Rating Rationale
March 03, 2020 | Mumbai
Intellect Design Arena Limited
Rating outlook revised to 'Stable'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.550 Crore
Long Term Rating CRISIL A-/Stable (Outlook revised from 'Positive' and rating reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Intellect Design Arena Limited (Intellect) to 'Stable' from 'Positive', and reaffirmed the rating at 'CRISIL A-'. The rating on the short-term bank facilities has also been reaffirmed at 'CRISIL A2+'.
 
The outlook revision reflects delay in closure of large deals, leading to slower than expected growth in revenues and consequent decline in profitability in fiscal 2020. As a result, Intellect's revenues declined by 6% compared to first nine months of fiscal 2019; license revenues declined to 147 crore during the first nine months of fiscal 2020 compared to Rs 218 crore during the same period last year. As a result of lower license revenues, operational earnings before interest, tax, depreciation and amortisation (EBITDA) also declined sharply to 0.9% during this period, from 7.6% during same period in the previous year.
 
Over the medium term, CRISIL expects Intellect to benefit from higher market acceptance for its product suites (especially in developed markets), healthy order pipeline leading to better business performance. The company has a healthy order backlog of ~Rs 1950 crore (including GeM project) as of December 31, 2019, strong deal funnel (greater than Rs 3800 crore as of December 31, 2019) and revenues will also gain from incremental contribution from launch of new product suites in fiscal 2021. Nevertheless, with a portion of its products suite expected to be in form of cloud deals where revenues are more spread over a period,  Intellect's annual revenue growth will moderate over the medium term, compared to healthy compounded annual growth rate of 24% registered between fiscal 2016 and 2019.
 
Expanding scale of operations will provide better cost absorption, while increasing share of revenues from software licenses and AMC revenues (annual maintenance contract) will gradually aid gross and EBITDA margins from fiscal 2021. Key credit metrics are expected to moderate in fiscal 2020 in keeping with lower cash generation and profitability, as well as higher working capital borrowings to support operations as compared to the previous year, and then recover in line with business performance. Improvement in cash flows to fund the continued investment in product development (estimated at Rs 120 crore per annum) and working capital requirements will remain key rating sensitive factors.
 
The ratings continue to reflect Intellect's growing stature as an intellectual property (IP)-led software product developer within the banking, financial services, and insurance (BFSI) domain, healthy prospects for software product companies in this domain and average financial risk profile. These strengths are partially offset by moderate operating profitability and exposure to intense competition in the products business.

Analytical Approach

CRISIL has taken a consolidated view on Intellect and its subsidiaries, considering financial fungibility among them, and presence of common management.
 
CRISIL has amortized the goodwill on acquisition of the subsidiaries, SFL Properties Pvt Ltd and Intellect USA, amounting to Rs 35.3 crore over a period of five years from fiscal 2015 (refers to financial year, April 1 to March 31). SFL properties was sold for Rs 20.1 crore during first quarter of fiscal 2020 and will be excluded from fiscal 2020.
 
CRISIL has capitalized the new product development cost while expensing the research cost from fiscal 2015 onwards, in line with the general industry practice.

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:
* Growing player in software product development and delivery, with presence across verticals within BFSI domain: Intellect has established itself in the BFSI products business globally by developing the Intellect suite of software products since 2004, while being a part of Polaris Consulting Services Ltd (previously Polaris Financial Technology Ltd). It has 14 products across various sub-segments of BFSI such as corporate banking, retail banking, treasury and capital markets, and insurance. It has spent over Rs 1200 crore for new product development, and owns a sizeable portfolio of IPs. Intellect's products have been well rated among the top products by industry analysts and has been instrumental in winning high value digital transformation deals against global competition. The company has also established a strong relationship with large international banks by providing critical information technology (IT) products to their business centres across the globe.
 
* Healthy demand prospects for product companies in BFSI: Within IT services and solutions, BFSI is the largest vertical, contributing to more than 50% of revenue. On an average, banks and financial institutions spend about 7-8% of revenue on IT, which is the highest among all verticals. Out of BFSI's IT budget, about 20% is allocated to buying new software or upgrading existing software. However, penetration of third-party vendor software is relatively low, at about 18% with majority of the software being developed in house. However, with increasing competition, it will be critical for banks to focus more on their core business to improve efficiency and outsource IT-related spending to third-party vendors such as Intellect. BFSI will continue to remain the largest technology spender, considering the dynamic nature and high regulatory requirements in the industry. Hence, revenue prospects for software firms in BFSI is expected to remain healthy, driven by continuing high spending, increasing adoption of digital technologies, and expected increase in penetration. Intellect is well placed to capitalize on this trend given its upgraded and matured product suites in this domain.
 
* Average financial risk profile: Intellect's financial risk profile is average. Regular equity infusion in the recent few years and improved business performance till fiscal 2019 lead to its net worth improving to a sizeable Rs 1028 crore on March 31, 2019, while healthy cash generation and sale of non-core assets also kept debt levels under control, leading to healthy credit metrics.
 
However given the expected moderation in operating performance in fiscal 2020,  key credit metrics such as Net cash accrual to total debt and interest coverage ratios, are expected to lower than 1.30 times and 17 times, respectively, in fiscal 2019. 
 
While the company had earlier availed term loans to fund new product development (estimated at Rs 120 crore per annum), additional debt may be raised sporadically for temporary cash flow mismatches (if any), in line with the business model. Operating performance will gradually improve in the medium term with better absorption of employee costs and moderate revenue growth in the coming quarters. Overall, CRISIL believes Intellect's financial risk profile will continue to improve over the medium term, backed by better cash flows.
 
Weaknesses:
* Moderate operating profitability: EBITDA margins increased to 8.8% in fiscal 2019 from 6.9% in fiscal 2018 mainly driven by better absorption of research and engineering costs and sales and marketing costs. However this has moderated to 0.9% in the first 9 months of fiscal 2020 due to lower contribution from license revenues (considering adjustments for deals closed but not recognized due to documentation delays, adjusted EBITDA margins were 4.5% in the first 9 months of fiscal 2020). Given the non-linear nature of revenues in the products business, profitability will be driven by higher scale of license revenues in advanced markets.
 
Ability to harness the potential in existing product suites as well as favourably monetize the products to be launched, driven by strong customer base and better pricing terms, which will drive revenue growth and thereby, improve profitability, will be key rating sensitivity factors.
 
* High competitive intensity in the BFSI vertical for IT products: The entire revenue is derived from the BFSI vertical, rendering revenue growth volatile and susceptible to cyclicality in the global financial sector. Furthermore, given the healthy business prospects in BFSI, the competitive intensity is also high with presence of several global and Indian vendors. This, combined with typically high client retention and long tenure of product implementation, acts as a high entry barrier for product companies in the BFSI space. This is different from the more commoditised IT services industry, where client retention is based on billing rates, with shorter tenure contracts.
Liquidity Adequate

Intellect has adequate liquidity supported by cash and cash equivalents of Rs 121 Cr as on December 31, 2019. Its working bank lines of Rs 250 crore, are moderately utilised at about 53% (of bank limits) over the 12 months period ended January 2020.  
 
Over the medium term, annual cash generation is expected to increase to about Rs 120-140 crore , which will just suffice to meet  ongoing product development capex (Rs.120 crore per annum) as well as debt repayments (Rs 30 crore per annum). Albeit, buffer is expected to be available in the form of unutilised bank lines, following the increase in working capital bank limits in fiscal 2020.
 
The company had reduced its working capital requirements in fiscal 2019. However, with increasing unbilled revenues in recent quarters, the working capital requirements are expected to increase in fiscal 2020 and gradually moderate following improved collection in fiscal 2021. The company has also steadily been enhancing its non-fund based limits, which helps it facilitate competitive bidding for IT project. Initiatives to dispose surplus assets may support liquidity.

Outlook: Stable

CRISIL believes Intellect's business risk profile will benefit from established product suites and steady monetization of its product suite, which will drive revenue growth along with non-linear improvement in operating efficiencies. Credit metrics, which have moderated in fiscal 2020, are expected to gradually recover in line with better business performance.

Rating Sensitivity factors
Upward factors
* Sustained Improvement in business risk profile driven by high growth in revenue through higher acceptance of products among a diversified client base.
* Sustainable increase in operating profitability to >12% through execution of higher value contracts leading to higher-than-expected improvement in operating cash flows in the medium term.
* Steady improvement in financial risk profile and reduction in working capital requirements, including through equity infusion.
* Better liquidity buffer, including through higher availability of unutilised working capital bank lines.
 
Downward factors
* Sustained modest growth in reveneus,  leading to operating profitability below 6-7%, and weaker than expected cash flow generation.
* Larger-than-expected debt funding of working capital or software development or acquisitions adversely impacting key credit metrics.
* Tightened liquidity, including due to high utilisation of working capital bank limits
About the Company

Intellect, incorporated in 2011 develops and delivers financial technology products for the BFSI domain. The company was listed on the Bombay Stock Exchange and National Stock Exchange on December 18, 2014. The promoters held a stake of 31.14% in Intellect as on December 31, 2019.  Intellect is headquartered in Chennai and has a global presence, with offices in India (Mumbai, Gurugram, and Hyderabad), Asia-Pacific, Europe, Middle East Asia, and Africa. It has around 4,000 employees.

For the nine months period through December 2019, Intellect reported net loss after tax of Rs 23.4 crore on net sales of Rs 989 crore, against profit after tax of Rs 89.7 crore on net sales Rs 1054 crore, during the nine months through December 2018.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 1450 1087
Profit after tax (PAT) Rs crore 102 36
PAT margins % 7.0 3.3
Adjusted debt/Adjusted net worth Times 0.13 0.22
Interest coverage Times 16.9 6.5
As per CRISIL adjusted figures

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)		 Rating assigned
with outlook
NA Cash Credit* NA NA NA 250.0 CRISIL A-/Stable
NA Foreign Currency Term Loan NA NA Jan-22 65.62 CRISIL A-/Stable
NA Bank Guarantee NA NA NA 199.5 CRISIL A2+
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 34.88 CRISIL A-/Stable
* Rs 45 crore interchangeable with non-fund based limits
 
Annexure - List of entities consolidated
Fully Consolidated Entities
S. No Name of Entity 
1 Intellect Design Arena Pte Ltd., Singapore
2 Intellect Design Arena Limited., United Kingdom (+)
3 Intellect Design Arena SA, Switzerland (+)
4 Intellect Design Arena, PT Indonesia**
5 Intellect Design Arena Ltda. Chile*
6 Intellect Design Arena Inc.,US**
7 Intellect Commerce Ltd, India
8 Intellect Design Arena Co. Ltd, Vietnam
9 Intellect Design Arena FZ LLC, Dubai (+)
10 Intellect Design Arena Phillipines, INC **
11 Sonali Polaris FT Ltd, Bangladesh (+)
12 SEEC Asia Technologies Private Limited, India***
13 Intellect Design Arena Inc., Canada*
14 Intellect Design Arena, SDN BHD, Malaysia**
15 Intellect Payments Limited, India (+)
16 Intellect India Limited, India (+)
17 Intellect Design Arena Pte Ltd, Australia**
18 Intellect Design Arena Ltd, Thailand**
19 Intellect Design Arena, Kenya (+)
* Subsidiaries of Intellect Design Arena Limited, UK
** Subsidiaries of Intellect Design Arena Pte Ltd, Singapore
*** Subsidiaries of Intellect Design Arena Inc, USA
{+) Direct Subsidiaries of Intellect Design Arena Ltd
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  350.50  CRISIL A-/Stable      29-06-19  CRISIL A-/Positive  08-03-18  CRISIL A-/Stable  12-10-17  CRISIL BBB+/Stable/ CRISIL A2  CRISIL BBB+/Stable/ CRISIL A2 
Non Fund-based Bank Facilities  LT/ST  199.50  CRISIL A2+      29-06-19  CRISIL A2+  08-03-18  CRISIL A2+  12-10-17  CRISIL A2  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 199.5 CRISIL A2+ Bank Guarantee 240 CRISIL A2+
Cash Credit* 250 CRISIL A-/Stable Cash Credit* 120 CRISIL A-/Positive
Foreign Currency Term Loan 65.62 CRISIL A-/Stable Foreign Currency Term Loan 87.86 CRISIL A-/Positive
Proposed Long Term Bank Loan Facility 34.88 CRISIL A-/Stable Proposed Fund-Based Bank Limits 30 CRISIL A-/Positive
-- 0 -- Proposed Non Fund based limits 72.14 CRISIL A2+
Total 550 -- Total 550 --
* Rs 45 crore interchangeable with non-fund based limits
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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