By Gaurav Mathur

India Ratings and Research (Ind-Ra) has affirmed Mindtree Limited’s (MTL) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Fund-based working capital limits

-

-

-

INR7,900 (increased from INR7,235)

IND A1+

Affirmed

Non-fund-based limits

-

-

-

INR450 (reduced from INR1,800)

IND A1+

Affirmed

Commercial paper (CP)

 

 

21 February 2018

INR3,000

WD

Withdrawn (debt is repaid fully)

Analytical Approach: Ind-Ra continues to take a consolidated view of Mindtree and its 100% subsidiaries Magnet LLC , Bluefin Solutions Limited and Blouvin Limited to arrive at the ratings, due to operational and strategic linkages among them, driven by similar business lines and common promoters.

KEY RATING DRIVERS

Growing Digital Presence: The ratings are underpinned by MTL’s growing presence in the digital space in line with the evolving customer requirements. The company’s digital product portfolio includes cloud computing, artificial intelligence, machine learning and productised end-to-end solutions. Digital-based technologies accounted for 43.5% of FY18 revenue, which increased to 48% during 1HFY18. Furthermore, MTL has developed a strong pool of SAP/salesforce trained employees on the back of Bluefin Inc and Magnet 360 LLC acquisitions. 

To enhance automation capabilities, MTL develops virtual workforce or bots using its CAPE platform. The company has entered into partnerships with educational institutions such as IIT and Stanford to create monetisable intellectual property which requires upfront investments. 

Strong Consolidated Credit Profile:
Gross adjusted leverage (gross adjusted debt/EBITDAR) increased slightly to 1.2x in FY18 from 1.0x in FY17, due to short-term financing using a CP and off-balance sheet rent capitalisation. However, the company repaid the CP during 1HFY19, leading to balance sheet debt at near zero level. Ind-Ra thus expects gross adjusted leverage to improve below 1x in FY19, with the repayment of debt and minimal near-term capex plans. At the current rate of revenue generation and EBITDA margins, MTL has the headroom to borrow an additional debt of about INR2700 million before breaching its negative sensitivity. 

Strong Liquidity, Despite Share Buyback:
Mindtree’s cash and cash equivalent was INR10,500 million in FY18 (FY17: INR8,300 million) and INR7,960 million at end-1HFY18. The total debt at end-FY18 was INR3,009 million (FY17: INR978 million), leading to negative net debt. Also, Mindtree generated an average cash flow from operations of about INR5,500 million per annum over FY16-FY18, which was sufficient to meet its capex, dividend payment and share repurchase requirements over the period. Over the next two years, Mindtree has not planned any major acquisition capex, while Ind-Ra expects a recurring annual capex of INR1,300 million-1,500 million.

Mindtree concluded its first share buyback programme in FY18, under which the company bought back 42,24,000 of its equity shares amounting to INR2,640 million. Apart from this, the company paid dividends worth INR6,200 million over FY16-FY18. 

Moderate Earnings & Margin Expansion in Constant Currency:
In USD terms, EBITDA margin expanded 120bp to 14.7% during 1HFY19 (FY18: 13.6%; FY17: 13.7%), supported by a 19.5% yoy increase in revenue and a 170bp fall in employee cost. During 1HFY19, the company’s top line amounted to USD487.9 million (FY18: USD846.8 million, up 8.6% yoy). The growth in revenue was driven by hitech-media and travel segments. However, the company witnessed some softness in BFSI segment during 2QFY19, based on a client-related issue. Revenue growth over the last six to 18 months has been driven by increased focus on digital products coupled with increased business from the top client. On a standalone basis, the company had INR53,250 million of revenue with EBITDA of INR7,762 million in FY18.

Shareholder’s Uncertainity:
As per the recent developments, VG Siddhartha has shown interest to sell his controlling 21% stake in Mindtree to external players. While nothing is not yet concrete, Ind-Ra notes there exists potential uncertainty regarding the  shareholding pattern and the terms with which the new shareholder would enter the company by taking over the largest stake. 

Increasing Customer &
Geographic Concentration: Mindtree’s top 10 customers contributed around 44.8% to revenues in 2QFY19 (2QFY18: 41.9%). Also, revenue contribution from the top client increased to 20% (nearly USD200 million annually) of the total revenue over the last six month, while the FY18 contribution was marginally lower at 16.5%. This is despite the company continuously adding new clients (341 as of 2QFY19) for healthy revenue visibility. Its geographic concentration has also increased, with revenue from the US increasing to 73.6% in 2QFY19 from 67.5% in 2QFY18 (FY18: 71.0%). 

Currency Fluctuations:
Mindtree earns around 89.8% of its revenue from the US and Europe and incurs about 65% operating expenses in foreign currency. The company has a hedging policy in place, which enables it to hedge 50% of its net cash accruals on a rolling three months basis. Although it has benefited from the currency impact based on the exchange rates over the past one year, any adverse exchange rate movement will be detrimental for the margins.  


RATING SENSITIVITIES

Positive: An improvement in EBITDA margin or a reduction in gross adjusted debt/EBITDAR to below 0.5x on a sustained basis could result in a positive rating action. 

Negative: Gross adjusted debt/EBIDTAR exceeding 1.5x on a sustained basis could lead to a negative rating action. 


COMPANY PROFILE

MTL was incorporated in August 1999 by a team of information technology professionals and ex- employees of companies such as Wipro Limited, Cambridge Technology Solutions and Lucent Technologies. The company classifies its business into four verticals namely manufacturing & retail, BFSI, travel and media, others and hi-tech. The company’s service offerings include development, engineering, maintenance, consulting, package implementation, intellectual property, independent testing and infrastructure management and technical support. The company has presence in four geographies, viz. the US, Europe, India and rest of the world. 

FINANCIAL SUMMARY (Consolidated)
 

Particulars

FY18

FY17

Revenue (INR million)

54,628

52,364

EBITDA(INR million)

7,405

6,518

Interest expense (INR million)

169

191

Debt (INR million)

3,009

991

Cash & equivalents (INR million)

10,495

8,377

Adjusted leverage (x)

1.2

1.0

Source: MTL, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

16 October 2017

1 February 2017

27 August 2015

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

Fund-based working capital limits

Short-term

INR7,900

IND A1+

IND A1+

IND A1+

IND A1+

Non-fund-based limits

Short-term

INR450

IND A1+

IND A1+

IND A1+

IND A1+

CP

Short-term

INR3,000

WD

IND A1+

IND A1+

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, 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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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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Gaurav Mathur

    Senior Analyst
    India Ratings and Research Pvt Ltd Unit 614 - 616, 6th Floor, B Wing Mittal Tower, M G Road Bengaluru - 560 001
    +91 80 46666802

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121