Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities of LTIMindtree Limited (LTIM).

The ratings factor in substantial improvement in the scale of business, post amalgamation of the two erstwhile Larsen & Toubro (L&T; CRISIL AAA/Stable/CRISIL A1+) entities - L&T Infotech Ltd (LTI) and Mindtree Ltd (Mindtree) that was completed on November 14, 2022. While revenue in fiscal 2023 has doubled to Rs 33,183 crore because of the merger, the company continues to demonstrate healthy growth in operations, estimated at ~Rs 36,000 crore in fiscal 2024. In the first quarter of fiscal 2024, the company reported Rs 8,702 crore revenue with sustained operating margin at 19%, in line with past fiscals. The company’s operations have demonstrated healthy sustenance despite the IT industry facing multiple headwinds in the recent past. The financial risk profile of LTIM has also remained strong with robust liquidity position, healthy profitability and steady return on capital employed at ~ 40%.

LTIM continues to exhibit strong financial risk profile, as indicated by near debt-free balance sheet (Rs 125 crore of financial bank debt and Rs 1,415 crore of lease liabilities as of March 2023), healthy cash generating ability and robust liquidity. Furthermore, the company benefits from the strength of the L&T brand. These rating strengths are partially offset by customer and geographical concentration in revenue and exposure to risks related to intense competition in the IT services industry in India.

Revenue is expected to grow in double-digits over the medium term, with continued healthy deal wins despite macro-economic headwinds; driven by improved cross-sell, up-sell, mining of existing large clients across end-user industries and improved ability to bid for large deals. In fiscal 2023, revenue grew 27% year-on-year to Rs 33,183 crore compared to Rs 26,109 crore in fiscal 2022 (post factoring in merger-driven numbers in fiscal 2022) because of growth across sectors. Operating margin remained healthy although it moderated to 18.4% in fiscal 2023 from 20.1% last year, owing to increased employee and one-time integration costs. Operating profitability should benefit from efficiency on account of improvement in employee utilisation and balanced offshore component.

The ratings also reflect the strategic focus of the parent, L&T, on the services business. Over the years, the contribution of the services business, both in terms of revenue and profitability, has been improving. Additionally, L&T has also been leveraging the capabilities of the services segment to augment its core business. The acquisition of Mindtree by L&T in 2019, as well as the amalgamation of Mindtree with LTI bodes well for the information technology business in general and the services business in particular.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of LTIM and its subsidiaries, held directly or indirectly, as all the companies have common management and are in the same line of business.

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:

Improved scale of operations, post Mindtree’s successful merger into LTIM:

Amalgamation of the two erstwhile L&T entities, LTI and Mindtree, was completed on November 14, 2022. This has led to LTIM now holding the sixth position amongst IT companies in India. Operating revenue doubled post the merger and was Rs.33,183 crore in fiscal 2023 with operating margin expected to sustain at 18-20%. The combined entity has enhanced scale, diversified technical capabilities and product offerings with presence across end-user industries, geographies, and customers.

The company has an enhanced and established market position in key end-user industries and benefits from sound operating efficiency. It earned 37% of its revenue from the banking, financial services and insurance (BFSI) sector, 24% from high-tech, media and entertainment sectors, 17% from manufacturing and resources sector, 15% from retail, fast-moving consumer goods (FMCG), travel, transport and hospitality, and the remaining 7% from health, life sciences and public services diversified.

Healthy deal pipeline and increasing number of active clients provides strong growth visibility over the medium term. The number of active clients has increased from 261 as on December 31, 2017, to 728 as on March 31, 2023. With the company growing faster in digital areas and with the addition of clients, dependence on the top 5, 10 and 20 clients have been reducing gradually over the past 4-5 years – further benefiting the business risk profile.

The company has also exhibited healthy operating profitability level of more than 18% over the years, which has led to robust return on capital employed in excess of 40%.

Strong financial risk profile

The strong financial risk profile is reflected in sizeable networth of over Rs 15,000 crore as on March 31, 2023, healthy cash accrual, near debt-free balance sheet and robust liquidity (Rs 8,355.2 crore as on March 31, 2023). The company does not expect to undertake any large, debt-funded capital expenditure or acquisition over the medium term. All capacity expansions of Rs 150-200 crore is expected to be incurred through internal accrual. With ample cash surplus and minimum reliance on debt, the capital structure is expected to remain healthy in the absence of gearing over the medium term.

Strategic importance to the parent, L&T

The IT services business has become increasingly critical to the L&T group in recent years. As against the earlier stance of focusing on infrastructure and capital-intensive segments, the L&T group is now focusing on the services business, which includes financial and IT services. The revision in strategy is also a fallout of the lower-than-envisaged performance of the infrastructure business and sustained growth in the services business, which are asset-light, have healthy growth potential and offer high return on capital employed.

Over the years, the contribution of the services business, both in terms of revenue and profitability, has been improving. Additionally, L&T has also been leveraging the capabilities of the services segment to augment its core business. The acquisition of Mindtree by L&T in 2019, the initiation of the strategic initiative called L&T Nxt in the same year (taken over by Mindtree in July 2021), as well as amalgamation of Mindtree with LTI bodes well for the information technology business in general and the services business in particular.

Being an L&T group company, LTIM also benefits from the strong brand and domain expertise available within the group, resulting in better penetration and acceptability in the market. Treasury operations are supported by L&T Treasury, and critical treasury decisions are taken by the treasury committee, which consists of members from the parent and LTIM. The parent and LTIM have five common board members.

Weaknesses:

Customer and geographical concentration in revenue

North America contributed 71.9% to the revenue in fiscal 2023. Any regulatory changes in the region could have a significant impact on operations. Protectionist measures adopted by the US may also pose a business challenge for the company as well as its peers. However, this is an inherent feature of most major companies in the IT services industry as a significant portion of the revenue originates from the US.

Exposure to intense competition in the IT industry

The business environment for the IT industry continues to be challenging. IT players in India will need to consistently scale up their operations, primarily on account of intense competition among themselves and from multinational corporations that are expanding their offshore operations in India. The other challenges include maintaining an efficient cost structure, ensuring effective labour retention and utilisation and remaining responsive to the dynamic nature of the industry. With digital services gaining traction, more and more companies are intensifying their focus on the digital technology space, resulting in increased competitive intensity. Given the increasing competition and pricing pressure, the ability to provide differentiated services will remain critical to maintain a competitive advantage.

Liquidity: Superior

Liquidity is robust, driven by expected cash accrual of more than Rs 4,000 crore annually over the medium term leading to further accretion to cash surplus which stood in excess of Rs 8,300 crore as on March 31, 2023. The company has remained near debt-free and is expected to remain so in the absence of any major debt-funded expansion plans over the medium term. The cash accrual will more than sufficiently cover the incremental working capital requirement and small ticket acquisitions.

Outlook: Stable

CRISIL Ratings believes LTIM will maintain its healthy business risk profile over the medium term, supported by steady revenue growth and sound operating efficiency and the strength of the L&T brand.

About the Company

LTIM, headquartered in Mumbai, was incorporated in December 1996. The company is a subsidiary of L&T. It provides IT services, including application, development, maintenance, enterprise solutions, infrastructure management services, testing, analytics, artificial intelligence (AI) and cognitive and other services. In January 2014, the company transferred its product engineering services division to a group company, Larsen & Toubro Technology Services (‘CRISIL AAA/Stable/CRISIL A1+’).

LTIM has offshore delivery centres in Mumbai, Pune, Bengaluru, and Chennai; global development centres in the US, Canada, Europe, South Africa, the Middle East and Singapore; as well as various sales offices.

On a consolidated basis, the company reported operating income of Rs 8,702 crore in the three months ended June 30, 2023 (Rs 7,644 crore in the corresponding period of the previous fiscal), with net profit of Rs 1,152 crore (Rs 1,106 crore in the corresponding period of the previous fiscal).

Key ESG highlights:

The environment, social, and governance (ESG) profile of LTIM 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. LTIM has focused on mitigating its environmental and social impact .

• LTIM has laid out its ESG vision and strategy with a focus on achieving net zero by 2040. Projects were taken up to improve energy efficiency in existing buildings as well as through retrofits
• In fiscal 2023, 52.07% of LTIM’s energy requirement has been met by renewable sources
• The company has 40% women in the workforce and aims to have 15% women in leadership by 2030. The company is also recognised as one of the Top Employers and Great Place to Work
• It has a strong governance structure with 50% of its board comprising independent directors and extensive disclosures

There is growing importance of ESG amongst investors and lenders. LTIM’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.

Key Financial Indicators (Consolidated)

Annexure – List of entities consolidated

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