| Coforge Limited | ||||||
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| 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. | ||||||
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| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Coforge Limited (Coforge; erstwhile NIIT Technologies Ltd) and withdrawn its rating on the Rs 75 crore non-convertible debentures (NCDs) at the company’s request. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.
Coforge’s revenue grew 38% on-year to Rs 4,689 crore during the first nine months of fiscal 2022 supported by organic growth as well as acquisition of 60% stake in SLK Global Solutions Pvt Ltd (SLK) in April 2021. Coforge has benefitted from cross selling its services to SLK’s customers, strengthening its presence in the financial services vertical to ~28% in the third quarter of fiscal 2022 and ~53% in the US market compared with ~19% and 49%, respectively, during the third quarter last fiscal. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin was flat at 16.8% during the period, compared with 16.7% a year earlier.
The company’s order book has grown steadily to Rs 5,200 crore as on December 31, 2021, from Rs 3,700 crore a year earlier, thereby providing revenue visibility. Revenue growth is expected to be healthy at 10-12% over the medium term while Ebitda margin is expected to sustain at about 17-18%.
The financial risk profile remains healthy, supported by healthy networth, low gearing and robust debt protection metrics despite debt of Rs 340 crore raised through NCDs for the acquisition of SLK. Cash surplus moderated after the share buyback of Rs 337 crore in fiscal 2021 and the SLK acquisition in April 2021, but was healthy at Rs 304 crore as on December 31, 2021. Existing cash augmented with healthy accruals over the medium term should be sufficient to pay for about Rs 300 crore required to purchase the remaining 20% stake in SLK in April 2023.
The ratings reflect the company’s diversified revenue mix across geographies and verticals and healthy financial risk profile. These strengths are partially offset by modest 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 five years.
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 geographies and verticals: Revenue comes from application development and maintenance services in the banking, financial services and insurance (BFSI) vertical (54% of turnover in the first nine months of fiscal 2022), travel, transport and logistics (19%), manufacturing, media and others (28%). In the past two years, the 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 market position or support entry into new verticals apart from expanding the clientele and reducing client concentration. Furthermore, the company has a geographically diverse revenue profile, which insulates it from downturn in any single region. During the first nine months of fiscal 2022, 53% of revenue came from the Americas (against the industry average of over 60%), 34% from Europe, the Middle East and Asia, and the remaining from other geographies.
Healthy financial risk profile: Debt mainly comprised Rs 340 crore of NCDs raised for the SLK acquisition while networth is estimated at a sizeable Rs 2,700 crore as on March 31, 2022. While the company has been aggressively acquiring entities, their modest size and healthy cash position have 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 estimated net cash accrual to total debt ratio of more than 2 times for fiscal 2022 compared with more than 14 times in fiscal 2020.
The financial risk profile is also supported by liquidity of Rs 304 crore as on December 31, 2021. Moderate capital expenditure (capex) and healthy cash accrual should keep the financial risk profile healthy over the medium term.
Weaknesses Average scale of operations: Coforge is a tier II player in the Indian software industry, as reflected in its revenue of Rs 4,689 crore in the first nine months of fiscal 2022. 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 efficient cost structure and ensure effective labour retention and utilisation. Protectionist measures adopted by governments across the world pose yet another business challenge for Indian IT companies. |
Liquidity: Strong Liquid surplus stood at Rs 285 crore as on March 31, 2021. The company used Rs 337 crore for share buyback in fiscal 2021 and Rs 536 crore in April 2021 for the SLK acquisition, leading to moderation in liquidity. Cash accrual is expected at more than Rs 700 crore per annum over the medium term. Fund-based limit of Rs 510 crore (excluding limit of USD 15 million in the US) was utilised moderately at 56% on average in the 12 months through February 2022. Annual capex (excluding acquisitions) of Rs 100-110 crore will be funded through internal accrual. |
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 will likely maintain healthy financial risk profile. |
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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 490 crore in the nine months ended December 31, 2021 (Rs 329 crore in the corresponding period of the previous fiscal), on revenue of Rs 4,689 crore (Rs 3,401 crore). |
Key Financial Indicators (CRISIL Ratings-adjusted)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
**Fully interchangeable with letter of credit *Interchangeable with bank guarantee ^Yet to be issued |
Annexure – List of Entities Consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||
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**Fully interchangeable with letter of credit
*Interchangeable with bank guarantee
Criteria Details
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