By Aashman Sharma

India Ratings and Research (Ind-Ra) has revised Compuage Infocom Limited’s (CIL) Outlook to Negative from Stable while affirming its Long-Term Issuer Rating at ‘IND A-’. The instrument-wise rating actions are as follows:
 

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based limits

-

-

-

INR2,054

IND A-/Negative/IND A2+

Affirmed; Outlook revised to Negative from Stable

Non-fund-based limits

-

-

-

INR4,950

IND A2+

Affirmed

KEY RATING DRIVERS

Weak Credit Metrics: The Negative Outlook reflects the stress on CIL’s credit metrics due to elevated working capital requirements. As a result, receivable period elongated to 63 days in 1HFY19 (FY18: 52 days, FY17: 47 days). However, the company managed to keep its net working capital cycle steady at 37 days (FY18: 33 days, FY17: 37 days) due to the commensurate increase in payable days. CIL’s net leverage (total debt less cash/EBITDA) was 4.4x in 1HFY19 (FY18: 4.3x, FY17: 3.99x). Net interest coverage (EBITDA/interest expense less interest income) was 2.01x in FY18 (FY17: 1.86x).


Its EBITDA margins remained muted at 1.8% in 9MFY19 (FY18: 1.7%, FY17: 1.6%), due to the trading nature of its business. CIL has received board approval to infuse INR270 million of equity via the promoters, and the promoters may consider additional capital aid to support the business. Ind-Ra shall monitor CIL’s working capital situation and equity infusion plans, and will revise the Outlook should the working capital and leverage metrics improve and show signs of stability.  


Reputed Vendors; Healthy Business Prospects: CIL generates over 60% of its revenue from distributing products of four large blue-chip companies namely – Cisco Systems Incorporated, Samsung Electronics Company Limited, Microsoft Corporation and Hewlett-Packard Company. It has been associated with these companies for over five years. The distributorship agreement is typically renewed every year. CIL increased its share in the mobility segment by distributing Apple accessories and is the sole distributor for the brand in north and east India. Moreover, CIL has expanded into surveillance, networking systems and computer accessories through new tie-ups signed in FY19. The management intends to balance its revenue mix, which is driven by the IT segment (about 80% of revenue), by increasing the share of more profitable mobility and surveillance segments to 35% from 15%. Ind-Ra believes the expansion into these untapped market segments would boost its business.


Strong Market Position; Increase in Scale of Operations: CIL is among the top 10 distributors of IT hardware products in India. Its revenue grew at a CAGR of over 20% during FY13-FY18 to INR40.7 billion (FY17: INR35.5 billion), driven by new distributorship agreements and a well-entrenched regional presence. CIL distributes to over 800 cities across India through over 10,000 retailers. CIL has distributorship agreements with more than 25 vendors. CIL has enhanced its exclusivity rights with its vendors in FY18, being Hewlett-Packard’s exclusive dealer in Gujarat and Lenovo’s exclusive dealer in Madhya Pradesh.


Insulated Business Model: CIL procures around 85% of its supplies such as computers, computer peripherals and mobile phones from the Indian subsidiaries of international vendors on a monthly basis. The balance 15% of the purchase is imported on a fully hedged basis at an annual hedging cost of around 7%. Although the procurement is on stock and sale basis, CIL is insulated from inventory losses as the vendors provide stock rotation and price protection in the event of stock obsolescence or a fall in prices. Despite negligible bad debts, the CIL’s board of directors has made it mandatory to take credit insurance, so that the entire bad debts are protected by way of insurance in the event of default. Moreover, the high barriers of entry to work with the blue-chip clientele of CIL strengthen the firm’s business model.


Comfortable Net Working Capital Cycle: CIL’s net working capital cycle has been stable since FY13 (1HFY19: 37 days, FY18: 33 days, FY17: 34 days). As informed by the management, CIL is entering into a channel financing arrangement for a dealer’s network (without recourse to company). This will enable a speedy recovery of sale proceeds and improve CIL’s net working capital cycle. However, any elongation of the working capital cycle would impact the credit profile.

Healthy Free Cash Balance: Ind-Ra believes CIL’s liquidity to be comfortable due to its large cash and cash equivalents (FY18: INR1.3 billion, FY17: INR1.02 billion). This is bolstered by the continuous support from the promoters in the form of unsecured loans. Furthermore, an equity infusion of INR250 million has been approved in March 2019, and should be used to repay debt. Management has confirmed to Ind-Ra that cash balances will remain at this level. Any decline in the cash balances without a commensurate decrease in the debt levels would impact the company’s credit profile.  


RATING SENSITIVITIES

Positive: A substantial reduction in working capital cycle with receivable days returning to historical level and a sustained improvement in the leverage profile could lead to a positive rating action.

Negative:
 Deterioration in the credit metrics or liquidity profile, with net interest coverage remaining below 2.0x on a sustained basis, elongation of the working capital cycle or decline in the cash level could lead to a rating downgrade. 


COMPANY PROFILE

CIL, promoted by Mr Atul Mehta, in 1987, is a distributor of over 30 major global IT brands. Its product portfolio includes monitors, laptops, computer hardware components, computer peripherals, pen drives, software, computer accessories, and mobile handsets. These products are sold to system integrators, corporate resellers, original equipment manufacturers, system assemblers and large format retailers. The company has a nationwide presence with 45 branches, around 50 warehouses and 55 service centres.

FINANCIAL SUMMARY

Particulars

FY18

FY17

Revenue (INR million)

40,774

35,513

EBITDA (INR million)

696

570

EBITDA margin (%)

1.7

1.6

Interest expense (INR million)

495

449

Net interest coverage (x)

2.01

1.86

Total debt (INR million)

4,211

3,297

Cash (INR million)

1,218

1,020

Net leverage (x)

4.3

3.99

Source: CIL, Ind-Ra


RATING HISTORY

Instrument

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

3 April 2018

18 January 2017

Issuer rating

Long-term

-

IND A-/Negative

IND A-/Stable

IND A-/Stable

Fund-based limits

Long-term/Short-term

INR2,054

IND A-/Negative/IND A2+

IND A-/Stable/IND A2+

IND A-/Stable/IND A2+

Non-fund-based limits

Short-term

INR4,950

IND A2+

IND A2+

IND A2+


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.

ABOUT INDIA RATINGS AND RESEARCH

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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Applicable Criteria

Analyst Names

  • Primary Analyst

    Aashman Sharma

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001783

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121