Rating Rationale

Strengths:
* Strong business risk profile, marked by presence across diverse verticals and service lines, and healthy operating profitability: HCL Technologies is the third-largest, listed Indian information technology (IT) services provider in terms of revenue. It has established a diverse industry-vertical portfolio; financial services segment (contributed 22.3% of revenues during fiscal 2019), while technology & services (18.5%), manufacturing (17.9%), while other segments in life sciences & healthcare, retail & CPG and others contributed the remaining 41.4%.

The company has further strengthened its capabilities in IT products and platforms segment with the acquisition of IBM's intellectual property rights for seven of its product suites in fiscal 2019. This has additionally provided access to a large addressable market about 20,000 clients across geographies. HCL Technologies has also formally launched the HCL Software division for steady monetization of the acquired products through product development and innovation. Over the past two years the company has been steadily increasing its share of digital revenues driven by its 'Mode 2'and 'Mode 3' strategies. The earlier acquisitions including Actian and C3i Solutions (in April 2018) will further support this long term business expansion towards providing digital solutions.

The continuous improvement in efficiency parameters, profitable monetisation of acquired IP assets and increasing contribution from higher-margin digital contracts will help mitigate the pressure created on operating margins by the industry-wide issue of increasing cost of employees and regulatory compliance.

* Healthy financial risk profile: Healthy capital structure with comfortable gearing at 0.10 time, large networth of Rs 40,239 crore and cash and cash equivalents of Rs 8,866 crore as on March 31, 2019. Debt-protection metrics are robust, with interest coverage ratio of 81 times and net cash accrual to total debt ratio of 2.6 times in fiscal 2019. HCL Technologies is expected to invest in niche acquisitions to strengthen its existing portfolio in the medium term and will be largely funded from its cash surplus and healthy accruals.

Weakness:
* Exposure to intense competition in the IT industry: Company has to compete with Indian IT majors such as TCS, Infosys (rated 'CRISIL AAA/Stable/CRISIL A1+'), Cognizant, and Wipro; and also global players such as IBM, Accenture, and Computer Sciences Corporation. CRISIL believes that though HCL Technologies, with its diversified service and vertical mix along with deeper client mining, will continue to register healthy revenue growth over the medium term, it will remain exposed to intense competition from its peers in the industry. CRISIL also believes that to leverage the opportunities arising in the global markets and cushion medium-term volatility, domestic IT companies will need to realign their cost structures, and improve operating efficiencies and financial flexibility.

Liquidity: Strong
Liquidity remains strong driven by cash surplus of Rs 8,866 crore as of March 2019. Repayment obligations remains moderate at about Rs 1,200 crore in fiscal 2020. Capex requirements are also expected to remain moderate at about Rs 2,000 crore per annum to fund the internal product development marketing and client acquisition costs. This will be funded through healthy accruals of greater than Rs 10,000 crore over the medium term. For the acquisition of IBM's assets, HCL technologies has already paid 48% of the deal value (about Rs 6000 crore) in June 2019. The remaining payment of about Rs 6500 crore will be paid in June 2020.

Outlook: Stable
CRISIL believes HCL Technologies will sustain its business risk profile over the medium term, driven by healthy revenue growth across segments, expanding customer base and timely execution of large deals. Furthermore, financial risk profile will continue to be backed by strong cash generating abilities, robust debt protection metrics, and cash surplus.

Rating Sensitive factors
Downward factor
* Decline in OPBDIT (Operating profit before depreciation, interest and tax) margins below 19% levels compared to 23.4% reported in fiscal 2019.

* Sustained slowdown in revenue growth due to regulatory changes in the regions in which it operates, resulting in weakening of business risk profile, overriding the advantage of healthy diversity in clientele and geographies.

* Sustained reduction in cash surplus below Rs 3000 crore due to large acquisitions or capital return to investors which can impact the healthy financial risk profile. The company reported healthy cash accruals of Rs. 10,872 crore in fiscal 2019.