Detailed Rationale

CRISIL Ratings has placed its ‘CRISIL AA’ rating on the long-term bank facilities and non-convertible debentures (NCDs) of Coforge Ltd (Coforge; erstwhile NIIT Technologies Ltd) on ‘Rating Watch with Developing Implications'. The rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1+'.

 

On May 2, 2024, Coforge signed a definitive agreement to acquire up to 54% share capital of Cigniti Technologies Ltd for purchase consideration of Rs 2,086 crore ($ 250 million). To fund this acquisition, the board of Coforge has approved fresh issue of equity through qualified institutional placement (QIP) aggregating Rs 3,200 crore. The acquisition is expected to be completed in the second quarter of fiscal 2025 subject to receipt of approvals from the Competition Commission of India (CCI), regulatory approvals and closing action items under the share purchase agreement. While the QIP is underway, the company also has bridge financing of $ 250 million from HSBC to fund this acquisition.

 

CRISIL Ratings is in discussion with the company’s management to understand the synergy benefits that may emerge post completion of the acquisition. CRISIL Ratings will remove the ratings from watch and take a final rating action once it has full clarity of the impact on the financial and business risk profiles of the company, along with receipt of requisite approvals for the acquisition.

 

The ratings factor in the established position of the company in the information technology (IT) and IT-enabled services (ITeS) industry, its presence across diverse business segments and a strong financial risk profile. Revenue grew by 15% on-year to Rs 9,179 crore in fiscal 2024 despite industry-led challenges, supported by growth across the banking, financial services, and insurance (BFSI) and other segments (includes healthcare, manufacturing, retail and hi-tech). The company continues to have large presence in the BFSI vertical, which contributes to 50% of overall revenue, with over 85% coming from the US and European markets. Repeat business from existing customers amid new customer additions have led to steady growth in orders, with the order book increasing by around 21% in fiscal 2024.

 

Operating margin moderated to 15.6% in fiscal 2024 from 17% in fiscal 2023 owing to the one-time sizeable employee stock option plan (ESOP) payout amid wage hike during the first half of fiscal 2024. The financial risk profile continues to be strong supported by sizeable networth and robust gearing and debt protection metrics. Cash surplus was healthy at Rs 335 crore as on March 31, 2024.

 

These strengths are partially offset by modest scale of operations and concentration in the US market (around 48% of revenue in fiscal 2024), compared to some large domestic IT services companies, amid intense competition in the IT industry.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Coforge and its subsidiaries, wherein 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 five years. With adoption of Ind AS 116 with effect from April 1, 2019, lease liabilities are being treated as debt while related adjustments are made in depreciation and amortisation 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:

• Consistent growth in operations despite industry challenges while maintaining steady profitability: Revenue registered healthy growth of 15% in fiscal 2024, as against single-digit growth in the industry. Despite a challenging macroeconomic environment and continued slowdown in the banking sector, Coforge’s revenue grew at a healthy 20% in the banking and financial services sector, 15% in the insurance sector, 10% in travel, transport and hospitality (TTH) and 20% in others in fiscal 2024. Presence in critical and niche product and services offerings have aided the growth. In addition, the company maintained steady operating margin at 16-17% over the last few fiscals through 2023. The operating margin stood at 15.6% in fiscal 2024, which has moderated from 17% in fiscal 2023, owing to high ESOP payout.

 

• Niche service offerings with diversified revenue mix: Revenue comes from IT service offerings to the BFS (32.2%), insurance (22%), TTH (17.8%) and others (2.1%). It also has a diversified portfolio spread across application development and maintenance (27.1%), cloud and infrastructure management (18.9%), business process management (9.2%), product engineering (7.8%), data and integration (25.7%), and intelligent automation (11.3%). In the last two fiscals, the company has acquired complete stake in SLK (80% in April 2021 and the remaining in 2024), which has enhanced its digital capabilities and presence in BFSI. While prudent acquisitions have augured well for the company, it has also achieved healthy growth organically. In the nine months of fiscal 2024, around 47% of revenue accrued from America; 40% from Europe, the Middle East and Asia (EMEA) and the remaining from other geographies.

 

• Healthy financial risk profile: As on March 31, 2024, debt comprised NCDs worth Rs 339 crore raised for the SLK acquisition along with lease liabilities of Rs 289 crore and short-term borrowing of Rs 97 crore. Networth was over Rs 3,500 crore as on March 31, 2024. While the company has been acquiring entities, their modest sizes and healthy cash positions have not necessitated substantial contracting of debt. Moderate debt, healthy networth and strong cash accrual have ensured the debt protection metrics remain robust, with net cash accrual to total debt ratio of 95% in fiscal 2024. The financial risk profile is also supported by liquidity of Rs 335 crore as on March 31, 2024. Scheduled repayment of the NCDs in fiscal 2025 and continued strong networth amid moderate capital expenditure (capex) and healthy cash accrual should keep the financial risk profile healthy over the medium term.

 

Weaknesses:

• Average size of operations: The company is a mid-tier player in the Indian IT industry, as reflected in revenue of Rs 9,179 crore in fiscal 2024. This restricts the pricing flexibility and the ability to bid for large orders and marquee clients.

 

• Exposure to intense competition: 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. To offset this, players must continuously acquire and retain customers, maintain an efficient cost structure and ensure effective labour retention and utilisation. The revenue and profitability of Coforge remain exposed to foreign exchange risks as revenue comes from the international market. Protectionist measures adopted by governments across the world remain yet another challenge for Indian IT companies.

Liquidity: Strong

Liquid surplus stood at Rs 335 crore as on March 31, 2024. Expected cash accrual of Rs 700-800 crore per annum over the medium term will sufficiently cover dividend payments, moderate capex (Rs 300-400 crore) and augment liquid surplus. Liquid surplus and healthy cash accrual should be sufficient to fund payment of Rs 339 crore of NCDs. Fund-based limit of Rs 510 crore (excluding limit of $15 million in the US) was moderately utilised at 63% in the 12 months through October 2023.

 

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:

• The company has been publishing its annual Business Responsibility Report and has set a clear target to achieve carbon neutrality by 2030
• It is committed to growing its operations while reducing dependence on fossil fuels and increasing green energy initiatives
• The company effectively takes care of the professional, social, emotional, financial and physical well-being of its employees
• It continues 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. The company’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Rating Sensitivity factors

Upward factors:

• Steady double-digit growth in revenue and stable operating margin at 16-18%
• Sustenance of strong financial risk profile and better liquidity

 

Downward factors:

• Slowdown in key verticals leading to decline in revenue and fall in operating margin below 12%
• Moderation in debt protection metrics because of continued debt-funded acquisitions or large capex
• Depletion in 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 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-off in tranches with no stake since September 30, 2023. The company is currently a professionally run business with an independent board of directors.

Key Financial Indicators (Consolidated)

Particulars	Unit	2024	2023
Revenue	Rs.Crore	9,179	8,034
Profit After Tax (PAT)#	Rs.Crore	836	745
PAT Margin	%	9.1	9.3
Adjusted debt (including leases)/adjusted networth	Times	0.18	0.19
Interest coverage	Times	11.75	16.65

#Adjusted for goodwill amortisation; Crisil Ratings-adjusted numbers

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit**	NA	NA	NA	55.5	NA	CRISIL AA/Watch Developing
NA	Cash credit	NA	NA	NA	124	NA	CRISIL AA/Watch Developing
NA	Letter of Credit*	NA	NA	NA	186	NA	CRISIL A1+
NA	Letter of Credit	NA	NA	NA	12	NA	CRISIL A1+
NA	Composite Working Capital Limit	NA	NA	NA	279.5	NA	CRISIL AA/Watch Developing
INE591G08012	Non-convertible debentures	26-Apr-2021	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-2026	340	Simple	CRISIL AA/Watch Developing

**Fully interchangeable with letter of credit

*Interchangeable with bank guarantee