TEXT-S&P summary: Tata Consultancy Services Ltd.
(The following statement was released by the rating agency)
Nov 15 -
Summary analysis -- Tata Consultancy Services Ltd. ---------------- 15-Nov-2012
CREDIT RATING: BBB+/Negative/-- Country: India
Primary SIC: Computer related
Credit Rating History:
Local currency Foreign currency
07-May-2010 BBB+/-- BBB+/--
23-Oct-2007 BBB/-- BBB/--
The rating on Tata Consultancy Services Ltd. (TCS) reflects the India-based information technology (IT) services provider's good competitive position and healthy margins. The rating also reflects TCS' conservative financial policy and strong free cash flows. The constraints of largely India-based operations and TCS' exposure to exchange rate fluctuations temper the above strengths.
TCS' service delivery capabilities and cost competitiveness support its "satisfactory" business risk profile. Most of the company's more-than-100 solution centers are in India. Its workforce of over 2,30,000 employees is also largely based out of India, which provides the company low-cost and skilled manpower. TCS is the largest India-based IT service provider in terms of revenues.
TCS' healthy and stable cash flows--with 96%-98% revenues from repeat business--support its "modest" financial risk profile. The company's revenue growth over the past two-three years was faster than the industry's. TCS' focus on the banking, financial services, and insurance domain, and on application, development, and maintenance services boosted its revenues.
TCS' dependence on India-based employees exposes it to the higher country risk of India (BBB-/Negative/A-3). According to Nasscom, which represents the Indian IT and business process outsourcing industry, the rate of refusal of U.S. visas to Indians is 40% now, from less than 10% a year earlier. This can affect TCS, which derives about 40%-45% of its revenues from on-site services (excluding global delivery centers) that largely Indian employees provide. TCS derives more than 90% of its revenues from exports, with the U.S. accounting for the majority. Indian exporters are exposed to strict regulatory requirements to remit export revenues back to India.
TCS' unhedged positions expose it to foreign exchange fluctuations. TCS follows an active but flexible hedging policy depending on the prevailing currency market trends. Other Indian IT companies estimate that a 1% appreciation in the Indian rupee (INR) reduces their operating margin by 30-50 basis points.
We expect TCS' revenues in fiscal years ending March 31, 2013, and 2014 to continue to grow higher than the industry despite uncertain demand. Nasscom forecasts a 11%-14% growth for the Indian IT services industry in 2012. We expect TCS' EBITDA margin for fiscal 2013 to fall slightly due to weak pricing, moderate wage inflation (high single-digit), and utilization rates (excluding trainees) stabilizing at about 78%-80%. However, we expect the margins to be above 28% for fiscal years 2013 and 2014, compared with more than 29% in fiscal 2012. For the first half of fiscal 2013, TCS' revenue grew 36%, higher than our expectations, and EBITDA margin was 29%, in line with our expectations.
In our view, the TCS management is conservative. The company has negligible term debt and modest adjusted debt, resulting in very strong cash flow adequacy measures. TCS has in the past acquired some smaller companies or operations entirely out of its surplus funds and internal accruals. We expect it to adopt the same approach for any future acquisitions.
We expect TCS' financial risk profile and business position to mitigate the risk from a potential steep rise in the already high inflation in India or a sharp appreciation in the Indian rupee. We therefore believe that TCS is likely to be able to service its obligations, even if the sovereign comes under severe stress.
TCS' liquidity is "strong," as defined in our criteria. We expect the company's ratio of sources to uses of liquidity to exceed 1.5x over the next two years. Sources will exceed uses even if EBITDA falls by over 30%. Our assessment of the company's liquidity is based on the following factors and assumptions:
-- As of Sept. 30, 2012, the company has cash and liquid investments of over INR90.8 billion. It largely deploys surplus funds in bank fixed deposits and in some mutual funds.
-- TCS' surplus funds exceed its minimal debt-like obligations, capital expenditure, and outgo for possible small to mid-sized acquisitions.
-- We expect the company to generate funds from operations of more than INR100 billion in fiscal 2013.
-- TCS also has strong access to capital markets in India and the U.S. Its investment-grade credit profile can also provide it strong access to banks and financial institutions.
The negative outlook reflects the outlook on the sovereign credit rating on India.
We could lower the rating on TCS if we revise downward our transfer and convertibility assessment on India. This could be due to a downgrade of the sovereign. We could also downgrade TCS if any of the following unlikely events occur:
-- The company makes a large acquisition or changes its financial policy such that its credit measures deteriorate significantly. A downward trigger would be a ratio of total debt to EBITDA of more than 1.0x;
-- TCS has problems in project management or delivery capability and this leads to a significant loss of clients and revenues.
We could revise the rating outlook on TCS to stable if the outlook on sovereign credit rating is revised to stable.