Detailed Rationale

CRISIL Ratings has upgraded the ratings on the bank facilities of Intellect Design Arena Limited (Intellect) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’             

 

The upgrade in rating reflects CRISIL Ratings’ expectation that Intellect’s business risk profile will continue to benefit from higher market acceptance and maturity of its product suites, and its strong order pipeline (over Rs.4000 crores), which will ensure healthy double digit revenue growth over the medium term. Increasing share of revenues from cloud platform, Software as a service (SaaS) and annual maintenance contract (AMC), besides cross selling of product suites and new product launches, will support revenue growth. Operating profitability is expected to sustain at healthy levels of over 20%, driven by better cost absorption through expanding scale of operations, and increase in software license revenues emanating from continued deal closures. Earlier, in fiscal 2021, revenue grew by 11% compared to previous year, driven by timely closure of digital transformation deals. Higher contribution from license revenues (35% higher over fiscal 2020) as well as SaaS and cloud revenues (45% higher over fiscal 2020) led to substantial improvement in operating profitability to 23.7% during fiscal 2021 (from 5.6% in fiscal 2020).

 

The rating upgrade also considers that Intellect will sustain the improvement in its financial risk profile, over the medium term, supported by steady cash generation, moderate capital investments in product development (Rs.120 crore per annum) and prudent working capital management, leading to limited need for debt additions. Debt protection metrics, which improved considerably in fiscal 2021, due to strong cash generation, which also enabled substantial debt reduction, are 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 over Rs.260 crore.

 

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 financial risk profile. These strengths are partially offset by moderate size of operations relative to global peers and 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.

 

CRISIL Ratings has amortised the goodwill on acquisition of the subsidiaries, SFL Properties Pvt Ltd and Intellect USA, amounting to Rs 35.3 crore over a period of five years from fiscal 2015. SFL properties was sold for Rs 20.1 crore during first quarter of fiscal 2020 and will be excluded from fiscal 2020.

 

CRISIL Ratings has capitalised 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 12 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 companies in BFSI: 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% is allocated to buying new software or upgrading existing software. However, penetration of third-party vendor software is relatively low, at about 18% with majority of the software being developed in house. However, 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, and expected increase in penetration. Intellect is well placed to capitalise on this trend given its upgraded and matured product suites in this domain.

 

• Improving financial risk profile: Intellect’s financial risk profile improved on account of healthy business performance in fiscal 2021; sizeable cash generation of over Rs.340 crores (highest ever achieved), also enabled sharp reduction in debt levels by over Rs.200 crores, thereby improving debt metrics. Net cash accrual to total debt and interest coverage ratios have improved to about 7.4 times and 41 times, respectively, in fiscal 2021, from 0.34 times and 4.9 times respectively in fiscal 2020.

 

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.120 crore per annum) and prudent working capital management, leading to continued healthy debt metrics.

 

Weaknesses

• Moderate scale of operations with long credit cycle: Though Intellect has grown at a compounded annual growth rate (CAGR) of 13% over the last five fiscals, the scale of operations remains moderate at less than Rs 1500 crore, compared with peers in the IT services industry, and also modest compared with global IT product companies it competes with. Almost about one third of revenues during fiscal 2021 remains dependant on timely closure of new licence contracts, which had remained volatile during fiscals 2019 and 2020. Also, due to its modest scale, while the company has been able to win large deals, it launches new product only gradually, given the large spend to be incurred and time to establish products, and given that the cost of development and maintaining products is substantially high. Hence, continued growth in scale of operations is critical for sustenance of healthy operating margins over the medium term.

 

Working capital requirements remained high, marked by high gross current asset days of 241 days as on march 31, 2021 (compared to 232 days on March 31, 2020). This was mainly due to high unbilled revenues of Rs 457 crore and debtors of Rs 187 crore as on March 31, 2021. The unbilled revenues is expected to gradually moderate with completion of work in progress implementation projects, while the high debtor days is likely to sustain 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 commoditised 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 262 Cr as on March 31, 2021. Its working bank lines of Rs 220 crore, were sparsely utilised (only for a few months) over the 12 months period ended April 2021.  The company also has adequate non-fund based limits, which helps facilitate competitive bidding for IT projects.

 

Over the medium term, annual cash generation is expected to sustain to over Rs 300 crore, which will remain adequate to meet  ongoing product development capex (Rs.120 crore per annum) as well as debt repayments of Rs 34 Crore during fiscal 2022. With expanding scale of operations, the working capital requirements may also remain high, mainly due to high debtor cycle, and unbilled revenues of Rs 457 crore as on March 31, 2021. Unbilled revenues are expected to gradually moderate following improved collections and steady implementation of work in progress projects over the medium term.

Outlook: Stable

CRISIL Ratings believes Intellect’s business risk profile will benefit from steady monetisation of its established product suites over the medium term leading to steady double digit revenue growth and healthy operating profitability. Financial risk profile will continue to witness improvement, supported by healthy cash generation, and moderate spending.

Rating Sensitivity Factors

Upward Factors

• Better than anticipated revenue growth (over 15%), supported by higher acceptance of products among a diversified and reputed  client base
• Sustainenace of operating profitability at over 20%, through execution of higher value contracts leading to larger-than-expected cash accruals over the medium term.
• Continuing healthy debt metrics and cash surpluses

 

Downward Factors

• Sluggish business growth, also impacting operating proitability (below 13-16%) and cash generation
• Material increase in debt levels, due to elongation of working capital cycle, higher development costs, or acquisitions, thereby impacting key debt metrics
• Reduction in cash surpluses to below Rs.100-125 crore

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 promoter, Mr. Arun Jain, holds 31.23% stake in Intellect as on March 31, 2021 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 4,000 employees.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs.Crore	1497	1347
Reported Profit after tax (PAT)	Rs.Crore	265	18
Reported PAT margins	%	17.7	1.3
Adjusted debt/ adjusted net worth	Times	0.03	0.25
Interest coverage	Times	41.0	4.9

As per CRISIL adjusted figures

Any other information: Not applicable

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	FT Grid Pte Ltd**, Singapore	Full	Operational similarities
6	Intellect Design Arena Ltd.*, 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	SFL Properties Private Limited, India	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 Pte Ltd**, Australia	Full	Operational similarities
20	Intellect Design Arena Limited**, Thailand	Full	Operational similarities
21	Intellect Design Arena Limited, Kenya	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