Rating Rationale
August 19, 2024 | Mumbai
Cadsys (India) Limited
Rating outlook revised to 'Stable'; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.7.5 Crore
Long Term RatingCRISIL BB+/Stable (Outlook revised from 'Positive'; Rating Reaffirmed)
Short Term RatingCRISIL A4+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Cadsys (India) Ltd (CIL; part of Cadsys group) to ‘Stable’ from ‘Positive’ while reaffirmed its rating at ‘CRISIL BB+’. The short-term rating has been reaffirmed at ‘CRISIL A4+’.

 

The outlook revision factors in the significant stretch in the working capital cycle of Cadsys group as indicated by gross current assets (GCAs) of 284 days on account of delay in realisation of payments from a single customer in the US, resulting in elongation of receivables cycle to 166 days in fiscal 2024 from 129 days in fiscal 2023. The group has terminated the execution of the order as the likelihood of payment from this counterparty is doubtful on account of weak financial flexibility and the receivable outstanding of ~$4 million (Rs 34 crore) amounted to 35% of the total debtors outstanding as on March 31, 2024. The group will initiate legal proceedings against the counterparty for payment realization. Further, any provision or write-off regarding these receivables might impact the profitability of the group as well.

 

The ratings continue to reflect the extensive experience of the promoters in the information technology-enabled services (ITES) industry and above-average financial risk profile. These strengths are partially offset by the modest scale of operations and exposure to intense competition and large working capital requirements.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of CIL and its subsidiaries Apex Advanced Technology LLC (AAT), Apex Engineers India Pvt Ltd (AEIPL), and Cadsys Technologies LLC, USA (CTLLC) as all the entities are in similar businesses.

 

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:

  • Extensive experience of the promoters: Founder director Mr Rangacharya is a post-graduate from the Indian Institute of Technology, Chennai, and has extensive experience in software development, computer-aided design (CAD), and marketing. Mrs Nallani Padmaja, the whole-time director and co-founder, handles the administrative and financial affairs. The promoters’ expertise in workflow design and process re-engineering, an essential requirement for the ITES industry, with a proven track record of around 20 years has given them an understanding of the dynamics of the market and enabled them to establish relationships with customers.

 

  • Comfortable financial risk profile: The financial risk profile is characterized by moderate capital structure and robust debt protection metrics. Networth remains strong around Rs 88 crore as on March 31, 2024. Due to healthy networth and capital infusion in the form of equity in AAT by FVLCRUM, an US based private equity (PE) investor, the capital structure remains healthy with gearing and total outside liabilities to tangible networth ratios below 0.99 time and 1.37 time as on March 31, 2024. Debt protection metrics remain robust, with interest coverage ratio of 6.45 times for fiscal 2024.

 

Weaknesses:

  • Exposure to intense competition: Intense competition in the ITES segment will continue to constrain revenue growth and pricing flexibility to an extent over the medium term. Revenue grew to Rs 217 crore and operating margin improved to 12.65% in fiscal 2024 as against Rs 178 crore and 8.96%, respectively, in fiscal 2023. This was largely fuelled by healthy order flow supported by huge demand from end-user segment along with venturing into the wireless segment. Group has healthy orderbook position providing moderate revenue visibility over the medium term.

 

  • Large working capital requirement: Operations are working capital intensive as reflected in sizeable GCAs of 284 days as on March 31, 2024, driven by receivables of 166 days. Significant receivables should keep operations working capital intensive going forward as well.

Liquidity: Adequate

Bank limit utilisation averaged 41.24% over the 12 months through March 2024. Cash accruals are expected to be Rs 18-22 crore, which should comfortably cover term debt obligation of Rs 6 crore over the medium term. In addition, it will act as a cushion to the liquidity of the company.

Outlook: Stable

CRISIL Ratings believes CIL's business risk profile will improve significantly in the medium term because of higher work orders.

Rating Sensitivity Factors

Upward factors

  • Enhancement in operating performance supported by revenue growth and improvement in operating margin leading to healthy net cash accrual of more than Rs 25 crore
  • Improvement in the working capital cycle largely driven by realization of payment from the counterparty

 

Downward factors

  • Further decline in revenue and profitability margin resulting in lower-than-expected net cash accrual
  • Stretch in receivables or any large debt-funded capital expenditure or acquisition weakening the financial risk profile with gearing deteriorating to above 3 times, adversely impacting credit metrics

About the Group

Incorporated in 1989, Hyderabad-based CIL provides engineering design, CAD services, geographic information system, and project management support in the fields of telecommunication, gas and electric and software development.

 

AAT currently acts as an executing arm for Cadsys in the US market and most of the revenue is booked through the entity. CIL holds 52% stake in the company.

 

AEIPL is a company where CIL holds around 80% stake, but there are no operations in the company.

Key financial indicators

Consolidated

As on/for the period ended March 31

Unit 

2024

2023

Operating income

Rs.Crore

215.11

177.82

Reported profit after tax (PAT)

Rs.Crore

13.87

2.62

PAT margin

%

6.45

1.47

Adjusted debt/Adjusted networth

Times

1.46

2.25

Interest coverage

Times

3.63

4.46

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 and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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 Export Finance Limit NA NA NA 4 NA CRISIL A4+
NA Overdraft Facility NA NA NA 3 NA CRISIL BB+/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 0.5 NA CRISIL BB+/Stable

Annexure - List of Entities Consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Cadsys India Ltd

Full

Same line of business

Apex Advanced Technology LLC

Full

Subsidiary of CIL engaged in the same line of business

Apex Engineers India Pvt Ltd

Full

Subsidiary of CIL engaged in the same line of business

Cadsys Technologies LLC, USA

Full

Subsidiary of CIL engaged in the same line of business
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST/LT 7.5 CRISIL BB+/Stable / CRISIL A4+   -- 23-05-23 CRISIL A4+ / CRISIL BB+/Positive 28-02-22 CRISIL BB+/Stable / CRISIL A4+   -- CRISIL BBB-/Negative / CRISIL A3
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Export Finance Limit 4 Canara Bank CRISIL A4+
Overdraft Facility 3 Canara Bank CRISIL BB+/Stable
Proposed Long Term Bank Loan Facility 0.5 Not Applicable CRISIL BB+/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation

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