Rating Rationale
November 26, 2019 | Mumbai
Price Waterhouse & Co Chartered Accountants LLP
'CRISIL AA-/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.30 Crore
Long Term Rating CRISIL AA-/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA-/Stable' ratings to the long-term bank facilities of Price Waterhouse & Co Chartered Accountants LLP (PW&Co CA LLP), part of Price Waterhouse Network of Audit Firms in India, herein referred to as 'PW Network'.
 
The rating reflects PW Network's established position in the risk assurance services segment in India, its strong, reputed, and diversified customer base, comfortable financial risk profile - supported by the absence of long-term debt'and robust credit metrics. The rating also factors in benefits the PW Network  derives from being member firm of  the PricewaterhouseCoopers International Limited (PwC Global Network), wherein each member firm  is a separate and independent legal entity. These strengths are partially offset by moderate working capital requirements, exposure to intense competitive pressure, and susceptibility to any regulatory changes.
 
Revenue of PW Network was Rs.1,212 crore in fiscal 2019, a moderate decline of around 7% over the previous fiscal on account of mandatory auditor rotation as per the Companies Act (2013) which resulted in loss of some old customers. The Securities and Exchange Board of India's (SEBI's) order of imposing a ban on the PW Network on undertaking auditing services for listed companies or securities market intermediaries in the Satyam Computer Services Limited's (Satyam) case also constrained revenue. However, in September 2019, Securities Appellate Tribunal (SAT) quashed SEBI's aforementioned order. This is expected to help resurrect revenue, which is expected to grow over 5% in the medium term.
 
Operating margin of the PW Network remained steady at 17-19% in the last 3 fiscals, supported by its strong expertise in risk assurance services and above-average operating efficiency. CRISIL expects the PW Network to sustain its operating margin over the medium term. Financial risk profile is likely to remain comfortable on account of steady cash generation and low capital spends.

Analytical Approach

CRISIL has combined the business and financial risk profiles of PW&Co CA LLP, Price Waterhouse Chartered Accountants LLP, Price Waterhouse, Price Waterhouse Bangalore, Price Waterhouse & Co Bangalore LLP, Price Waterhouse & Co., Lovelock and Lewes, Lovelock and Lewes LLP, Dalal & Shah LLP, Dalal and Shah Chartered Accountants LLP, Price Waterhouse & Co LLP, and Choksey Bhargava & Co. LLP. This is because the firms, collectively referred to as the PW Network herein, are in the same line of business (Assurance) and have operational and managerial linkages.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Established position in the risk assurance services segment in India
PW Network is one of the leading players in the risk assurance business and has a longstanding presence in India. Being member firm of the PwC Global Network, wherein each member firm is a separate and independent legal entity'one of the largest and among the big four professional services firms globally, it has access to an extensive knowledge base, adopts best practices and policies globally, and adheres to international quality standards and processes.
 
* Diversified, reputed, and strong customer base
PW Network is part of one of the big four accounting firms and commands a good market share in terms of external accounting audit of companies in India. It has a diversified client base and provides services to large corporates such as Hindalco Industries Ltd (rated 'CRISIL AA/Positive/CRISIL A1+'), Tata Steel Ltd, Ashok Leyland Ltd, and Tata Teleservices Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+'). Furthermore, services extended to the top 10 customers contributed not more than 10% to revenue in fiscal 2019.
 
* Comfortable financial risk profile
PW Network had a healthy networth of Rs 253 crore as on March 31, 2019, despite large withdrawals by its partners over the last 2 fiscals, in the absence of any material capital spending needs. It does not have any long-term debt obligations. Debt only comprised working capital loans, and gearing and total outside liabilities to tangible networth (TOL/TNW) ratio remained low at 0.22 time and 1.25 times, respectively, as on March 31, 2019. The group is expected to sustain its comfortable financial risk profile over the medium term; albeit, capital withdrawal by the partners will remain a key rating sensitivity factor.
 
Weaknesses:
* Moderate working capital requirement
Operations are working capital intensive, with gross current assets (GCAs) of over 150 days as on March 31, 2019, resulting from large receivables and high unbilled revenue. GCAs are expected to remain stable over the medium term. On average, debtors remain high at 70-100 days. Any sustained increase in debtors, and therefore, working capital requirement with increase in scale of operation will continue to be monitored.
 
* Intense competition and susceptibility to regulatory changes
Although the majority of the market is dominated by the big four firms and being one among them helps PW Network acquire new customers, exposure to intense competition persists; this impacts pricing of the group.
 
Besides, the business is highly regulated and remains susceptible to regulatory changes. Mandatory auditor rotation, restriction in providing other services due to conflict of interest, resignation as statutory auditor for some of the large clients, payment penalty in the Satyam  case are a few examples of heightened regulatory and reputation risks faced by the entities. Some of these led to a decline in revenue in the past 2 fiscals.
 
The firms of the PW Network take insurance cover to mitigate financial loss emanating from such events; however, reputation-related risks may arise in case of any unforeseen adverse regulatory action.
Liquidity Adequate

PW Network is expected to generate healthy cash accrual (of Rs 20-40 crore per annum) and does not have long-term debt obligations. As on March 31, 2019, liquid investments (including cash and cash equivalents) aggregated Rs 20 crore. Bank limit utilisation averaged a high 86% in the 8 months ending July 2019. In the absence of any material capital expenditure (capex) over the medium term, cash accrual is expected to be sufficient to meet incremental working capital requirements. Being part of the PwC global network, it provides entities additional flexibility to raise funds in the event of an exigency.

Outlook: Stable

CRISIL believes PW Network will continue to benefit from being a member of the PwC global network, each of which is a separate and independent legal entity, and from its established market position in the risk assurance business and comfortable financial risk profile.
 
Rating sensitivity factors:
Upward factors
* Significant and sustained improvement in revenue and operating performance
* Substantial improvement in working capital management and liquidity, leading to TOL/TNW of less than 0.75 time
 
Downward factors
* Adverse regulatory action against the PW Network or any of its entities
* Significant decline in profitability (to below 14%) weakening cash accrual
* Larger-than-expected debt-funded capex or significant withdrawal of capital by the partners weakening credit metrics - for instance, TOL/TNW increasing to more than 2 times
* Stretch in working capital cycle

About the Group

PW&Co CA LLP and other firms of PW Network of Audit Firms in India are members of PricewaterhouseCoopers International Limited (PwC Global Network), each of which is a separate and independent legal entity. PW&Co CA LLP was established in July 2014 as a limited liability partnership firm. The member firms of PW Network provide assurance services (internal and external accounting audit). PW&Co CA LLP, Price Waterhouse Chartered Accountants LLP, Price Waterhouse Bangalore, Price Waterhouse & Co Bangalore LLP, Lovelock and Lewes, Lovelock and Lewes LLP, Dalal & Shah LLP, Dalal and Shah Chartered Accountants LLP, Price Waterhouse & Co LLP, Price Waterhouse, Price Waterhouse & Co and Choksey Bhargava & Co LLP, together form Price Waterhouse Network of Audit Firms in India (PW Network).

Key Financial Indicators - standalone - PW&Co CA LLP
As on / for the period ended March 31 Units 2019* 2018
Operating income Rs crore 270 252
Profit after tax (PAT) Rs crore 36 34
PAT margin % 13.1 13.4
Adjusted debt / adjusted Networth Times 0.31 NA
Interest coverage Times 51.90 68.48
*Provisional

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 Cr) Rating Assigned with Outlook
NA Cash Credit & Working Capital demand loan NA NA NA 30.00 CRISIL AA-/Stable
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Price Waterhouse & Co Chartered Accountants LLP 100% Part of PW Network
Price Waterhouse Chartered Accountants LLP 100% Part of PW Network
Price Waterhouse & Co LLP 100% Part of PW Network
Price Waterhouse & Co 100% Part of PW Network
Price Waterhouse & Co Bangalore LLP 100% Part of PW Network
Price Waterhouse Bangalore 100% Part of PW Network
Price Waterhouse 100% Part of PW Network
Dalal & Shah LLP 100% Part of PW Network
Dalal & Shah Chartered Accountants LLP 100% Part of PW Network
Lovelock and Lewes 100% Part of PW Network
Lovelock and Lewes LLP 100% Part of PW Network
Choksey Bhargava & Co LLP 100% Part of PW Network
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  30.00  CRISIL AA-/Stable    --    --    --    --  -- 
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
Cash Credit & Working Capital demand loan 30 CRISIL AA-/Stable -- 0 --
Total 30 -- Total 0 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation

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