Detailed Rationale

CRISIL Ratings has re-affirmed its ratings ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and Non convertible debentures of Coforge Ltd (Coforge; erstwhile NIIT Technologies Ltd).

 

Coforge’s revenue grew 25% year-on-year to Rs 5,845 crore during the first nine months of fiscal 2023 supported by new deal wins and client additions across all segments mainly led by banking & financial services (BFS), and travel, transportation and hospitality. Coforge continues to have healthy presence in the BFS vertical which contributed the largest share of revenue at ~31% in the first nine months of fiscal 2023 with ~90% revenue from the US and European markets. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin moderated slightly to 16.9% during the same period, compared to 17.7% during fiscal 2022 mainly due to high employee related costs with growing employee base and high attrition, which is seen moderating from its peaks.

 

Coforge’s order wins has been growing steadily over the years. Order intake grew 47% on-year to USD 1,151 million during full year of fiscal 2022 and further by USD 841 million during first nine months of fiscal 2023, thereby providing revenue visibility. Revenue growth is expected to be 22-25% in fiscal 2023 and moderate to 12-15% over the medium term owing to global macroeconomic and financial sector headwinds in key markets. EBITDA margin is expected to sustain at about 16-17% in fiscal 2023 before improving by 75-100 basis points (bps) next fiscal.

 

Coforge’s financial risk profile continues to be strong with sizeable networth, low gearing, and robust debt protection metrics. Cash surplus was healthy at Rs 409 crore as on December 31, 2022. Healthy cash accrual over the medium term should be sufficient to augment the cash surplus, pay for dividends, capex and pay for about Rs 300 crore for the remaining 20% stake in SLK Global Solutions Pvt Ltd (SLK) in fiscal 2024.

 

The ratings continue to reflect the company’s diversified revenue mix across geographies and verticals and healthy financial risk profile. These strengths are partially offset by moderate scale of operations and exposure to intense competition in the information technology (IT) industry.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Coforge and its subsidiaries, in which it holds direct or indirect majority stake, because the entities have common management and strong business and financial linkages. Additionally, CRISIL Ratings has amortised goodwill on acquisitions for 5 years. With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are being treated as debt while related adjustments are also made in depreciation and amortization and interest cost components.

 

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

• Diversified revenue mix across verticals and practices: Revenue comes from a mix of information technology services to the BFS (31% of turnover in nine months of fiscal 2023), insurance (8%), travel, transport and hospitality (30%), and others (23%). Amongst the practices, it has a diversified portfolio spread across Application Development and Maintenance (25% of turnover in fiscal 2022), Cloud and Infrastructure Management (18%), Business Process Management (11%), Product Engineering (12%), Data and Integration (21%), and Intelligent Automation (14%. In last two years, company has acquired 81% stake in Whishworks IT Consulting Pvt Ltd (in fiscal 2020) and SLK (in April-2021) which has enhanced its digital capabilities and BFSI presence. Acquisitions strengthen the company’s market position or support entry into new verticals apart from expanding the clientele and reducing client concentration. During the first nine months of fiscal 2023, 51% of revenue came from the Americas, 39% came from Europe, the Middle East and Asia, and the remaining from other geographies.

 

• Healthy financial risk profile: Debt as on March 31, 2022 comprised mainly of Rs 336 crore of NCDs raised for the SLK acquisition alongwith lease liabilities of Rs 135 crore. Networth is expected to be sizeable at more than Rs 3,000 crore by March-2023. While the company has been aggressively acquiring entities, their modest size and healthy cash position has not necessitated material raising of debt. Moderate debt, healthy networth and strong cash accrual have ensured debt protection metrics remain robust, albeit lower than earlier, as indicated by net cash accrual to total debt ratio expected at more than 2 times for fiscal 2023 as compared to more than 7 times in fiscal 2021.

 

• The financial risk profile is also supported by liquidity of Rs 409 crore as on December 31, 2022. Moderate capital expenditure (capex) and healthy cash accrual should keep the financial risk profile healthy over the medium term.

 

Weaknesses

• Average scale of operations: The company is a tier-II player in the Indian software industry, reflected in revenue of Rs 5,845 crore in the nine months of fiscal 2023. The modest scale of operations restricts the ability to bid for large orders.

 

• Exposure to intense competition: The IT industry in India is challenging because of intense competition among local players and from multinational corporations, which are continuously expanding their offshore operations in India. To offset the impact of competition, players have to continuously acquire and retain customers, maintain an efficient cost structure and ensure effective labour retention and utilisation. Protectionist measures adopted by governments across the world remain yet another business challenge for Indian IT companies.

Liquidity: Strong

Liquid surplus stood at Rs 409 crore as on December 31, 2022. Cash accrual is expected at about Rs1,000 crore per annum over the medium term is expected to be sufficient to fund dividend payments, moderate capex (about Rs 150-200 crores) and augment liquid surplus over the medium term. Liquid surplus should be sufficient to fund payment of Rs 300 crore for remaining 20% stake in SLK in fiscal 2024. Fund-based limit of Rs 510 crore (excluding limit of USD 15 million in the US) was moderately utilised at 45% in the past 12 months through January 2023.

 

ESG Profile

CRISIL Ratings believes that Coforge’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The IT sector has a low impact on the environment because of the inherent nature of digital services, core operations as well as products. The sector has a social impact because of its large workforce. Coforge has continuously focused on mitigating its environmental and social impact. 

 

Key ESG highlights:

• Coforge has been annually publishing its "Business Responsibility Report" and has set a clear target to achieve "Net Zero" emission by 2050 against baseline year of 2017 for India and 2020 for international operations
• Company is committed to grow its operations while also assessing carbon emissions and to relatively reduce them by 20% by 2030 (from baseline year)
• Company effectively takes care of overall well-being of its employees and maintains healthy gender diversity and modest attrition rate of 17.7% in fiscal 2022.
• It also continued its Corporate Social Responsibility (CSR) drive around education, employability, infrastructure, local initiatives and engagement.
• It has a strong governance structure with 38% of its board comprising independent directors and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Coforge’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook Stable

CRISIL Ratings believes Coforge will continue to benefit from longstanding relationships with clients in diverse verticals and growth in the digital services segment. While being open to acquisitions, the company is also expected to maintain healthy financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors

• Steady double-digit growth in revenue, and increase in operating profitability of over 20%
• Sustenance of strong financial risk profile and better liquidity

 

Downward factors

• Slowdown in key verticals, leading to decline in revenue and fall in operating profitability to below 12-14%
• Sustained moderation in debt protection metrics because of continued debt-funded acquisitions or large capex
• Depletion in the liquid surplus

About the Company

Coforge is an IT company providing end-to-end software solutions and services. It was formerly known as NIIT Technologies Ltd, and was incorporated in April 2003 when NIIT Ltd (NIIT) spun off its software solutions business (excluding knowledge solutions) into a separate legal entity. In May 2019, NIIT and the founder's family members sold total stake of 30.2% in Coforge to Hulst BV (Hulst; affiliate of Baring Private Equity Asia). In August 2019, Hulst acquired 39.85% stake through an open offer, increasing its total stake in Coforge to 70.05%.

 

Coforge is a capability maturity model level 5 player in the software services industry. It is among the top 20 Indian software exporters. Prominent global customers include British Airways, the ING group, SEI Investments Company, Sabre Corporation and SITA. Over the years, Coforge has set up subsidiaries in the US, Singapore, Australia, the UK, Germany and Thailand, mainly to market and mobilise projects for the software division. The company has business partnerships with large IT companies across the world.

 

On a consolidated basis, net profit was Rs 628 crore in the nine months ended December 31, 2022 (Rs 490 crore in the corresponding period of the previous fiscal), on revenue of Rs 5,845 crore (Rs 4,689 crore).

Key Financial Indicators (CRISIL Adjusted)

# adjusted for goodwill amortisation

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs.Cr)	Complexity level	Rating assigned with outlook
NA	Cash Credit**	NA	NA	NA	150	NA	CRISIL AA/Stable
NA	Cash Credit	NA	NA	NA	174	NA	CRISIL AA/Stable
NA	Letter of Credit*	NA	NA	NA	186	NA	CRISIL A1+
INE591G08012	Non-Convertible Debentures	26-Apr-21	First 3 months - 3 YEAR MIFOR+3.30%; Post 3 months till 3 years - 3 YEAR MIFOR+4.25%; Post that - 1 YEAR MIFOR+4.25%	24-Apr-26	340	Simple	CRISIL AA/Stable

**Fully interchangeable with letter of credit

*Interchangeable with bank guarantee