| Larsen and Toubro Infotech Limited | ||||||
| Rated amount enhanced for Bank Debt | ||||||
| Rating Action | ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities of Larsen and Toubro Infotech Limited (LTI) at ‘CRISIL AAA/Stable/CRISIL A1+’.
The ratings continues to reflect the expected sustenance in healthy business performance supported by company’s healthy deal pipeline, diversified service offering across multiple verticals and increasing share of digital revenues. Despite some delays and deferrals, especially in the manufacturing, energy and utilities segments in the first quarter of fiscal 2021 on account of covid-19, LTI’s performance in the first 9 months of fiscal 2021 was better than anticipated driven by strong growth in Banking & Financial Services (15% y/y growth), manufacturing (15%) and consumer packaged goods (CPG) retail & pharmaceutical segment (27%); overall revenue grew at 16% y/y in the first 9 months of fiscal 2021 compared to the corresponding period of previous fiscal. The company’s profitability benefitted from improved operational efficiency and lower SG&A costs. Operating margin remained healthy at 22% in the first 9 months of fiscal 2021.
Revenue is expected to grow at a healthy 12-15% over the medium term. Operating profitability should benefit from efficiencies on account of improvement in employee utilization and balanced offshore component. Further, the company’s financial profile continue to be strong, supported by healthy cash generating ability and a debt free balance sheet.
The ratings also reflect the strategic focus of the parent, Larsen & Toubro Ltd (L&T; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’) under the L&T Nxt initiative towards service based businesses such as information technology (IT), and financial services with the objective of reducing the dependence on capital intensive and low margin businesses. L&T is eyeing more than USD 1 billion revenue from its newly launched new-age technology platform L&T Nxt in the next five to seven years and LTTS is set to play a major role in this. Over the years, the contribution of service based business towards group’s overall business, both in terms of revenue and profitability has also been improving.
The ratings continue to reflect LTI’s established market position in the banking, financial services, insurance, manufacturing and other segments like Energy and Process, Consumer Packaged Goods, Retail and Pharmaceuticals, and strong financial risk profile marked by a debt free balance sheet, healthy cash generating ability and robust liquidity. Furthermore, the company benefits from the expected support from its parent, and the strength of the L&T brand. These rating strengths are partially offset by customer and geographic concentration in revenue, and exposure to risks related to intense competition in the IT industry in India. |
Analytical Approach: For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of LTI and its subsidiaries, held directly or indirectly, as all the companies have a common management and are in the same line of business. The ratings also factor in support expected from its parent. CRISIL Ratings believes that LTI will, in case of exigencies, receive necessary support from its parent, considering the strategic focus of the parent towards service based businesses |
Key Rating Drivers & Detailed Description Strengths: Healthy business risk profile, supported by an established market position The company has an established market position in key verticals and sound operating efficiency. Diversified service offerings such as Application Development Maintenance, Enterprise Solutions, Infrastructure Management Services, Testing, Analytics & Artificial Intelligence strengthens the business risk profile of the company. Healthy deal pipeline and healthy share (44% in Q3 fiscal 2021 against 43% in Q2 fiscal 2021) of digital services in the revenue streams provides strong future growth visibility. With the company growing faster in digital areas, and with addition of newer clients, dependence on the top 5, 10 and 20 clients has been reducing gradually over the past 4-5 years – further benefiting business risk profile. The number of active clients has also increased from 211 as on December 31, 2015 to 419 as on December 31, 2020.
Strong financial risk profile The company has a strong financial risk profile marked by large net worth (Rs. 4724 crore at March 31, 2020), healthy cash accruals, a debt free balance sheet and robust liquidity (Rs 3856 crore at December 31, 2020). No large scale debt funded capital expenditures or acquisitions are expected over the medium term. All the capacity expansions of about Rs 150 – Rs 200 cr are expected to be funded through internal accruals. Since LTI has ample cash surpluses and there is minimum reliance on debt, the capital structure is expected to be healthy with nil gearing over the medium term.
Support from parent, L&T The IT services business has been becoming more critical to L&T group in recent years. As against the earlier stance of focusing more on infrastructure and capital intensive segments, the L&T group presently is focusing more on services business, which include financial service and IT service. The revision in strategy is also a fallout of lower than envisaged performance of infrastructure business and sustained growth in services business, which are asset light, have healthy growth potential, and offer high return on capital employed. Over the years, the contribution of service business, both in terms of revenue and profitability has been improving. Additionally, L&T has also been leveraging the capabilities of the services businesses to grow its core business. L&T’s new strategic initiative, L&T Nxt, also bodes well for the services business. L&T is eyeing more than USD 1 billion revenue from its newly launched new-age technology platform L&T Nxt in the next five to seven years and LTI is set to play a major role in this. The acquisition of Mindtree Ltd further signifies L&T’s intent to become larger and more credible in the IT services business. Further, being an L&T group company, LTI 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 LTI. Besides, both the parent, and LTI also have 5 common board members.
Weaknesses Customer and geographical concentration in revenue North America contributed 69% to the revenue, in the first 9 months of fiscal 2021. Any regulatory changes in the region could have a significant impact on operations. Protectionist measures adopted by the US may also pose business challenge for the company as well as its peers. However, the same is an inherent feature of the most major companies in the IT industry as significant portion of revenues originate from US.
Exposure to intense competition in the IT industry The business environment for the IT industry continues to be challenging. Indian IT players will need to consistently scale up their operations, primarily due to intense competition among themselves and from multinational corporations that are expanding their offshore operations in India. The other challenges faced include maintaining an efficient cost structure, ensuring effective labour retention and utilization, and remaining responsive to the dynamic nature of the industry. As digital services are gaining traction more and more companies are intensifying their focus on digital technologies space resulting in increased competitive intensity. Given the increasing competition and the resultant pricing pressures, the ability provide differentiated services will remain extremely critical to maintain competitive advantage. |
Liquidity: Superior Liquidity is robust, driven by expected cash accrual of around Rs 1,400-1600 crore per fiscal in fiscals 2022-23, and cash and marketable securities of Rs 3856 crore as on December 31, 2020. The company has remained debt-free for the past three fiscals and is expected to remain so due to no major debt-funded expansion plans over the medium term. Cash accruals should more than suffice to meet incremental working capital requirement and small ticket acquisitions. |
Outlook Stable CRISIL Ratings believes LTI will maintain a 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. The financial risk profile is also expected to remain strong over this period due to healthy cash accrual, debt free balance sheet, and only moderate capital spending. |
Rating Sensitivity factors
|
About the Company LTI, headquartered in Mumbai, was incorporated in December 1996; the company is a subsidiary of L&T. LTI provides IT services, including Application, Development, Maintenance, Enterprise Solutions, Infrastructure Management Services, Testing, Analytics, AI & 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+’).
LTI 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. |
Key Financial Indicators (consolidated)
|
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
& - Fully interchangeable with packing credit ^ - Fully interchangeable with cash credit/overdraft facility and buyer's credit limits % - Overdraft Facility $ - Interchangeable with Packing Credit facility limits |
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
|