| Coforge Limited | ||||||
| Ratings Reaffirmed | ||||||
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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 reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of and non convertible debentures of Coforge Limited (Coforge; erstwhile NIIT Technologies Ltd).
Coforge’s revenue grew 38% year-on-year to Rs 4,689 crore during the first nine months of fiscal 2022 supported by both organic growth as well as acquisition of 60% stake in SLK Global Solutions Pvt Ltd (SLK) in April-2021. Coforge has benefitted from the cross-selling its services to SLK’s customers, strengthening the former’s presence in the financial services vertical to ~28% in the third quarter of fiscal 2022 and ~53% in the US market as compared to ~19% and 49%, respectively during the third quarter last fiscal. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin stood at 16.8% during the same period, compared to 16.7% last year.
Coforge’s order book has been growing steadily and stood at about Rs 5,200 crore as on December 31, 2021 from Rs 3,700 crore last year, 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%.
Coforge’s financial risk profile continues to be healthy even after Rs 340 crore NCD debt raised for the acquisition driven by healthy networth, low gearing, and robust debt protection metrics. Cash surplus has moderated to some extent after paying for the share buy-back 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. Healthy cash accrual generation over the medium term should be sufficient to augment the cash surplus and pay for about Rs 300 crore for the remaining 20% stake 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 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.
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 BFSI (54% of turnover in the nine months of fiscal 2022), travel, transport and logistics (19%), manufacturing, media and others (28%). 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. 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% came from Europe, the Middle East and Asia, and the remaining from other geographies.
Healthy financial risk profile: Debt comprised mainly of Rs 340 crore of NCDs raised for the SLK acquisition while networth is expected to be sizeable at about Rs 2,700 crore as on March 31, 2022. 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 2022 as compared to 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: The company is a tier-II player in the Indian software industry, reflected in revenue of Rs 4,689 crore in the nine months of this fiscal. 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 285 crore as on March 31, 2021. Company has used Rs 337 crore for share buy-back 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 moderately utilised at 56% in the past 12 months through February 2022. Annual capex (excluding acquisitions) of around 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 is also expected to maintain healthy financial risk profile over the medium term. |
Rating Sensitivity Factors Upward 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%.
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)
*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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Criteria Details
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