Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long term bank facilities of Intellect Design Arena Limited (Intellect) at ‘CRISIL A+/Stable’ while upgraded its rating on the short-term bank facilities to ‘CRISIL A1+’ from ‘CRISIL A1’.

 

The rating reflects continuous improvement in the business risk profile of Intellect, supported by sustained increase in revenues by ~20% during fiscal 2023 driven by market acceptance and maturity of its product suites and its strong order pipeline (~Rs. 7500 crores), which will ensure steady revenue growth over the near to medium term. Increasing share of revenues from its new products, migration to cloud platform, Software as a service (SaaS) and annual maintenance contract (AMC), besides cross selling of product suites and continued product launches, will support the revenue growth going forward. Besides, the company’s operating profitability is also expected to sustain at healthy levels of ~20%, supporting cash generation. The company’s healthy financial risk profile continues to improve, supported by healthy cash generation, and a debt free balance sheet. Besides, liquid surpluses have increased over time (Rs.600 crores at September 30, 2023), adding to the company’s financial flexibility.

 

During first half of fiscal 2024, revenues increased by 18% to Rs.1260 crore compared with Rs.1070 crore during first half of fiscal 2023. Licensing income, which contributes ~15% revenue share, grew by 30% to Rs.188 crore in first half of fiscal 2024 supported by timely closure of large deals and continuous increase in deal sizes; Implementation income representing ~48% revenue share, grew by ~12% to ~Rs.571 crore in first half of fiscal 2024, while cloud (~ 23% revenue share) and AMC (~ 17% revenue share) grew by 23% each during first half of fiscal 2024 to Rs. 288 crore and Rs.218 crore respectively. Revenues are expected to witness growth of 17-18% in fiscal 2024, supported by growth across segments, and by 12-15%, albeit on a higher base, over the medium term.

 

Intellect’s operating profitability remains at healthy levels, though it declined to 20.4% in fiscal 2023 from ~25.5% during fiscal 2022 following normalization of travel costs, and higher employee costs. Higher contribution from licensing and cloud revenues led to improved operating profitability over ~21.4% in first half of fiscal 2024 as compared to 18.8% in first half of fiscal 2023. Over the near to medium term, operating profitability is expected to sustain at healthy levels of ~20-21%, driven by better cost absorption through expanding scale of operations and increase in software license revenues emanating from continued deal closures.

 

Financial risk profile continues to strengthen supported by steady cash generation (>Rs.400 crore annually), moderate capital investments in product development (Rs.140-150 crore per annum) and prudent working capital management, leading to limited need for debt addition. Debt protection metrics remains strong due to strong cash generation and is expected to remain healthy over the medium term. Besides, Intellect’s liquidity position is also healthy, supported by minimal utilisation of its working capital bank lines, and surplus cash of ~Rs.613 crore as on September 30, 2023. The surplus have built up over time, adding to the company’s financial flexibility.

 

The ratings continue to reflect Intellect’s established business position as an intellectual property (IP)-led software product developer within the banking, financial services, and insurance (BFSI) domain, healthy prospects for software product companies in this domain, improving operating capabilities and healthy financial risk profile. These strengths are partially offset by moderate size of operations relative to peers, high working capital intensity and exposure to intense competition in the products business.

Analytical Approach

CRISIL Ratings has taken a consolidated view on Intellect and its subsidiaries, considering financial fungibility among them, and presence of common management. List of entities consolidated is given at Annexure.

 

CRISIL Ratings has capitalized the new product development cost while expensing the research cost from fiscal 2015 onwards, in line with the general industry practice.

 

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:

Growing presence in software product development and delivery, with presence across verticals within the BFSI domain: Intellect has established itself in the BFSI products business globally by developing the Intellect suite of software products since 2004, while being a part of Polaris Consulting Services Ltd (which subsequently merged into Virtusa (India) Private Ltd). It has 17 products across various sub-segments of BFSI such as corporate banking, retail banking, treasury and capital markets, and insurance. It has spent over ~Rs.1200 crore for new product development and owns a sizeable portfolio of IPs. Intellect’s top products have been well received by its customers, which has helped in winning high value digital transformation deals against global competition. The company has also established a strong relationship with large international banks by providing critical information technology (IT) products to their business centres across the globe.

 

Healthy demand prospects for product based IT companies in BFSI segment: Within IT services and solutions, BFSI is the largest vertical, contributing to more than ~50% of revenue. On an average, banks and financial institutions spend about 7-8% of revenue on IT, which is the highest among all verticals. Out of BFSI’s IT budget, about ~20-25% is allocated to buying new software or upgrading existing software generally. However, penetration of third-party vendor software is relatively low, at about ~18-20% with majority of the software being developed in house. Globally, banks and FIs are expected to spend over ~USD 10-11bn for upgrading its transaction banking technologies. With increasing competition, it will be critical for banks to focus more on their core business to improve efficiency and outsource IT-related spending to third-party vendors such as Intellect. BFSI will continue to remain the largest technology spender, considering the dynamic nature and high regulatory requirements in the industry. Hence, revenue prospects for software and IT products firms in BFSI are expected to remain healthy, driven by continuing high spending, increasing adoption of digital technologies such as machine learning, artificial intelligence etc.,. Intellect is well placed to capitalise on this trend given its upgraded and matured product suites in this domain.

 

Good operating capabilities: Steady ramp up of its various business segments has enabled Intellect register margins of over 20% since fiscal 2021, reflecting in healthy operating capabilities and steady cash generation. The company is expected to sustain its operating profitability at these levels over the near to medium term, despite rising travel and employee costs, supported by improving scale.

 

Healthy and improving financial risk profile: Intellect’s financial risk profile has strengthened on continuously, supported by healthy cash generation (over ~Rs.350 crores in fiscal 2023 as compared to ~Rs.450 crore in fiscal 2022), and sharp reduction in debt levels. The company remains almost debt free as on March 31, 2023, translating into robust debt metrics. Interest coverage ratios have improved to ~75 times in fiscal 2023 as compared to ~70 times in fiscal 2022 respectively. The ratio of total outside liabilities to tangible net worth (TOL/TNW) remained favourable at 0.55 times as on March 31, 2023, compared with 0.57 times as on March 31, 2022. Intellect is expected to sustain the improvement in its financial risk profile over the medium term, supported by steady cash generation, moderate investments in product development (Rs.140-150 crore per annum) and prudent working capital management, leading to continued robust debt metrics.

 

Weaknesses:

Moderate, though improving scale of operations with long credit cycle: Though Intellect has grown at a compounded annual growth rate (CAGR) of 20% over the last three fiscals with improved scale of operations crossing Rs.2000 crore, Intellect’s scale is modest compared with global IT product companies it competes with. While the company has been able to win large deals, continuous monetization of its product portfolio is a key monitorable, given the large spend incurred and time to establish its products and continuous spending required towards upgradations and R&D. Hence, continued growth in scale of operations is critical for sustenance of healthy operating margins over the medium term. Working capital requirements remained sizeable marked by high unbilled revenues on account of milestone payment basis which is expected to gradually moderate with completion of work in progress implementation projects given the operating norms in the product business.

 

Intense competition in the BFSI vertical for IT products: The entire revenue is derived from the BFSI vertical, rendering revenue growth volatile and susceptible to cyclicality in the global financial sector. Furthermore, given the healthy business prospects in BFSI, the competitive intensity is also high with presence of several global and Indian vendors. This, combined with, typically high client retention and long tenure of product implementation, acts as a high entry barrier for product companies in the BFSI space. This is different from the more commoditized IT services industry, where client retention is based on billing rates, with shorter tenure contracts.

Liquidity: Strong

Intellect has healthy liquidity supported by cash and cash equivalents of ~Rs 613 crore as on September 30, 2023. Bank lines of Rs 180 crore were unutilised over the 12 months period ended October 2023. The company also has adequate non-fund based limits, which helps facilitate competitive bidding for IT projects. As company is largely debt free, there are no long term debt obligations as well.

 

Over the medium term, annual cash generation is expected to sustain to over Rs ~400 crore, which will remain adequate to meet ongoing product development capex (~Rs.140 crore per annum). With expanding scale of operations, the working capital requirements may also remain high, mainly due to its debtor cycle. Unbilled revenues have remained at fiscal 2022 levels of ~Rs 710 crore in fiscal 2023 as well. Over the medium term, this is expected to remain at similar levels following steady increase in large deals and implementation of work in progress projects.

 

ESG profile

CRISIL Ratings believes that Intellect’s Environment, Social, and Governance (ESG) profile supports its 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, though, has a higher social impact because of its large and diverse workforce, Intellect has continuously focused on mitigating its environmental and social impact.

 

Key ESG Highlights

• Intellect is setting up a 100 kW solar power plant to reduce the energy consumption through grid thereby reducing the Scope 2 GHG emissions.
• Company has a sustainable sourcing policy through which it sources 60% of all its requirements.
• Around ~27.8% women workforce as of FY23.
• The company ensures that no untreated effluent is discharged. Water consumption/employee for FY23 is at 4.73 KL.
• It has a strong governance structure comprising of 4 out of 7 Directors as Independent Directors with extensive disclosures

 

There is growing importance of ESG among investors and lenders. Infosys’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes Intellect’s business risk profile will continue to grow supported by its diverse products and advancements in AI space benefiting healthy revenue generation and steady profitability over the medium term. Financial risk profile will continue to strengthen, supported by healthy cash generation, and moderate spending.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in business risk profile driven by steady growth in revenue through higher acceptance of products among a diversified client base.
• Maintenance of operating. profitability at 20-21% through execution of higher value contracts leading to healthy operating cash flows in the medium term.
• Sustenance of strong financial risk profile and healthy surpluses.

 

Downward Factors

• Sustained decline or modest growth in revenue leading to operating profitability below 15%.
• Larger-than-expected debt funding of working capital or software development or acquisitions adversely impacting key credit metrics
• Material reduction in cash surpluses, owing to large dividend payout, share buy back or capital reduction.

About the Company

Intellect, incorporated in 2011, develops and delivers digital financial technology products for the BFSI domain. The company was listed on the Bombay Stock Exchange and National Stock Exchange on December 18, 2014. The promoters hold 30.42% stake in Intellect as on Sep 30, 2023, as per stock exchange filings. The company is headquartered in Chennai and has a global presence, with offices in India (Mumbai, Gurugram, and Hyderabad), Asia-Pacific, Europe, Middle East Asia, and Africa. It has over 5,500 employees.

 

During first half of fiscal 2024, the company reported revenues of Rs. 1258 crore and profit after tax (PAT) of Rs. 164 crore on consolidated basis, compared with net revenues of Rs. 1069 crore and PAT of Rs. 115 crore in the corresponding period of fiscal 2023.

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue**	Rs crore	2236	1878
Reported Profit after tax (PAT)	Rs crore	269	350
Reported PAT margins	%	12.0	18.7
Adjusted debt/ adjusted networth	Times	0.00	0.00
Interest coverage	Times	75.38	70.0

**Revenue from operations as per CRISIL Ratings adjusted figures

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	20.0	NA	CRISIL A+/Stable
NA	Cash Credit^	NA	NA	NA	80.0	NA	CRISIL A+/Stable
NA	Cash Credit%	NA	NA	NA	50.0	NA	CRISIL A+/Stable
NA	Bank guarantee&	NA	NA	NA	125.0	NA	CRISIL A1+
NA	Bank guarantee	NA	NA	NA	189.0	NA	CRISIL A1+
NA	Proposed Short-term bank loan facility	NA	NA	NA	86.0	NA	CRISIL A1+

&Interchangeable with fund based limit of Rs. 40 crore

^Interchangeable with WCDL and Packing credit

%Interchangeable with nonfund based sub-limit for Rs. 20 crore

Annexure - List of Entities Consolidated

S. No	Name of Entity	Extent of Consolidation	Rationale for Consolidation
1	Intellect Design Arena Pte Ltd, Singapore	Full	Operational similarities
2	Intellect Design Arena Limited, United Kingdom	Full	Operational similarities
3	Intellect Design Arena SA, Switzerland	Full	Operational similarities
4	Intellect Design Arena PT**, Indonesia	Full	Operational similarities
5	Intellect Design Arena GmbH, Germany	Full	Operational similarities
6	Intellect Design Arena Ltda.*, Chile	Full	Operational similarities
7	Intellect Design Arena Inc.**, United States	Full	Operational similarities
8	Intellect Commerce Limited, India	Full	Operational similarities
9	Intellect Design Arena Co. Ltd, Vietnam	Full	Operational similarities
10	Intellect Design Arena(Mauritius) Ltd # Mauritius	Full	Operational similarities
11	Intellect Design Arena FZ LLC, Dubai	Full	Operational similarities
12	Intellect Design Arena Philippines**	Full	Operational similarities
13	Sonali Intellect Ltd, Bangladesh	Full	Operational similarities
14	SEEC Asia Technologies Private Limited***, India	Full	Operational similarities
15	Intellect Design Arena Inc *, Canada	Full	Operational similarities
16	Intellect Design Arena SDN BHD**, Malaysia	Full	Operational similarities
17	Intellect Payments Limited, India	Full	Operational similarities
18	Intellect India Limited	Full	Operational similarities
19	Intellect Design Arena Pty Ltd**, Australia	Full	Operational similarities
20	Intellect Design Arena Limited**, Thailand	Full	Operational similarities
21	Intellect Design Arena Limited, Kenya	Full	Operational similarities
22	Intellect Polaris Design LLC,USA @, United States	Full	Operational similarities
23	Intellect Design Arena Hungary Kft, Hungary	Full	Operational similarities
24	Intellect Design Arena Saudi Arabia Ltd, Saudi Arabia	Full	Operational similarities

*Subsidiaries of Intellect Design Arena Limited, UK

**Subsidiaries of Intellect Design Arena Pte Ltd, Singapore

***Subsidiaries of Intellect Design Arena Inc., USA

#Subsidiary of Intellect Design FZ LLC, Dubai

@On July 1, 2020, the Company has increased its ownership interest in Intellect Polaris Design LLC (“IPDLLC”) from 50% to 100% resulting in IPDLLC being a wholly owned subsidiary.