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April 25 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Rolta India Limited's (Rolta) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-'. The Outlook is Stable. Fitch also has affirmed the company's foreign-currency senior unsecured rating at 'BB-' as well as Rolta LLC's 10.75% USD200m guaranteed senior notes due 2018 at 'BB-'. Rolta LLC is a wholly owned subsidiary of Rolta, a diversified company with interests in IT and geospatial services.
The company has changed its financial year-end from June 30 to March 31. The ratings factor in Rolta's estimated results for the nine months ended March 2014.
KEY RATING DRIVERS
Low Ratings Headroom: Rolta's funds flow from operations (FFO)-adjusted leverage of 3.7x at end-March 2014 (FY13: 4.1x) is close to the 4.0x threshold above which Fitch may consider negative rating action. We expect its leverage to remain stable at around 3.5x during FY15-16 as a decline in capex/revenue to 12%-13% (9MFY14: 29%) would offset a likely deterioration in operating EBITDAR margin to 33%-35% (FY14: 37.3%) resulting in free cash flow (FCF) margin of 5%-6% (9MFY14: -9%).
Likely Lower Profitability: Rolta is gradually shifting its business mix from a high-margin but capital-intensive model to a lower-margin, lower-capex model. Fitch expects annual capex to reduce to around INR3.5bn-4bn during FY15-16 in line with the company's plan to generate new products, the development costs of which would be expensed rather than capitalised. Management expects annual capex to fall to INR2bn during the same period. Rolta invested about INR45bn, or 56% of its revenue, during FY11-14 mostly to acquire intellectual properties, intangible assets and to develop demonstrations and prototypes.
Changing Revenue Mix: Operating EBITDAR margin is also likely to fall due to a change in the product mix with a higher revenue contribution from Rolta's IT services business, which contributed 72% of FY14 revenue (FY09: 55%) and typically generates a relatively lower operating EBITDAR margin of 28%-30%. The geospatial segment, which generates margins of 50%-55%, contributed 28% of FY14 revenue.
Reasonable Barriers to Entry: Rolta's 'BB-' ratings benefit from its niche-market strategy, established market position in engineering and geospatial services and innovative product portfolio in IT services, which are reasonably differentiated from traditional IT companies. Rolta's geospatial segment has high entry barriers given a limited number of competitors offering similar expertise including 3D mapping, surveying and image processing to various federal and local governments, utilities, telcos, and infrastructure and defence agencies.
Subordination of Notes: Rolta's USD200m senior note holders are subordinated to secured debt, which constitutes 70% of total debt at end-March 2014. Fitch does not notch the senior unsecured notes down from the IDR given reasonable recovery on unsecured debt, growing cash generation and management's stated strategy to replace secured debt with unsecured debt.
Positive FCF starting FY15: Fitch expects Rolta to start generating positive FCF of INR1.5bn-2bn or 5%-6% of its revenue during FY15-16 as operating cash generation should be stable and capex lower. During FY15, Fitch forecasts that Rolta will generate about INR10bn of EBITDA which would be sufficient to cover its interest and tax of INR3bn-4bn and a similar amount of spend on capex. Rolta is forecast to stick to its dividend policy of distributing 20% of its net income.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- FFO-adjusted leverage at above 4.0x.
- Further subordination of unsecured creditors from existing levels would lead to a downgrade of the issue rating.
Rolta's IDRs are constrained by the small scale of its operations. As such, Fitch does not foresee any positive rating action over the medium term.