Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities and commercial paper programme of Hinduja Global Solutions Limited (HGSL) from 'Rating Watch with Developing Implications’ (RWDI) and has reaffirmed the ratings at 'CRISIL A+/CRISIL A1+’ while assigning a 'Stable' outlook.

 

The short-term ratings were put on RWDI on January 25, 2022, 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 along with buy-back of equity shares. Earlier, long-term ratings were put on RWDI on August 17, 2021 following the announcement of sale of healthcare vertical to Baring Private Equity Asia, a private alternate investment firm.

 

The rating action follows the announcement on November 12, 2022 regarding completion of the acquisition of NDL, following the receipt of approval and sanction by the NCLT and minority shareholders. As per the finalised share exchange ratio, the shareholders of NDL will receive 20 shares of HGS for every 63 NDL shares held. The sale of the healthcare vertical was completed in early January-2022 for an enterprise value of USD 1.2 billion (~Rs. 8900 crore) which boosted liquid funds available with the firm globally to Rs 5,992 crore as of March 31, 2022 (excluding inter corporate deposits (ICDs) but including overseas cash and investments in overseas debt instruments) after rewarding shareholders with dividends totaling Rs 220 per share (amounting to Rs 512 crore) for fiscal 2022 and increasing investments in inter corporate deposits (ICDs) of Hinduja group companies based in India to Rs 1,125 crore as on March 31, 2022. HGSL (excluding NDL) has progressively increased its lending to group companies in India the form of ICDs to Rs 1,715 crore as on September 30, 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).

 

HGSL has also crystallized the share buy-back amount at Rs 1,050 crore basis the audited fiscal 2022 results and completed acquisition of 100% equity in Diversify Offshore Staffing Solutions (DOSS, based in Brisbane, Australia) on February 25, 2022. DOSS will help gain foothold in the Australian market while increasing its strength in the Philippines.

 

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.

 

Revenue (including NDL) during the first half of fiscal 2023 grew 10% on-year to Rs 2,316 crore with EBITDA of Rs 126 crore at 5.4% margins as compared to 8.0% margins last year. The moderation in margins was owing to lower revenue booking and profits at NDL. Operating performance over the medium term is expected to be driven by ramp up in legacy HGS business with increased focus on new client addition and higher margin digital deals in the legacy business as well as customer acquisition philosophy in NDL. CRISIL Ratings expects HGSL’s revenue to grow to Rs 4,800-5,000 crore in fiscal 2023 with full year impact of NDL, with EBITDA margin of about 6-7% 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 marked by low gearing, comfortable debt protection metrics, and strong financial flexibility. These strengths are partially offset by exposure to intense competition in the business process management (BPM), broadband and digital video industry, amicable settlement among Hinduja family promoters 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 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. CRISIL Ratings has also consolidated the NDL’s media business subsidiaries in arriving at its ratings.

 

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: HGSL’s business diversification has improved with acquisition of NDL and presence in the media and communication (24% of the combined fiscal 2022 revenue). Also, its legacy customer services and Solutions business continues to be diversified across 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%). Post inclusion of NDL’s business, its exposure to media and entertainment would increase to ~30% (of combined fiscal 2022 revenue), followed by technology & telecom and consumer & retail with 15% share each, banking and financials with 14%, chemicals and biotech at 3% and remaining 24% contributed by the public sector and others. Post inclusion of NDL, ~31% of revenues will come from India (of combined fiscal 2022 revenue), followed by the US (29%), UK (24%), Canada (14%) and remaining from 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 of HGS in fiscal 2022, absence of debt-funded acquisitions, and maintenance only low capital expenditure in the last few fiscals have helped to sustain a healthy capital structure with negligible gearing. The company had nil debt (Rs 308 crore including lease liabilities) as on March 31, 2022, compared with Rs 394 crore (Rs 1,179 crore including lease liabilities) in the previous fiscal. The combined entity’s financial risk profile will continue to be marked by low debt (mainly comprising NDL’s debt), high networth and low gearing. Although capital spending will increase given NDL’s customer acquisition strategy (about Rs 90-100 crore annually), gearing will increase moderately but will remain low over the medium term.

 

Liquid funds was Rs 5,238 crore (excluding inter corporate deposits (ICDs) but including overseas cash and investments in overseas debt instruments) as on September 30, 2022, bolstered by proceeds from the sale of the healthcare business and residual cash accrual (after interim dividend payout and ICDs to group companies in India amounting Rs 1,715 crore as of September 30, 2022). 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. HGSL 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/CRISIL 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 cost and the ability to transfer any cost increase to customers.

 

High exposure to group companies: In recent years, HGSL has invested about Rs 200-500 crore each in group companies [Hinduja Group Ltd(HGL), Hinduja Realty Ventures Ltd(HRVL), Hinduja Energy India Ltd (HEIL) and NDL], which generate higher return compared to fixed deposits; the loans are returnable on call. Exposure to ICDs of group companies increased substantially to Rs 1,630 crore on January 31, 2022, and stood at Rs 1,715 crore (excluding NDL) as on September 30, 2022, including lending to HGL, HRVL, and NDL. Further, the company has also invested in debt instruments of overseas Hinduja group companies amounting Rs 2,645 crore as of September 30, 2022 (increasing from Rs 2,467 crore as of March 31, 2022) which too earn interest. Any sharp increase in exposure to group companies will be a monitorable.

Liquidity: Strong

Liquid surplus was Rs 5,238 crore (excluding ICDs but including overseas cash and investments in overseas debt instruments) as on September 30, 2022, bolstered by proceeds from the sale of the healthcare business and residual cash accrual (after interim dividend payout and ICDs to group companies in India amounting Rs 1,715 crore as of September 30, 2022). Working capital limit of Rs 355 crore was unutilized in the 12 months through September 2022 and the company fully repaid HGS’s long-term financials debt obligation by March 2022. Post-acquisition of the digital media business of NDL, 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.

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 operating profitability margin above 12-13% on a sustained basis
• Maintenance of strong financial risk profile and debt metrics while pursuing organic and inorganic growth opportunities
• Ensuring material liquid surpluses, despite ICDs to group companies, share buyback, and dividend

 

Downward Factors

• Sluggish performance leading to operating profitability below 5-6% 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

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.

 

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. The company has a pan-India presence, NDL delivers television 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 Television services, it's subsidiary ONEOTT Entertainment Limited has a strong presence in Broadband and Internet services in 40 cities. Its services under the brand "ONE Broadband'' provide converged services of Video, Data and Voice to consumers by delivering high-speed internet and services across multiple cities in India. With "ONE Gigafiber'', the broadband company also provides FTTH (Fibre To The Home) services for consumers - providing speeds up to 1,000Mbps.

 

During first half of fiscal 2023, HGSL (including NDL) reported a consolidated profit after tax (PAT) of Rs 273 crore on revenue of Rs 2,316 crore against Rs 201 crore of PAT generated on Rs 2,112 crore revenue during the same period last year.

Key Financial Indicators (CRISIL Ratings-adjusted)

Particulars	Unit	2022 (Actual)	2021* (Actual)
Operating income	Rs crore	3,271	5,638
PAT	Rs crore	6104	336
PAT margin	%	187	6.0
Interest coverage#	Times	9.21	9.67
Adjusted debt (excluding lease liabilities)/adjusted networth	Times	0.00	0.23
Adjusted debt /adjusted networth	Times	0.04	0.70

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

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