| Coforge Limited | ||||||
| Long-term rating removed from 'Watch Developing'; Short-term rating reaffirmed; NCD withdrawn | ||||||
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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. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its rating on the long-term bank facilities of Coforge Limited (Coforge) from 'Rating Watch with Developing Implications'. The rating has been reaffirmed at ‘CRISIL AA’ and a ‘Positive’ outlook has been assigned. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’. CRISIL Ratings has also withdrawn its rating on Rs 340 crore of non-convertible debentures (NCDs; see ‘Annexure - Details of Rating Withdrawn’) upon request by the company and on receipt of withdrawal documents from the debenture trustee. The rating withdrawal is as per the CRISIL Ratings policy on withdrawal of ratings.
CRISIL Ratings had placed the long-term rating on developing watch in May 2024, following an announcement by Coforge that it had signed a definitive agreement to acquire up to 54% share capital of Cigniti Technologies Ltd (Cigniti) for a purchase consideration of Rs 2,109 crore (~$250 million). To fund this acquisition, the board of Coforge had approved fresh issue of equity through qualified institutional placement (QIP) aggregating to Rs 3,200 crore. While the QIP was underway, the company also had bridge financing of $250 million from HSBC Bank to fund this acquisition. The rating was placed on developing watch to monitor the transaction which required regulatory approvals and to understand the impact on the credit risk profile of Coforge.
Coforge recently raised funds worth Rs 2,240 crore, through QIP, to fund this acquisition. The necessary regulatory approvals facilitating transfer of promoter ownership is also in place. CRISIL Ratings notes that Coforge has acquired 28% stake in Cigniti and has taken control over Cigniti’s board on July 5, 2024. Coforge is now in the final stages of obtaining approval from the Securities and Exchange Board of India (SEBI) on the open offer for the final tranche of 26% stake, expected to be completed by the second quarter of fiscal 2025. Post the acquisition of 54%stake in Cigniti, Coforge will enter a share swap arrangement with the minority shareholders (46%) through an open offer, thereby making Cigniti a wholly owned subsidiary of Coforge, and ultimately merging it by April 01, 2025.
The ‘Positive’ outlook assigned to the long-term bank facilities of the company takes into account a sustained improvement in Coforge’s business risk profile, with steady double-digit growth in revenue, majorly through organic growth. Revenue grew 15% on-year in fiscal 2024 to Rs 9,179 crore, against single-digit growth reported by the industry overall. This was supported by robust growth in key verticals of banking, financial services and insurance (BFSI), travel and others through prudent cross selling of its services across business segments. The acquisition will further add to the improved business risk profile of the company through its presence in newer verticals in retail, hi-tech and healthcare, besides expanding its presence in the US market. While revenue could grow over ~20% in fiscal 2025 after factoring in the Cigniti acquisition (Cigniti reported revenue of Rs 1,815 crore in fiscal 2024), a 12-14% growth is expected over the medium term. The company has also been able to maintain steady operating profitability of 17-18% over the last few fiscals through several cost optimisation measures. That said, one-off acceleration in employee stock ownership plan (ESOP) costs and wage hikes have moderated the operating margin to 15.5% in fiscal 2024. The operating margin is expected to taper further to 14-15% in fiscal 2025 due to integration costs from the Cigniti acquisition, and then stabilise at previous levels of 16-17% over the medium term.
Coforge’s financial profile continues to be strong and will further benefit from the QIP which will bolster its already solid networth (Rs 3,727 crore as on March 31, 2024) to over Rs 5,000 crore. The company has low debt on its balance sheet, primarily comprising lease liabilities, resulting in strong debt protection metrics. Continuing healthy cash generation will suffice to bolster liquid surpluses, and the company is expected to be net debt free by the end of this fiscal. Any sizeable debt-funded acquisition, which alters the debt protection metrics, will remain a key monitorable.
However, the ratings remain constrained by Coforge’s high revenue dependence on the US market (~48% of revenue in fiscal 2024) and 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 of common management and strong business and financial linkages. Additionally, CRISIL Ratings has amortised goodwill on acquisitions for ten 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:
Coforge’s revenue growth was strong at 15% in fiscal 2024, compared to single-digit growth in the industry during the same period. Despite a challenging macro-economic environment and continued slowdown in the banking sector, Coforge’s revenue verticals have registered healthy growth of 20% in the banking and financial services sector, 15% growth in the insurance sector, 10% growth in travel, transport, and hospitality (TTH) and 20% growth in others during fiscal 2024 demonstrating its foothold with customers. During the first quarter of fiscal 2025, revenue grew 8% on-year against the corresponding period of the previous fiscal, with all business verticals registering growth. Coforge’s presence in critical and niche product and services offerings have aided revenue growth. While acquisition of Cigniti will drive revenue growth in healthy double digits in fiscal 2025, medium-term revenue growth is expected to normalise to 10-12%.
In addition, the company has also maintained steady profitability margin of 16-17%over the last few fiscals through 2023. Operating margin in fiscal 2024 stood at 15.5% which has moderated from 17% in the previous period because of one-time accelerated ESOP costing during the second quarter of the fiscal. This fiscal too, considering integration and transaction costs, the operating margin is expected at 14-15%, before improving to ~16-17% over the medium term.
Revenue comes from a mix of IT services to the BFS (31.8%), insurance (21.4%), TTH (18.1%), and others (2.1%). Among the practices, it has a diversified portfolio spread across application development and maintenance (28.8%), cloud and infrastructure management (19.2%), business process management (9.4%), engineering (32.1%), data and integration (27.4%), and intelligent automation (11.7%) as of the first quarter of fiscal 2025. Through the Cigniti acquisition, Coforge will benefit through an expanded presence in the BFSI segment and venture into new verticals of retail, hi-tech and healthcare. While prudent acquisitions have augured well for the company, it has also demonstrated healthy organic growth. During the first three months of fiscal 2025, 50% of revenue accrued from America; 38.8% from Europe, the Middle East and Asia (EMEA); and the remaining from the rest of the world.
As on March 31, 2024, debt was Rs 762 crore, comprising mainly of Rs 340 crore of NCDs raised for the acquisition of SLK Global Solutions (SLK) in 2021, along with lease liabilities of Rs 289 crore and short-term borrowings. The NCDs stand repaid as on date. Networth was over Rs 3,727 crore as on March 31, 2024. While the company has acquired entities earlier, their modest sizes and healthy cash positions have not necessitated substantial contracting of debt. Moderate debt, healthy networth and strong cash accrual have ensured robust debt protection metrics with net cash accrual to total debt ratio of 0.95 time in fiscal 2024. The financial risk profile is also supported by liquidity of Rs 335 crore as on March 31, 2024. Continuing strong networth, bolstered by proceeds from the QIP, amid moderate capital expenditure (capex) and acquisition-related costs, and healthy cash accrual should keep the financial risk profile strong over the medium term. The debt protection metrics are expected to remain healthy at 0.5 time, over the medium, given low debt and improving profitability. Any significant debt-funded acquisition, which alters the debt protection metrics, is a key monitorable.
Weaknesses:
Like other large established peers in the IT services sector, Coforge is highly dependent on the US market for 48% of its revenue, rendering it vulnerable to sluggish spend by corporates and financial institutions in the US markets. The company is a mid-tier player in the Indian IT industry, as reflected by revenue of Rs 9,179 crore in fiscal 2024. This restricts its pricing flexibility. Nevertheless, the scale and revenue diversity are expected to improve post the acquisition of Cigniti. However, revenue dependence on the US market will increase with Cigniti also driving a significant portion of its revenue from USA.
The IT industry in India is challenging because of intense competition among local players and entry of multinational corporations that are continuously expanding their offshore operations in India. To offset this, players must continuously acquire and retain customers, maintain an efficient cost structure, and ensure effective labour retention and utilisation. The revenues and margins remain exposed to foreign exchange (forex) risks as revenues are derived from the international market. Protectionist measures adopted by governments across the world remain yet another business challenge for Indian IT companies. |
Liquidity: Strong Liquid surplus stood at Rs 335 crore as on March 31, 2024. Expected cash accrual of Rs 1,200-1,500 crore per annum over the medium term is likely to be sufficient to fund dividend payments, moderate capex (~Rs 500 crore) and augment liquid surplus. The company has also repaid outstanding NCDs of Rs 340 crore through its surplus liquidity. Fund-based limit of Rs 657 crore (excluding limit of $15 million in the US) was moderately utilised at 67% on average in the 12 months through March 31, 2024.
ESG profile The environment, social and governance (ESG) profile of Coforge 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:
There is growing importance of ESG among investors and lenders. The company’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Positive CRISIL Ratings believes Coforge’s business risk profile will further improve with robust growth in revenue, supported by the Cigniti acquisition, which will also improve the company’s market position. The company is also expected to sustain its strong financial risk profile, supported by the QIP and continuing healthy cash generation. |
Rating Sensitivity factors Upward factors
Downward factors
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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% and later sold it off in tranches with no current stake since September 30, 2023. The company is currently a professionally run business with an independent board of directors.
Profit after tax (PAT) stood at Rs 139 crore on revenue of Rs 2,401 crore for the first three months of fiscal 2025, against Rs 176 crore and Rs 2,170 crore, respectively, in the corresponding period of fiscal 2024. Additionally, Cigniti reported PAT of Rs 10.5 crore on revenue of Rs 438 crore for the first three months of fiscal 2025, against Rs 44.5 crore and Rs 440 crore, respectively, in the corresponding period of fiscal 2024. |
Key Financial Indicators (Consolidated)
#Adjusted for goodwill amortisation CRISIL Ratings adjusted numbers |
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
Annexure - Details of Rating withdrawn
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Annexure – List of entities consolidated
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*Interchangeable with bank guarantee
Criteria Details
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