UK and Canada) vis-à-vis low-cost locations like India or Philippines along with legacy costs related to the healthcare vertical, being slowly restructured, has led to moderate but improving margins. Over the medium term, while new customer addition in the legacy BPM space is expected to be slow, new client additions in the new age analytics and digital segment may get exacerbated by mid-sized acquisitions, bolstering margins too.

 

Inclusion of NDL, the flagship media business of Hinduja Group with a track record spanning more than 3 decades, has not only diversified HGS’s business profile (contributing ~31% of the fiscal 2023 aggregate operating income) given the longstanding track record in the media and communication but also improved locational diversification with India now contributing ~30% of revenue (versus 10% in fiscal 2022). The company has a pan-India presence with increased reach in lower tier cities delivering TV services through a dual delivery platform consisting of the terrestrial fibre route and the country's only Headend-In-The-Sky (HITS) satellite platform, under the brand names INDigital and NXTDIGITAL respectively. Other than TV services, its subsidiary ONEOTT Entertainment Limited has a strong presence in broadband and internet services in 40 cities. Over the medium term, increased focus on customer acquisition led by broadband business would be key to drive growth.

 

• Healthy financial risk profile, including strong liquidity: HGS’s financial risk profile will continue to be marked by moderate debt, high networth and low gearing. Capital spending to fund Teklinks acquisition and working capital has led to gross debt (including leases of Rs 764 crore) growing to Rs 1,684 crore as of December 31, 2023 from Rs 998 crore as of March 31, 2023 with gearing increasing to 0.29 times as of December-2023 from 0.14 times in March-2023. However, healthy accruals should be sufficient to fund annual capex of Rs 400-500 crore leading to low reliance on debt and gearing sustaining at ~0.30 times over the medium term. Interest cover, albeit moderated from ~9-10 times historically should remain healthy at 4.0-5.0 times over the medium term.

Aggregate surplus funds were strong at Rs 5,814 crore (including overseas cash, investments of Rs 3,269 crore in debt instruments including of Hinduja group companies, as well as intercorporate deposits) as on December 31, 2023, after paying for share buy-back of Rs 1,248 crore (including taxes) during the first nine months of this fiscal. 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: Both the information technology-enabled services (ITES) as well as broadband and digital video industry are highly competitive. Quality, price, reliability, range of services and data security technology determine margins. HGS has to compete with established players such as Genpact, WNS (Holding) Ltd and Firstsource Solutions Ltd (‘CRISIL A+/Stable/CRISIL A1’) in the ITES space and with Reliance Jio Infocomm Ltd ('CRISIL AAA/Stable/CRISIL A1+') and Bharti Airtel Ltd (CRISIL AA+/Stable/A1+) in the broadband and digital video business. 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 costs and the ability to transfer any cost increase to customers.

 

In the BPM segment, the company is restructuring legacy costs related to healthcare business apart from other cost efficiency efforts, which has led to improvement in margins in recent periods – further improvement of which remains a key monitorable. Also, the media business, where the competitive intensity has increased in recent years, reports low margins while requiring high capital to sustain the growth in subscriber base. Sustained addition to subscriber base along with improvement in cost structure, should improve margins in the segment over the medium term and is a key monitorable.

 

• High exposure to group companies: In recent years, HGS has invested about Rs 200-300 crore each in group companies [Hinduja Group Ltd (HGL), Hinduja Realty Ventures Ltd(HRVL), and Hinduja Energy India Ltd (HEIL)], which generate higher return compared to fixed deposits; the loans are returnable on call. HGS has recalled part funds from these investments to fund the share buy-back. Besides, it has also invested in debt instruments of overseas Hinduja group companies to the tune of Rs 2,500-3,300 crore which too earns healthy interest albeit subject to forex volatilities but are available on call and may be used to fund any acquisitions outside India. Exposure to group companies which remains substantial will remain a key monitorable.

 

CRISIL Ratings also notes the feud in the Hinduja family, amicable settlement of which too is monitorable.

Liquidity: Strong

Aggregate surplus funds were Rs 5,814 crore (including overseas cash, investments of Rs 3,269 crore in debt instruments including of Hinduja group companies, as well as intercorporate deposits and funds in India at about Rs ~Rs 700-800 crore) as on December 31, 2023, bolstered by proceeds from the sale of the healthcare business. Utilisation under the Rs 325 crore working capital limits averaged at ~60% over last 12 months through December 2023. Term debt repayments remain low at Rs 50-70 crore over the medium term. Combined capex of Rs 400-500 crore annually for NDL’s customer acquisitions, including Teklinks related payments (about Rs 130 crore annually) could lead to moderate increase in debt while aggregate cash surplus fund including healthy surplus in India will continue to be maintained at current levels.

Outlook: Stable

CRISIL Ratings believes the business risk profile will continue to be supported by an established client relationship and presence in diversified businesses and geographies, while the financial risk profile should remain strong supported by strong networth, low gearing, and strong financial flexibility.

Rating Sensitivity factors

Upward factors:

• Sustained healthy revenue growth for existing business leading to adjusted EBITDA margin above 12-13% on a sustained basis.
• Maintenance of strong financial risk profile and debt metrics while pursuing organic and inorganic growth opportunities.

 

Downward factors:

• Sluggish performance leading to adjusted EBITDA below 3-4% on a steady-state basis impacting cash generation.
• Large, debt-funded acquisitions impacting financial risk profile and key debt metrics.
• 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

HGS 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 December 31, 2023, it had 35 delivery centres in eight countries and ~20, 000 employees.

 

On November 12, 2022 HGS received NCLT approval to acquire NXTDIGITAL Limited (NDL). Incorporated in the year 1985, NDL is the flagship media business of the global Hinduja Group with a track record spanning more than 3 decades in the media and communications segment.

 

During the first nine of fiscal 2024, HGS reported a consolidated profit after tax (PAT) of Rs 43 crore on Operating income of Rs 3,517 crore against Rs 309 crore on Rs 3,435 crore operating income during the same period last year.

Key financial indicators (CRISIL Ratings-adjusted)

Particulars	Unit	2023	2022*
Operating income	Rs crore	4,506	3,271
PAT	Rs crore	334	6104
PAT margin	%	7.4	187
Interest coverage#	Times	5.13	9.21
Adjusted debt /adjusted networth	Times	0.14	0.04

*- Revenue 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+
NA	Rupee Term Loan	NA	NA	31-Mar-2026	145	NA	CRISIL A+/Stable
NA	Rupee Term Loan	NA	NA	31-Mar-2029	100	NA	CRISIL A+/Stable
NA	Proposed Rupee Term Loan	NA	NA	NA	100	NA	CRISIL A+/Stable
NA	Cash credit*	NA	NA	NA	300	NA	CRISIL A+/Stable
NA	Proposed working capital facility	NA	NA	NA	111	NA	CRISIL A+/Stable
NA	Non-Fund Based Limit	NA	NA	NA	44	NA	CRISIL A1+

*Interchangeable with post-shipment credit and other working capital financing instruments