| Tech Data Advanced Solutions (India) Private Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 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 Tech Data Advanced Solutions (India) Pvt Ltd (TDAS) at ‘CRISIL A-/Stable/CRISIL A2+’.
The ratings continue to reflect strong financial and operational support TDAS receives from its parent, improving operating performance of TDAS with a growing presence in the domestic information technology (IT) network and storage systems segment, an established relationship with customers and suppliers, and healthy policies for mitigating counterparty risks. These strengths are partially offset by a sub-par financial risk profile and debt protection metrics, due to low profitability, and large working capital requirement in the distribution business.
Operating income grew 30% year-on-year to Rs 2,662 crore during fiscal 2022 along with Earnings before interest, tax, depreciation and amortisation (EBITDA) margin improving to 1.9% as compared to a break-even last fiscal. The improvement in operating performance was driven by a healthy demand for IT systems, network and storage systems by both corporates and governments. Over the medium term, revenue growth is expected to be healthy at 12-15% while EBITDA margin is expected to be low at ~2% given high competition in the distribution business with continuing net profits; which remains a key monitorable. The improvement in performance is expected to be driven by shift in the company’s business model to a value driven business, compared with volume driven earlier.
The rating also takes into account the healthy credit profile of TDAS’s parent, TD Synnex Corp (TD Synnex, rated BBB-/stable by S&P Global Ratings), which was formed post September-2021 acquisition of Tech Data Corp by Synnex Corp. |
Analytical Approach CRISIL Ratings has used the parent notch-up framework in its assessment of ratings of bank facilities of TDAS. Its parent has provided corporate guarantees provided to banks for debt obligations, given its strategic importance, considering it is one of the largest subsidiaries in the Asia pacific region. With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are treated as debt along-side adjustments are also made in depreciation and amortization and interest cost components. |
Key Rating Drivers & Detailed Description Strengths: Strong financial and operational support from the parent In February 2017, Tech Data acquired the technology solutions business of TDAS (formerly, Avnet Technology Solution India Pvt Ltd) to broaden its product offerings and enter the Asian market where technology solutions have a strong demand. Since then, Tech Data Corporation has been providing technological and financial support to TDAS. Further, since September-2021, the new parent TD Synnex which was formed post September-2021 acquisition of Tech Data Corp by Synnex Corp, too continues to provide support given its strategic importance as Synnex Corp did not have operational presence in India and south-east Asia. The parent has guaranteed the secured short-term debt contracted by TDAS for working capital requirement. TDAS, which specialises in networking and data storage solutions, plans to enter the high-value enterprise segment, which includes cloud- and analytics-based applications. Technical expertise and the broad products portfolio of Tech Data will help TDAS penetrate the domestic market.
Healthy risk management practices The company follows the risk management policies defined by its parent to efficiently mitigate risks inherent in the IT distribution business, such as vendor concentration, product obsolescence, and credit risks. The vendor base is diversified. A quick conversion cycle and a strong relationship with vendors ensure limited risk arising from product obsolescence. Credit risk is mitigated by checking credit worthiness of customers, placing orders for equipment only on receipt of purchase orders, and taking post-dated cheques. Purchases in foreign currencies account for about 20% of total purchases, which are hedged locally.
Growing presence in the domestic IT network and storage systems segment TDAS operating income has grown at a healthy 15% rate during last five fiscal ended fiscal 2022. The company has been steadily expanding its presence in the domestic market by strengthening channel partners and the vendor base. It has more than 300 channel partners and the number is expected to increase steadily over the medium term. Revenue is expected to register annual growth of ~12-15% over the medium term, supported by steady demand for products, though competitive intensity remains high.
Weakness: Low profitability resulting in sub-par financial risk profile The IT asset and services distribution business is characterised by intense competition leading to lean operating margins. After years of reported net losses, TDAS broke even at the operating level in fiscal 2021 and improved it to 1.9% in fiscal 2022 while also reporting net profits which also plugged the networth erosion. Debt protection metrics remain sub-par for the rating but are expected to slowly improve over the medium term with improving product mix.
Large working capital requirement in the distribution business Operations are working capital intensive because of stretched receivables, as favourable payment terms are offered to customers to ensure loyalty and expand business. The company is able to negotiate better payment terms with suppliers in case of large deals, which partially cover receivables. Though inventory is minimal, operations remain working capital intensive, resulting in significant reliance on short-term borrowing. |
Liquidity: Adequate While TDAS standalone liquidity is modest, its overall liquidity is supported by its parent. Despite weak cash accruals the company has been able to manage through funding support from parent. The parent has guaranteed the secured short-term debt contracted for working capital requirement. Bank lines are carved out of those of its parent, utilisation of which has increased in recent months with growing business averaging at 76% during last 6 months ended January-2023. The company has minimal long-term debt, and obligations can be serviced from unutilised bank lines. |
Outlook: Stable CRISIL Ratings believes TDAS will continue to benefit from the financial and operational support from its parent, and also from increasing penetration in the domestic market and entry into new product segments. The financial profile is expected to remain sub-par due to low profitability albeit improving net margins is expected to slowly plug net worth erosion. Nevertheless, support from parent is expected to be forthcoming. The ratings will continue to remain sensitive to any change in the parent’s rating. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Company TDAS was incorporated in 1995 as Ontrack Solutions Pvt Ltd and sold to Avnet in 2009. The company, based in Mumbai, distributes IT hardware and software solutions. Most of the revenue is derived from the domestic market. Before February 2017, it was a subsidiary of Avnet, forming part of its USD 8.7 billion (around Rs 56,550 crore) technology services business. Subsequently, Tech Data Corporation acquired this entire business to transform itself into an end-to-end service provider. Later, in September-2021, Tech Data Corp was acquired by Synnex Corp with the entity being renamed as, TD Synnex Corp; which now is the ultimate parent of TDAS. |
About Tech data The company is a distributor of broad-line products such as personal computing, mobile devices, and consumer electronics; and IT products such as servers, and storage and networking hardware and software. It has a significant presence in North America and Europe. After acquiring the technology solutions business from Avnet, the company entered the Asian markets. Tech Data was recently acquired by Synnex, and is now a wholly owned subsidiary of Synnex. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
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This Annexure has been updated on 10-Mar-2023 in line with the lender-wise facility details as on 14-Dec-2021 received from the rated entity.
Criteria Details
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