Detailed Rationale CRISIL Ratings rating on the bank facilities of Intellect Design Arena Limited (Intellect) continues 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
The reaffirmation 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.6000 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 2022, revenue grew by over 25% compared to previous year, driven by timely closure of digital transformation deals. Higher contribution from license revenues (7% higher over fiscal 2021) as well as SaaS and cloud revenues (112% higher over fiscal 2021) led to improvement in operating profitability over 25% during fiscal 2022 (from ~24% in fiscal 2021).
Intellect is also expected to sustain the improvement in its financial risk profile, over the medium term, supported by steady cash generation, moderate capital investments in product development (Rs.120-140 crore per annum) and prudent working capital management, leading to limited need for debt addition. Debt protection metrics, which improved considerably in fiscal 2022, due to strong cash generation, 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 utilization of its working capital bank lines, and surplus cash of Rs.558 crore as on March 31, 2022 (Rs.262 crore as on March 31, 2021). |
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 30.45 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.
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 has been improving over time, supported by healthy cash generation (over Rs.440 crores - highest ever achieved in fiscal 2022), and sharp reduction in debt levels. The company was almost debt free as on March 2022, translating into robust debt metrics. Net cash accrual to total debt and interest coverage ratios have improved to about 533 times and 70 times, respectively, in fiscal 2022, from 6.7 times and 29.23 times respectively in fiscal 2021.
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.120-140 crore per annum) and prudent working capital management, leading to continued robust debt metrics.
Weaknesses Moderate scale of operations with long credit cycle: Though Intellect has grown at a compounded annual growth rate (CAGR) of 16% over the last five fiscals, the scale of operations remains moderate at less than Rs 2000 crore, compared with peers in the IT services industry, and also modest compared with global IT product companies it competes with. Almost about 19-20% of revenues during fiscal 2022 remains dependent on timely closure of new license contracts, which had remained volatile during previous fiscals. 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 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 558 Cr as on March 31, 2022. Its working bank lines of Rs 220 crore, were unutilised over the 12 months period ended May 2022. 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 ~400 crore, which will remain adequate to meet ongoing product development capex (Rs.120-140 crore per annum).With expanding scale of operations, the working capital requirements may also remain high, mainly due to high debtor cycle, and unbilled revenues of Rs 710 crore as on March 31, 2022. 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 * Higher than expected growth in revenues supported by increased acceptance of products among a diversified and reputed client base, and steady operating profitability at >20-22% leading to significant cash generation on sustained basis. * Controlled inventory levels and gradual decline in the level of receivables, including unbilled revenues, driven by timely implementation of projects and improving collection cycle. * Continued healthy financial risk profile and robust debt metrics as well as steady improvement in liquidity position.
Downward factors * Sustained decline or modest growth in revenue leading to operating profitability below 15-16%, impacting cash generation * Larger-than-expected debt funding of working capital or software development or acquisitions adversely impacting key debt metrics. * Liquid surpluses depleting materially |
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 30.64% stake in Intellect as on December 31, 2022 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.
As on 9m fiscal 2023, Intellect had reported operating income of Rs.1,615 crore with EBITDA of Rs.297.65 crore and net cash accruals of Rs. 266 crore on consolidated basis. |
Key Financial Indicators
*As per CRISIL adjusted figures ** Revenue from Operations |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
@ - Rs 45 crore interchangeable with non-fund based limits. |
Annexure – List of entities consolidated
* Subsidiaries of Intellect Design Arena Limited, UK ** Subsidiaries of Intellect Design Arena Pte Ltd, Singapore *** Subsidiaries of Intellect Design Arena Inc., USA # 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. |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||
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Criteria Details
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