| Tech Data Advanced Solutions (India) Private Limited | ||||||
| Ratings placed on ‘Watch Positive’ | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has placed its ‘CRISIL BBB+/CRISIL A2’ ratings on the bank facilities of Tech Data Advanced Solutions (India) Private Limited (TDAS) on ‘Rating Watch with Positive Implications’
The rating action follows the recent action by S&P Global Ratings (S&P) of placing the ‘BB’ rating on the parent, Tech Data Corporation (Tech Data) on ‘Credit Watch with Positive Implications’ on account of Tech Data`s announcement of merger with SYNNEX Corp.
Tech Data Corp. announced that it has agreed to merge with SYNNEX Corp. in a transaction valued at $7.2 billion. If the transaction closes as announced, it is believed that it will likely lead to the creation of a combined company with a less-leveraged capital structure. In addition, the transaction will also reduce the influence of Tech Data's current financial sponsor, affiliates of Apollo Global Management, over its financial decision making.
The ratings continue to reflect strong financial and operational support from the parent, a growing presence in the domestic information technology (IT) network and storage systems segment, an established relationship with customers and suppliers, and healthy policies for mitigating counterparty risks. These strengths are partially offset by an average financial risk profile due to net losses and a below-average capital structure, and large working capital requirement in the distribution business. |
Analytical Approach The ratings factor in support from the parent, Tech Data, considering corporate guarantees provided to banks for timely meeting of debt obligation and the strategic importance of the Indian entity as one of the largest subsidiaries in the Asia-Pacific region. |
Key Rating Drivers & Detailed Description Strengths:
In February 2017, Tech Data Corporation acquired the technology solutions business of TDAS (formerly, Avnet Technology Solution India Pvt Ltd) to broaden its product offerings and enter the Asian market where technology solutions have a strong demand. Since then, Tech Data Corporation has been providing technological and financial support to TDAS, and will continue to do so, given the strategic importance of the latter. Tech Data Corporation has guaranteed the secured short-term debt contracted by TDAS for working capital requirement. TDAS, which specialises in networking and data storage solutions, plans to enter the high-value enterprise segment, which includes cloud- and analytics-based applications. Technical expertise and the broad products portfolio of Tech Data Corporation will help TDAS penetrate the domestic market. Any change in stance by the new management towards supporting the Indian entity will remain a key rating montiorable.
The company follows the risk management policies defined by Tech Data Corporation to efficiently mitigate risks inherent in the IT distribution business, such as vendor concentration, product obsolescence, and credit risks. The vendor base is diversified. A quick conversion cycle and a strong relationship with vendors ensure limited risk arising from product obsolescence. Credit risk is mitigated by checking credit worthiness of customers, placing orders for equipment only on receipt of purchase orders, and taking post-dated cheques. Purchases in foreign currencies account for about 20% of total purchases, which are hedged locally.
There was a compound annual growth rate of 15% in revenue between fiscals 2017 and 2020. The company has been steadily expanding its presence in the domestic market by strengthening channel partners and the vendor base. It has more than 300 channel partners and the number is expected to increase steadily over the medium term.
Weakness:
There is intense competition, especially in urban markets, for data storage- and networking-related products. While profitability in distribution is typically lean, the operating margin has been lower than that of peers in fiscal 2020 mainly due to currency depreciation and impact of covid-19 in last month. The average margin in the industry is 1.5-2.7%, while the company’s margin is -0.6% in fiscals 2020
Operations are working capital intensive because of stretched receivables, as favourable payment terms are offered to customers to ensure loyalty and expand business. The company is able to negotiate better payment terms with suppliers in case of large deals, which partially cover receivables. Though inventory is minimal, operations remain working capital intensive, resulting in significant reliance on short-term borrowing.
The credit metrics are constrained by low operating profitability and net losses. The operating profitability declined because of currency depreciation and impact of pandemic in fiscal 2020. Increasing utilisation of the bank limit has led to higher interest expense and resulted in net losses and hence to a negative networth as on March 31, 2020.
Debt protection metrics were weak. The gearing and interest cover was negative as on March 31, 2020. While profitability and cash flow are expected to improve gradually, large working capital debt will continue to constrain the financial risk profile. |
Liquidity: Adequate Despite weak cash accruals the company has been able to manage through support from parent. Tech Data Corporation has guaranteed the secured short-term debt contracted for working capital requirement. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company TDAS was incorporated in 1995 as Ontrack Solutions Pvt Ltd and sold to Avnet in 2009. The company, based in Mumbai, distributes IT hardware and software solutions. Most of the revenue is derived from the domestic market. Before February 2017, it was a subsidiary of Avnet, forming part of its USD 8.7 billion (around Rs 56,550 crore) technology services business. Subsequently, Tech Data Corporation acquired this entire business to transform itself into an end-to-end service provider. |
About Tech Data The company is a distributor of broad-line products such as personal computing, mobile devices, and consumer electronics; and IT products such as servers, and storage and networking hardware and software. It has a significant presence in North America and Europe. After acquiring the technology solutions business from Avnet, the company entered the Asian markets. |
Key Financial Indicators
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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)
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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 | ||||||||||||||||||||||||||||||||||||||||||
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