By Niraj Rathi

India Ratings and Research (Ind-Ra) has assigned Mindtree Limited’s (Mindtree) commercial paper (CP) programme an ‘IND A1+’ rating. The instrument-wise rating action is given below:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of the issue (million)

Rating/Outlook

Rating Action

CP( carved out of working capital limits)

-

-

180 days - 365days

INR3,000

IND A1+

Assigned


The CP will be used to fund working capital requirements. The commercial paper is backed by a credit line of INR300 million from financial institution which shall remain undrawn and be available for redeeming the outstanding CPs at all point of time.

KEY RATING DRIVERS

Comfortable Credit Profile: The ratings reflects Mindtree’s comfortable credit profile and liquidity position. Gross adjusted leverage (gross adjusted debt/ EBITDAR) was at 0.91x according to 9MFY17 audited financials (FY16: 0.63x; FY15: 0.57x) mainly on account of increased rent capitalisation amounting to INR7.8 billion (FY16: INR5.3billion ; FY15:4.4billion ).  Ind-Ra notes that further increase in off-balance sheet debt or borrowings or margin pressure might result in gross leverage exceeding the negative guideline as the headroom for additional borrowing remains limited. Mindtree used about INR7.44 billion of its accumulated cash for the acquisition of new companies during 2015 and 2016, the company’s cash and cash equivalent at end-9MFY17 was a healthy INR6.1 billion (FY16: INR4.4billion and FY15: INR9.1billion).

Established Position
: The ratings continue to benefit from Mindtree’s position as a midsized Indian IT service provider with 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 INR8.5 billion, of which the company has paid INR7.44 billion until FYE16. Ind-Ra believes that the company would be able to meet its commitment for the additional payout of about INR1.1billion over the next two years without relying on external debt.

Margins Under Pressure
: Mindtree’s revenue grew 31.7% yoy to INR46.8 billion 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. The proportion of fixed-price contracts increased to about 52.5% of the total revenue in 3QFY17 (FY16: 49.0% ; FY15: 45.2%), onsite efforts have increased steadily to 23.5% in 3QFY17 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%).

Ind-Ra believes that the 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 work force 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 9MFY17, Mindtree generated revenue of INR39.1billion (9MFY16 : INR33.7billion) and EBITDA margins of 13.6% (18%) 
 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (million)

Rating

3 October 2016

27 August 2015

30 June 2014

Issuer Rating

Long Term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

Fund-based working capital limits

Short Term

INR2,085

IND A1+

IND A1+

IND A1+

IND A1+

Non-fund-based working capital limits

Short Term

INR1,380

IND A1+

IND A1+

IND A1+

IND A1+

CP

Short Term

INR3,000

IND A1+

-

-

-



COMPLEXITY LEVEL OF INSTRUMENTS

Commercial Paper are instruments with low complexity levels where the relationship between the inherent risk factors and intrinsic return characteristics is straightforward.

For more information, visit
https://www.indiaratings.co.in/complexity-indicators

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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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