Rating Rationale
May 31, 2018 | Mumbai
3i Infotech Limited
Rating upgraded to 'CRISIL BBB-/Stable'
 
Rating Action
Total Bank Loan Facilities Rated Rs.387.81 Crore (Reduced from Rs.451.56 Crore)
Long Term Rating CRISIL BBB-/Stable (Upgraded from 'CRISIL BB/Stable')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facility of 3i Infotech Ltd (3i Infotech) to 'CRISIL BBB-/Stable' from 'CRISIL BB/Stable'.
 
The upgrade reflects sustained operating performance and steady cash flow generation, leading to improved liquidity and a longer track record of timely servicing of debt.
 
Following implementation of the revised debt restructuring scheme (DRS) under corporate debt restructuring (CDR) mechanism in June 2016, 3i Infotech focused on consolidation of operations in terms of leveraging existing products and services, cost reduction, and optimal utilisation of resources. This helped in sustaining operating profitability of around 16% in fiscal 2018, despite losing the largest and highly profitable customer. While revenue declined by 1.3% for fiscal 2018, revenue adjusted for the loss of largest customer grew stronger by 4.5%.
 
Steady operating performance with net cash accrual of Rs 116 crore for fiscal 2018 improved liquidity, which is also supported by unencumbered cash and bank balance of Rs 49 crore as on March 31, 2018 (Rs 119 crore as on March 31, 2017). The company prepaid debt of Rs 97 crore falling due between April 2018 and June 2019 under the DRS package. The package has been approved by lenders representing 96% by exposure and 91% by number, in line with CDR guidelines. The non-CDR lenders too have restructured their exposure along the lines of the CDR package. CRISIL considers the revised structure as applicable for all lenders, including two CDR and one non-CDR that are yet to approve the DRS package.
 
Over the medium term, 3i Infotech's strategy of focusing on key markets such as the United States, and higher budgeted investments towards product development will help drive revenue growth while sustaining profitability.
 
The rating reflects 3i Infotech's diversified revenue profile, leading BFSI (banking, financial services, and insurance) product portfolio with healthy demand prospects and profitability, and adequate liquidity backed by steady cash generation and long tenure of borrowings. These strengths are partially offset by average financial risk profile and modest scale of operation amid intense competition.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of 3i Infotech and all its subsidiaries, held directly or indirectly. This is because all these entities, together referred to as 3i Infotech, share a common management and are in the same business.

Key Rating Drivers & Detailed Description
Strengths
* Diversified revenue profile: Clients are spread across geographies and in multiple verticals such as banking, finance, insurance, and manufacturing. Wide product range reduces concentration risk and offsets slowdown in any particular segment. Also, presence in both the product and service segments gives the company an edge over other domestic competitors as most information technology (IT) companies in India are service centric. Steady revenue from annual maintenance charges in the products business provides stability to cash flow.
 
* Leading BFSI product portfolio with healthy demand prospects and profitability: The company's products, PREMIA and MFund, are among the leading in their segments in India. Product portfolio has strong intellectual property and boasts of healthy profitability. Within IT services and solutions, BFSI is the largest vertical, contributing to more than 50% of revenue. On average, banks and financial institutions spend 7-8% of revenue on IT, which is the highest customer spend among all verticals. Out of BFSI's IT budget, about 20% is allocated to buying new software or upgrading existing software. Revenue prospects for IT product firms focusing on BFSI is expected to remain healthy, driven by continued high spending, increasing adoption of digital technologies, and expected increase in penetration.
 
* Adequate liquidity backed by steady cash flow and debt repayment tenure: Liquidity is supported by steady cash accrual. Long tenure of repayment schedules approved under DRS for both term loans as well as preference share capital provide financial flexibility and partly offset effects of a leveraged financial risk profile.
 
Weakness
* Average financial risk profile: Long term debt is Rs 483 crore and preference share capital Rs 341.9 crore against a small networth of Rs 139 crore, as on March 31, 2018. Hence, gearing was high at 6.1 times. Large debt and modest profitability have led to subdued debt protection metrics, reflected in interest coverage and net cash accrual to total debt ratios of 3.43 times and 0.14 time, respectively, for fiscal 2018.
 
* Modest scale of operations amid intense competition: Small scale is a constraining factor in an industry wherein economies of scale matter. With global majors such as Computer Science Corporation and International Business Machine Corporation having an established base in India and many companies shifting to an offshore revenue model, competition in the domestic market is intensifying. 3i Infotech is a medium-sized player and its revenue and operating profitability are likely to be constrained.
Outlook: Stable

CRISIL believes 3i Infotech will sustain improvement in business and financial risk profiles over the medium term, backed by healthy revenue growth, improving profitability, and reduction in debt.
 
Upside scenario
* Better-than-expected operating profitability with healthy cash generation
* Significant reduction in debt backed by improved financial risk profile
 
Downside scenario
* Lower-than-expected revenue growth and operating profitability
* Further weakening of financial risk profile due to large, debt-funded capital expenditure or acquisitions

About the Company

3i Infotech (formerly, ICICI Infotech Ltd) was set up in 1993 by the erstwhile ICICI Ltd as a back-office processing company. The entity has presence across the globe with delivery centres in South Asia, the Asia-Pacific region, the Middle East, North America, and Western Europe. It offers a range of IT products and services. Its IT product solutions include applications for the banking, financial, and insurance sectors, and an enterprise resource planning suite of applications. The IT services include application development and maintenance, IT consulting, infrastructure management services, business intelligence and enterprise applications, and offshore and onsite support (through its business process outsourcing operations).

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs Crore 991 1004
Profit after tax(PAT) Rs Crore 110 94
PAT Margins % 11 9.4
Adjusted Debt/Adjusted Net Worth Times 6.10 15.18
Interest Coverage Times 3.43 2.25

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 Term Loan NA NA Mar-2024 387.81 CRISIL BBB-/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  30-11-17  Withdrawal  29-11-16  CRISIL D  16-11-15  CRISIL D  CRISIL D 
Fund-based Bank Facilities  LT/ST  1317.90  CRISIL BBB-/Stable      30-11-17  CRISIL BB/Stable  29-11-16  CRISIL D/ CRISIL D  16-11-15  CRISIL D/ CRISIL D  CRISIL D/ CRISIL D 
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
Term Loan 387.81 CRISIL BBB-/Stable Term Loan 451.56 CRISIL BB/Stable
Total 387.81 -- Total 451.56 --
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
Rating Criteria for Software Industry
CRISILs Approach to Recognising Default
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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