| Larsen and Toubro Infotech Limited | ||||||
| Long-term rating upgraded to 'CRISIL AAA/Stable'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||
| Detailed Rationale |
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CRISIL has upgraded its rating on the long term bank facilities of Larsen and Toubro Infotech Limited (LTI) to 'CRISIL AAA/Stable' from 'CRISIL AA+/Positive' and reaffirmed its rating on short term bank facilities on at 'CRISIL A1+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of LTI and its subsidiaries, held directly or indirectly, as all the companies have a common management and are in the same line of business. The ratings also factor in support expected from its parent. CRISIL believes that LTI will, in case of exigencies, receive necessary support from its parent, considering the strategic focus of the parent towards service based businesses |
| Key Rating Drivers & Detailed Description |
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Strengths: * Healthy business risk profile, supported by an established market position The company has an established market position in key verticals and sound operating efficiency. Diversified service offerings such as Application Development Maintenance, Enterprise Solutions, Infrastructure Management Services, Testing, Analytics & Artificial Intelligence strengthens the business risk profile of the company. Healthy deal pipeline and healthy share (41% in Q3-20 against 37.0% in Q3-19) of digital services in the revenue streams provides strong future growth visibility. With the company growing faster in digital areas, and with addition of newer clients, dependence on the top 5, 10 and 20 clients has been reducing gradually over the past 4 years ' further benefiting business risk profile. The number of active clients has increased from 211 as on Dec 31, 2015 to 429 as on Dec 31, 2019 which has resulted in compound annual growth rate of 17% between FY15 and FY19. In H1-20 the slower growth in BFS segment has been mitigated by better performance in energy and utilities and CPG Retail and Pharma segment. LTI has shown considerable growth in all the segments CPG Retail and Pharma, BFS, Insurance, energy and utilities, manufacturing and others. Geography wise, major growth contribution was from North America and India followed by Europe. * Strong financial risk profile The company has a strong financial risk profile marked by large net worth (Rs.4706 crore at September 30, 2019), healthy cash accruals, a debt free balance sheet and robust liquidity (over Rs.2000 crore at September 30, 2019). No large scale debt funded capital expenditures or acquisitions are expected over the medium term. All the capacity expansions of about Rs 150 ' Rs 200 cr are expected to be incurred through internal accruals. Since LTI has ample cash surpluses and there is minimum reliance on debt, the capital structure is expected to be healthy with nil gearing over the medium term. * Support from parent, L&T The IT services business has been becoming more critical to L&T group in recent years. As against the earlier stance of focusing more on infrastructure and capital intensive segments, the L&T group presently is focusing more on services business, which include financial service and IT service. The revision in strategy is also a fallout of lower than envisaged performance of infrastructure business and sustained growth in services business, which are asset light, have healthy growth potential, and offer high return on capital employed. Over the years, the contribution of service business, both in terms of revenue and profitability has been improving. Additionally, L&T has also been leveraging the capabilities of the services businesses to grow its core business. L&T's new strategic initiative, L&T Nxt, also bodes well for the services business. L&T is eyeing more than USD 1 billion revenue from its newly launched new-age technology platform L&T Nxt in the next five to seven years and LTI is set to play a major role in this. The recent acquisition of Mindtree Ltd further signifies L&T's intent to become larger and more credible in the IT services business. Further, being an L&T group company, LTI also benefits from the strong brand and domain expertise available within the group, resulting in better penetration and acceptability in the market. Treasury operations are supported by L&T Treasury, and critical treasury decisions are taken by the Treasury Committee which consists of members from the parent and LTI. Besides, both the parent, and LTI also have 5 common board members. Weaknesses: * Customer and geographical concentration in revenue North America contributed 68% to the revenue, in fiscal 2019. Any regulatory changes in the region could have a significant impact on operations. Protectionist measures adopted by the US may also pose business challenge for the company as well as its peers. However, the same is an inherent feature of the most major companies in the IT industry as significant portion of revenues originate from US. * Exposure to intense competition in the IT industry The business environment for the IT industry continues to be challenging. Indian IT players will need to consistently scale up their operations, primarily due to intense competition among themselves and from multinational corporations that are expanding their offshore operations in India. The other challenges faced include maintaining an efficient cost structure, ensuring effective labour retention and utilization, and remaining responsive to the dynamic nature of the industry. As digital services are gaining traction more and more companies are intensifying their focus on digital technologies space resulting in increased competitive intensity. Given the increasing competition and the resultant pricing pressures, the ability provide differentiated services will remain extremely critical to maintain competitive advantage. |
| Liquidity Superior |
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Liquidity is robust, driven by expected cash accrual of around Rs 1,200-1500 crore per fiscal in fiscals 2020-22, and cash and marketable securities of Rs 2182 crore as on Sep 30, 2019. The company has remained debt-free for the past three fiscals and is expected to remain so due to no major debt-funded expansion plans over the medium term. Cash accruals should more than suffice to meet incremental working capital requirement and small ticket acquisitions. |
| Outlook: Stable |
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CRISIL believes LTI will maintain a healthy business risk profile over the medium term, supported by steady revenue growth and sound operating efficiency and the strength of the L&T brand. The financial risk profile is also expected to remain strong over this period due to healthy cash accrual, debt free balance sheet, and only moderate capital spending. |
| Rating Sensitivity factors |
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Downward factors * Significant decline in revenues by over 10% and deterioration of operating margin to below 14%, adversely impacting cash flows * Sizeable debt-funded acquisition, leading to material weakening of debt protection metrics and liquidity * Change in the strategic focus of parent L&T towards service-based businesses and/or deterioration in credit risk profile of the parent. |
| About the Company |
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LTI, headquartered in Mumbai, was incorporated in December 1996; the company is a subsidiary of L&T. LTI provides IT services, including Application, Development, Maintenance, Enterprise Solutions, Infrastructure Management Services, Testing, Analytics, AI & Cognitive and other services. In January 2014, the company transferred its product engineering services division to a group company, Larsen & Toubro Technology Services ('CRISIL AAA/Stable/CRISIL A1+'). |
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| Key Financial Indicators - Year to date figures (9 months ended figures) | ||||||||||||||||||||||||
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Interchangeable with packing credit up to Rs 25 crore **Rs 25 Crore interchangeable with buyer's credit limit ^Fully interchangeable with cash credit/overdraft facility and buyer's credit limits ^^Interchangeable with cash credit/overdraft facility limits %Rs 28 crore interchangeable with buyer's credit limit @Overdraft Facility | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Interchangeable with packing credit up to Rs 25 crore **Rs 25 Crore interchangeable with buyer's credit limit ^Fully interchangeable with cash credit/overdraft facility and buyer's credit limits ^^Interchangeable with cash credit/overdraft facility limits %Rs 28 crore interchangeable with buyer's credit limit @Overdraft Facility | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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