By Niraj Rathi

India Ratings and Research (Ind-Ra) has affirmed Mindtree Limited’s (Mindtree) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Strong Credit Profile: The affirmation reflects Mindtree’s continued strong credit profile and liquidity position. Gross adjusted leverage (gross adjusted debt/ EBITDAR) was 0.63x at FYE16 (FY15: 0.57x). Although Mindtree has used about INR7.44bn of its accumulated cash for the acquisition of new companies during 2015 and 2016, the company’s cash and cash equivalent at 1QFYE17 was a healthy INR4.9bn (FY16: INR4.4bn and FY15: INR9.1bn).

E
stablished Position: The ratings continue to benefit from Mindtree’s position as a midsized Indian IT service provider with a focus in the digital space, which constitutes about one-third of its revenue. The company derives about two-thirds of its revenue from the US markets and 22%-24% of its revenue is from the European region. 

Payout For Acquisitions:
Mindtree has acquired four companies since the beginning of 2015 and the total cash outflow for these would be close to INR8.5bn, of which the company has paid INR7.44bn until FYE16. We believe that the company would be able to meet its commitment for the additional payout of about INR1.1bn over the next two years without relying on external debt.

Margins Under Pressure:
Mindtree’s revenue grew 31.7% yoy to INR46.8bn in FY16 including the inorganic growth, although its EBITDA margins declined to 17.7% (FY15: 19.9%). The key reasons for the drop in margins were wage inflation, increased proportion of lower margins fixed-price contracts, and a steady increase in onsite efforts and subcontracting costs. While the proportion of fixed-price contracts increased to about 48.9% of the total revenue in FY16 (FY15: 45.1%), onsite efforts have increased steadily to 22.6% in 1QFY17 from 18.6% in 1QFY16. The subcontracting expenses as a percentage of revenue also increased to 6.4% in FY16 (FY15: 5.9%; FY14: 4.6%). 

We believe that Indian IT companies would continue to face these challenges, which would keep the EBITDA margins under pressure. A partial containment of the pressure on EBITDA margins is possible through increased utilisation of
workforce and ability to shift work offshore.  

Slowing Revenue Growth:-
Ind-Ra notes that Mindtree’s revenue growth has slowed down due to various reasons including a slowdown in ramp up of some of its projects. A further slowdown might also affect the EBITDA margins. A significant drop in revenue or EBITDA margins might have a bearing on Mindtree’s credit profile. 


RATING SENSITIVITIES

Positive: A sustained improvement in the EBITDA margins or a sustained reduction in gross adjusted debt/EBIDTAR below 0.5x could result in a positive rating action. 

Negative: Any sustained deterioration in the gross adjusted debt/EBIDTAR above 1.5x could lead to a negative rating action.


COMPANY PROFILE

Incorporated in August 1999, Mindtree is a global information technology solutions company. During 1QFY17, Mindtree generated revenue of INR13.3bn (1QFY16: INR9.8bn) and EBITDA margins of 14.7% (17.7%) . 

Mindtree’s ratings as follows: 
- Long-Term Issuer Rating: affirmed at ‘IND AA’; Outlook Stable
- INR2,085m fund-based working capital limits (reduced from INR2,320m): affirmed at ‘IND A1+’
- INR1,380m non-fund-based working capital limits: affirmed at ‘IND A1+’ 



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Niraj Rathi

    Associate Director
    India Ratings and Research Pvt Ltd 6-3-339, Ozone Complex, 1st Floor Punjagutta Main Road Hyderabad 500082
    +91 40 67661912

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121