Detailed Rationale

Crisil Ratings has upgraded its ratings on the bank facilities of Black Box Ltd (BBL, erstwhile AGC Networks Ltd) to ‘Crisil BBB+/Stable/Crisil A2’ from ‘Crisil BBB/Positive/Crisil A3+’.

 

The upgrade factors an expectation of an improved business as well as financial risk profile of the company. While revenues could witness some degrowth amidst a continued slowdown seen in global IT spends as well as on factoring the company’s decision to focus on high margin deals, EBITDA has seen a significant improvement, benefited by the cost optimization measures undertaken by the company. BBL’s financial risk profile to also improve, supported by improved operating profitability as well as intended capital infusion, of which Rs.136 crore has been received as on date. These funds, are primarily to be utilised to fund the working capital requirement of the company, to help reduce dependence on external debt.

 

The ratings continue to reflect the established market position of BBL in the IT infrastructure solutions business and its healthy and diversified revenue profile, marked by diverse end-user industries and an established clientele. These strengths are partially offset by high geographical concentration in revenue and exposure to global competition.

 

Revenues could degrow by 5-7% to Rs 5925-6000 crore in fiscal 2025, as end user customers in the key geographies of US (contributing ~74% of revenue) and Europe (contributing ~8% of revenue) have deferred capital expenditure (capex) amid continued macroeconomic headwinds in these regions. To add, the company has also restructured its operating model during the year, with greater focus now on securing larger deals in terms of value with key customers. The benefit of this restructuring along with the cost optimization measures undertaken in terms of employee rightsizing has enabled a significant improvement in EBITDA margins to 8.7% during the first nine months of fiscal 2025 from 6.8% in fiscal 2024 (~4.5% in fiscal 2023). Operating revenues are expected to witness a recovery next fiscal supported by its outstanding order book of USD 465 Million as of 31st December 2024, with stable profits expected over the medium term.
 

Of the total equity infusion, Rs 210 crore is expected to be contributed by the promoters, i.e. Essar Group & the Key Managerial Personnel of BBL, while the balance would be spread across several investors who mainly comprise of HNI’s. As per the terms of the warrant, the warrant holders have already deposited 25% of the total consideration of the warrants (i.e. Rs 96.5 Crore). While the full amount is due by March 2026 (18 months since warrant issue) some investors, primarily non promoters have prepaid their contribution. Consequently, the company has already received Rs 136 crore and is expecting the balance by fiscal 2026. Timely receipt of the balance planned equity infusion, and its deployment would be a key monitorable.

Analytical Approach

• Crisil Ratings has combined the business and financial risk profiles of BBL and its subsidiaries, given their significant managerial, operational and financial linkages.
• Crisil Ratings has amortised goodwill on acquisition of BBX and COPC Holdings in fiscal 2019, amounting to around Rs 150 crore, over five years. It has also amortised the goodwill amounting to Rs 49 crore pertaining to the acquisition of Black Box Technologies LLC (Dubai), Fujisoft Security Solutions LLC (Dubai), Fuji Soft Technology LLC (Abu Dhabi), Pyrios Pty Ltd, Pyrios Ltd and Mobiquest Solutions Pte Ltd in fiscal 2021.
  
  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:

Healthy business risk profile, driven by established market position: 

BBL has an established market position in the IT infrastructure solutions business and a diversified reach across end-user industries such as banking, financial services and insurance (BFSI), healthcare, manufacturing, business services, retail, and distribution. The company provides a wide array of solutions, including unified communications, customer experience, borderless networks, data centers, clouds and data security solutions. The marquee client base includes Bank of America, Wells Fargo, Meta, Amazon, Cleveland Hospital. Client relationships are longstanding, with average relationship of over two decades with the top 10 clients. The company also has collaborations with various global technology leaders. BBL will continue to benefit from its established market position, driven by its diversified range of service offerings and end-user industries, alliances with leading software vendors, and longstanding customer relationships. Orders of USD 465 million as of December 2024 provide revenue visibility for the medium term.

Large scale of operations and healthy accrual

In January 2019, BBL acquired Black Box Corporation, USA (BBX), a loss-making company at that time. BBL has successfully turned around the operations of BBX, clocking around 7% operating margin in the first year of takeover itself. The revenue of BBL grew at a CAGR of 5-6% over fiscals 2020-2024, to Rs 6,268 crore in fiscal 2024. The operating margin was impacted in fiscals 2022 and 2023, largely due to supply chain challenges and higher manpower/freight cost. but improved to ~8.7% by YTD 9MFY25. The margin is expected to improve to 9-9.2% in fiscals 2026 and 2027.

 

Weaknesses:

Moderate through improving capital structure and debt protection metrics

The company’s operations are working capital intensive which the company also manages by utilizing off balance sheet non-recourse securitisation of BBX’s receivables which the company had started availing since the leveraged buyout of BBX, wherein BBL has focused on reducing its debt. While the on-book debt utilization stood at Rs 397 crore as of 31st December 2024, the same does not include the factoring debt which is generally utilised at USD 90-95 Million. Even after factoring this debt, the interest coverage remains comfortable and estimated at around 3.7x in fiscal 2025. The fund infusion from convertible warrants are also expected to help with managing of long term working capital requirement of the company & would be further supported by improving profitability. While BBL is part of the Essar group, no financial support is expected from the company to the group. Any such support will remain a key monitorable.

 

Networth was impacted in the past due to carried forward losses of BBX after its acquisition but will see an improvement from fiscal 2025 supported by equity infusion & healthy cash generation, thereby improving the capital structure of the company.

 

Exposure to intense competition in the IT solutions integration sector

With rapid evolution of the global IT-enabled services sector, competition is intensifying as more companies vie for a share of the revenue pie. BBL competes with multiple players in most of the verticals. Availability of low-cost skilled talent is also a key variable in this industry. The company also faces the risk of economic slowdown in key markets such as the US and Europe, as well as regulatory changes.

Liquidity: Adequate

BBL had cash and equivalents of Rs 282 crore as on September 30, 2024. Utilisation of fund-based limits in India averaged around 21% over the 9 months through November 2024. Expected healthy annual cash accrual of Rs 330-500 crore between fiscals 2025 to 2027 will support annual debt obligation of Rs 20-22 crore in fiscals 2025 and 2027 and also cover any moderate capex/acquisition plans.

Outlook: Stable

Crisil Ratings believes the credit risk profile of BBL will continue to benefit from the company’s cost optimisation measures, established market position and improving financial risk profile.

Rating Sensitivity Factors

Upward Factors:

• Sustained double-digit growth in revenue with operating margins maintained at current levels
• Improvement in capital structure, backed by healthy accretion to reserve, progressive debt reduction or equity infusion

 

Downward Factors:

• Significant weakening in revenues or weakened profitability, leading to interest cover below 3 times
• Significant increase in debt due to dividend, buyback, acquisitions, or indirect or direct support to Essar group companies

About the Company

BBL is a global information and communication (ICT) solutions provider and integrator in business communication systems, applications and services. The company provides a server-based converged networking platform for voice, data and video, including IP telephony, multimedia call center and customer relationship management (CRM) solutions, unified communications, and customer service. To expand its presence globally, the company acquired BBX on January 7, 2019. BBX provides technology solutions by partnering with leading technology vendors and offers need-based value-added services through its key technology alliance partners, aiming to extend end-to-end solutions.

 

BBL has scaled up revenue to nearly Rs 6,200 crore post-acquisition of BBC and caters to over 8,000 customers in multiple geographies such as the Middle East, Africa, North America, Australia, New Zealand, Singapore, Philippines, and the UK.

 

BBL was incorporated by Tata Telecom Pvt Ltd in 1986, to manufacture telecommunication equipment, and was acquired by US-based Avaya Inc in 2004. In August 2010, the Essar group took over the company and now holds 71.14% stake in BBL.

 

For the first nine months of fiscal 2025, BBL reported revenue of Rs 4422 Cr with a profit after tax of 144.31 crore, compared to Rs 4,801 crore and profit after tax of Rs 96.77 crore in the previous fiscal.

Any other information: Not Applicable