Rating Rationale
October 17, 2022 | Mumbai
Subex Limited
Rating downgraded to 'CCR BBB+/Negative'
 
Rating Action
Corporate Credit RatingCCR BBB+/Negative (Downgraded from 'CCR A-/Stable')
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has downgraded its rating on the corporate credit rating of Subex Limited (SL; part of the Subex Group) to ‘CCR BBB+/Negative’ from ‘CCR A-/Stable’.

 

The rating action reflects weakened business risk profile marked by decline in group revenue by 8.6% year on year to Rs.340.93 crore in FY22 while the operating margin has declined from 25.5% to 10.4% during the same period. Scale of operation has remained stagnant for the group in the last few fiscals. Further, in the last few quarters scale and margin have been impacted due to change in organizational structure wherein major revenue contributing division has been exchanged between the parent company SL and its subsidiary i.e., Subex Assurance LLP (SAP). Incremental employee cost and other expenses were incurred for this restructuring which coupled with reduced revenue contribution has led to decline in profitability in the last 2-3 quarters. Management has stated that this internal restructuring has now been fully completed. However, the stabilization of this restructuring would be a key rating monitorable over the medium term.

 

The rating continues to reflect the established market position with strong client relationship in telecom software service segment, an experienced management team and strong financial risk profile. These strengths are partially offset by the group’s customer and end user industry concentration in revenue profile and moderate scale of operations.

Analytical Approach:

For arriving at the ratings CRISIL Ratings has consolidated the business and financial risk profiles of SL and its subsidiaries Subex Assurance LLP; Subex Technologies Limited, Subex Digital LLP, Subex Americas INC, Subex UK Limited, Subex Middle East Limited, Subex Bangladesh Private Limited, Subex Asia Pacific Pte Limited and Subex Inc, collectively referred to as the Subex group.

 

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:

  • Established market position with strong client relationship in telecom software service segment: The Subex group provides revenue assurance and fraud management software solutions to its customers amongst other products; which are of critical importance to the customers in the telecom segment. With its ability to meet changing requirement of customers and provide robust support services, the group has been able to secure repeat contracts from its key customers like British Telecom Limted, Telstra International Limited, Optus Systems Private limited etc. CRISIL Ratings believes the group shall benefit from its strong client relationship in the telecom segment over the medium term.

 

  • Experienced Management team: The group is managed by Mr. Vinod Kumar who has an experience of more than 4 decades giving strategic direction and turning around entities. Additionally, Mr Vinod Kumar along with his core management teams, have a strong domain knowledge and understanding of software requirements for various end-users, which benefits the group.

 

  • Strong financial risk profile: The financial risk profile is strong marked by a comfortable capital structure and robust debt protection metrics.  Due to absence of external debt, the capital structure remains strong and is expected to remain so over the medium term. The group is likely to fund its incremental working capital requirements and capital investments through its internal accruals and cash balances Further debt protection metrics are strong marked by an interest coverage of around 13.11 times for fiscal 2022; the interest component primarily being finance lease charges.  Supported by absence of debt funded acquisitions and capital expenditure, the financial risk profile is expected to remain strong over the medium term.

 

Weaknesses:

  • Modest scale of operations: The scale of operations is modest as reflected in revenues of around Rs.340.93 in FY22. Subex group has recently concluded internal restructuring wherein major revenue contributing domains which were earlier handled by the subsidiaries is brought down under the parent company i.e., Subex Limited. This is expected to increase the standalone revenue contribution of Subex Limited. However, at the group level the same is not expected to have any major impact. Subex limited continues to face intense competition in the software application industry which reflected muted growth marked by revenue CAGR of less than 1% in the last six fiscals ended FY22.  Further there are players who are building core competencies around several products/services which overlap with that of this group’s offerings, thereby, exposing Subex group to competition. The moderate scale of operations shall continue to constrain the business risk profile over the medium term.

 

  • Customer and end user industry concentration in revenue profile: The group derives almost its entire revenues from the telecom segment. Any slowdown in the telecom segment could adversely impact the group’s ability to add new customers and add new projects from existing customers. This is partially mitigated by launch of new products to other end-user segments like banking and financial institutions. However revenue contribution from these products are currently low at around 5% of the overall revenues. Diversification in end user industry and customer profile resulting in an improvement in revenues shall remain a key monitorable.

Liquidity: Strong

Liquidity remains strong supported by large cash and equivalents and absence of debt. The group is expected to generate cash accrual of around Rs.15-20 crore annually against no major repayment obligations.  Liquidity is further supported by unencumbered cash and bank balances of more than Rs.100 crore. This is likely to support the group’s incremental working capital requirements. The group does not have any debt funded capital expenditure/acquisition plans over the medium term supporting the liquidity. Contingent liabilities comprising of income tax and service tax disputes were at around Rs.103 crore as on March 31, 2022. Crystallization of these liabilities and its impact on the liquidity shall remain a key monitorable.  The group does not have any fund based working capital limits.

Outlook: Negative

CRISIL Ratings believes SL shall benefit from its established market position over the medium term

Rating Sensitivity factors

Upward Factors

  • Significant revenue growth while improvement in operating profitability to more than 20 percent
  • Sustenance of strong financial risk profile
     

Downward Factors

  • Decline in business profile, resulting in a decrease in cash accrual to less than Rs.13 crore
  • Any large debt funded acquisition impacting the financial risk profile

About the Group

SL is a technology company listed on the National Stock Exchange and BSE Ltd. Subex Assurance LLP is a wholly owned subsidiary of Subex Limited. The group provides business support systems to telecommunication companies, which improves their revenue and profits through the identification and elimination of leakages in their revenue chain and includes fraud, revenue assurance, analytics, partner management, cost management and credit risk management.

Key Financial Indicators Consolidated

As on / for the period ended March 31

 

2022

2021

Operating income

Rs crore

340.93

372.99

Reported profit after tax

Rs crore

21.0

53.2

PAT margins

%

6.16

14.26

Adjusted Debt/Adjusted Net worth

Times

0.00

0.03

Interest coverage

Times

13.11

26.89

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)

Complexity Levels

Rating Assigned 

with Outlook

NA

NA

NA

NA

NA

NA

NA

NA

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Subex Limited

100%

Parent company

Subex Assurance LLP

100%

Subsidiary

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Corporate Credit Rating LT 0.0 CCR BBB+/Negative   -- 18-10-21 CCR A-/Stable   --   -- --
All amounts are in Rs.Cr.

                                                                 

Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation

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