| Price Waterhouse & Co Chartered Accountants LLP | ||||
| Rating upgraded to 'CRISIL AA/Stable' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities of Price Waterhouse & Co Chartered Accountants LLP (PW&Co CA LLP), to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’. PW&Co CA LLP is part of Price Waterhouse network of firms in India, herein referred to as “Price Waterhouse Assurance India (PWAI)” as they have common line of business, namely assurance and tax and regulatory services (TRS).
The upgrade in rating reflects the material improvement in business and financial risk profiles, driven by revenues from new business segment, TRS. Additionally, capital infusion by incoming partners to the tune of Rs 130 crores (spread over 2 years) will also help shore up the balance sheet and liquidity.
In fiscal 2021, PWAI is expected to report top-line of Rs 1,600-1700 crore, a growth of 25-30% on year, and operating margin of 24-25% vis-à-vis 21% reported for fiscal 2020. The improvement in top-line is driven by healthy growth in its audit business and incremental revenues from TRS. Over the medium term, top-line is expected to grow by 8-12%. The improvement in operating margin is attributed to new business segment which has higher margins; coupled with cost optimisation measures undertaken in the current fiscal.
In fiscal 2020, PWAI reported operating income of around Rs 1,280 crore, a growth of around 6% over the previous fiscal. The growth was largely driven by almost similar growth in both audit and transfer pricing segments. Operating margins improved to over 21%, due to operating leverage achieved on account of lower employee costs.
PWAI continues to sustain its strong financial risk profile. As of February 2021, PWAI had a cash surplus of over Rs 100 crore and nil debt. Debt has reduced from Rs.44 crore as on March 31, 2020 due to efforts made by the management to lower receivables, so as to maintain substantial liquidity during the pandemic and also due to receipt of tax refunds. Over the medium term, receivables are likely to improve on account of expectations of reduction in time for tax assessments, resulting in lower debt requirement.
The rating reflects PWAI’s established and long standing presence in India, its strong, reputed, and diversified customer base and improving financial risk profile supported by the absence of long-term debt, strengthening of capital structure on account of equity infusion and improvement in overall liquidity. The rating also factors in benefits PWAI derives from being a member firm of the PricewaterhouseCoopers International Limited (PwC Global Network), wherein each member firm is a separate and independent legal entity. These strengths are partially offset by moderate working capital requirements, exposure to intense competitive pressure, and susceptibility to any regulatory changes. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of PW&Co CA LLP, Price Waterhouse Chartered Accountants LLP, Price Waterhouse LLP, Price Waterhouse Bangalore, Price Waterhouse & Co Bangalore LLP, Price Waterhouse & Co., Lovelock and Lewes Chartered Accountants LLP, Lovelock and Lewes LLP, Dalal & Shah LLP, Dalal and Shah Chartered Accountants LLP, Price Waterhouse & Co LLP, and Choksey Bhargava & Co. LLP. This is because the firms, collectively referred to as PWAI herein, are in the same line of business, namely assurance and TRS, and have operational and managerial linkages.
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:
PWAI is one of the leading players in the assurance and TRS business and has a longstanding presence in India. Being member firm of the PwC Global Network, wherein each member firm is a separate and independent legal entity, one of the largest and among the big four professional services firms globally, it has access to an extensive knowledge base, adopts best practices and policies globally, and adheres to international quality standards and processes.
PWAI is one of the big four accounting firms and commands a good market share in terms of assurance and TRS for companies in India. It has a diversified client base and provides services to large corporates such as Tata Steel Ltd, Reliance Industries Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), United Spirits Ltd (‘CRISIL AA+/Positive/CRISIL A1+’) and Glenmark Pharmaceuticals Ltd (‘CRISIL AA-/Stable/CRISIL A1+’). Furthermore, services extended to the top 10 customers contributed not more than 8% to revenue in fiscal 2020.
PWAI’s net worth is expected to benefit materially from the capital infusion proposed by new incoming partners, from Rs 282 crore as on March 31, 2020. Furthermore, PWAI raises debt occasionally only for short term purposes, and does not have any long-term debt obligations. Given its healthy profitability and low reliance on debt, debt metrics remain healthy.
With improvement in receivables, the group is expected to sustain its comfortable financial risk profile with gearing of under 0.1 time and total outside liabilities (TOL)/ tangible net worth (TNW) of under 1 time over the medium term. However, capital withdrawal by the partners will remain a key rating sensitivity factor.
Weakness:
Operations are working capital intensive, with gross current assets (GCAs) of over 165 days as on March 31, 2020, resulting from large receivables and high unbilled revenue. GCAs are expected to improve over the medium term. Debtors were high at 70-100 days over fiscals 2018 to 2020, however it is expected to improve to 50-60 days over the medium term driven by reduction in time for tax assessments and more frequent fee receipt from TRS segment. Any sustained increase in debtors, and therefore, working capital requirement with increase in scale of operation will continue to be monitored.
Although the majority of the market is dominated by the big four firms and being one among them helps PWAI acquire new customers, exposure to intense competition persists; this impacts pricing of the group.
Besides, the business is highly regulated and remains susceptible to regulatory changes. Mandatory auditor rotation, restriction in providing other services due to conflict of interest, resignation as statutory auditor for some of the large clients, payment penalty in the Satyam case are a few examples of heightened regulatory and reputation risks faced by the entities. Some of these led to a decline in revenues in the past.
The firms of PWAI take insurance cover to mitigate financial loss emanating from such events; however, reputation-related risks may arise in case of any unforeseen adverse regulatory action. |
Liquidity: Superior PWAI’s liquidity is superior and supported largely by recent increase in working capital bank lines to Rs.210 crore (utilisation was modest at ~25% in calendar year 2020). As on February 2021, liquid investments (including cash and cash equivalents) aggregated to over Rs 100 crore. Furthermore PWAI does not have any long term debt or material capital spending plans. Its modest cash accruals of Rs.30-60 crore per annum, should suffice to fund incremental working capital needs. The liquidity position though remains vulnerable to sizeable capital withdrawals by partners. |
Outlook Stable CRISIL Ratings believes PWAI will continue to benefit from being a member of the PwC global network, each of which is a separate and independent legal entity, and from its established market position in the risk assurance and TRS business and comfortable financial risk profile. |
Rating Sensitivity factors Upward Factors
Downward Factors
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About the Group PW&Co CA LLP and other firms of PWAI are members of PricewaterhouseCoopers International Limited (PwC Global Network), each of which is a separate and independent legal entity. PW&Co CA LLP was established in July 2014 as a limited liability partnership firm. The member firms of PWAI provide assurance services (internal and external accounting audit) and TRS. PW&Co CA LLP, Price Waterhouse Chartered Accountants LLP, Price Waterhouse Bangalore, Price Waterhouse & Co Bangalore LLP, Lovelock and Lewes Chartered Accountants LLP, Lovelock and Lewes LLP, Dalal & Shah LLP, Dalal and Shah Chartered Accountants LLP, Price Waterhouse & Co LLP, Price Waterhouse LLP, Price Waterhouse & Co and Choksey Bhargava & Co LLP, together form Price Waterhouse Assurance India (PWAI). |
Key Financial Indicators (Standalone - PW&Co CA LLP):
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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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||
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