By Reshma Sankar

India Ratings and Research (Ind-Ra) has revised Virinchi Limited’s (VL) Outlook to Positive from Negative while affirming its Long-Term Issuer Rating at ‘IND BB’. The instrument-wise rating action is as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund-based working capital limit

-

-

-

INR130

IND BB/Positive/IND A4+

Affirmed; Outlook Revised to Positive from Negative

 


Ind-Ra continues to take a consolidated view of VL and its subsidiaries, including Virinchi Healthcare Private Limited (VHPL), while affirming the ratings.

KEY RATING DRIVERS

The Outlook Revision reflects timely debt servicing of the guaranteed debt by VHPL during the last three months ended July 2018. VL has extended an unconditional and irrevocable corporate guarantee for the entire debt of VHPL. Moreover, VL provided tangible support in the form of unsecured loans totalling INR224.6 million in FY18.

 

The ratings are supported by a 19.1% increase in VL’s revenue to INR3,414 million in FY18, driven by a rise in contribution from its IT product and healthcare businesses. However, the scale of operations continues to be medium.  As per 1QFY19 provisional financials, revenue was INR963.3 million. Ind-Ra expects VL’s revenue to rise in the medium term in view of its strong business profile and long-term contracts with customers under the IT business.

 

The ratings are also supported by VL’s continued healthy EBITDA margin, which rose to 28.1% in FY18 from 22.3% in FY17 on account of better cost absorption. According to 1QFY19 provisional financials, the margin was 28.8% and is likely to improve in view of higher earnings expected from the IT division. Return on capital employed increased to 16.0% in FY18 from 13.0% in FY17 on account of an increase in operating profit.

 

The ratings, however, reflect VL’s modest credit metrics. In FY18, VL’s interest coverage (operating EBITDA/gross interest expense) was 5.3x (FY17: 5.5x) and net leverage was (total adjusted net debt/operating EBITDAR) was 2.3x (2.8x). The marginal deterioration in the coverage was due to a proportionately higher rise in interest expenses than that in EBITDA. On the other hand, the improvement in the leverage was driven by the rise in EBITDA and a fall in debt. According to 1QFY19 provisional financials, its interest coverage was 5.4x.

 

The ratings also reflect VL’s elongated working capital cycle of 325 days in FY18 (FY17: 131 days). The elongation was due to higher stocking up of pharmaceuticals for the hospital business. Despite the rise in operating profitability, VL’s cash flow from operations fell to INR352 million in FY18 from INR584 million in FY17 owing to the stretch in the cycle. The working capital limits was utilised fully over the last 12 months ended July 2018.


RATING SENSITIVITIES

Positive: Any improvement in the consolidated business profile will lead to a positive rating action.

 

Negative: Any deterioration in the consolidated business profile and/or any delay in the repayment of the guaranteed debt by VHPL will lead to a negative rating action.


COMPANY PROFILE

Founded in 1991, Hyderabad-based VL, a part of Virinchi Group, has a capability maturity model integration certification. It provides information and communications technology products and services. It employs over 1,000 employees across three offshore development centres in Hyderabad that have 100,000 square feet of ready-to-plug-in workspace. Its clients are majorly from North America.

CONSOLIDATED FINANCIAL SUMMARY

Particulars

FY18

FY17

Revenue (INR million)

3,414

2,867

EBITDA (INR million)

958

639

EBITDA margin (%)

28.1

22.3

Interest coverage (x)

5.3

5.5

Net leverage (x)

2.3

2.8

Source: VL, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Rating Watch/Outlook

Rating Type

Rated Limits

(million)

Rating

8 March 2018

 

31 January 2018

 

9 November 2016

Issuer rating

-

-

IND BB/Positive

IND BB/Negative

IND BBB-/RWN

IND BBB/Stable

Fund-based working capital limit

Long-/short-term

INR130

IND BB/Positive/IND A4+

IND BB/Negative/IND A4+

IND BBB-/RWN/IND A3/RWN

IND BBB/Stable/IND A2



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instrument, please 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.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Reshma Sankar

    Analyst
    India Ratings and Research Pvt Ltd Harmony Square 3rd Floor, Door No. 48 & 50 Prakasam Street T Nagar Chennai - 600017
    044 43401700

    Media Relation

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    Manager – Corporate Communication
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