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July 15 (The following statement was released by the rating agency)
Fitch Ratings has assigned Rolta Americas
LLC's proposed US dollar senior unsecured notes an expected rating of
'BB-(EXP)'. The notes will be unconditionally and irrevocably guaranteed by
India's Rolta India Limited (Rolta; BB-/Stable) and are therefore rated at the
same level as Rolta's foreign-currency senior unsecured rating of 'BB-'. The
final rating of the proposed notes is contingent upon the receipt of documents
conforming to information already received.
Rolta will use about 75% of the proceeds of the notes to refinance its existing
secured debt and the balance for general corporate purposes. The notes will rank
pari passu with the issuer's existing and future senior unsecured indebtedness.
Rolta Americas LLC is a wholly owned subsidiary of Rolta, a diversified company
with interests in information technology (IT) and geospatial services. The
company has changed its financial year-end from June 30 to March 31. The ratings
factor in Rolta's financial results for the nine months ended March 2014.
The terms and conditions of the proposed bond are similar to Rolta LLC's 10.75%
USD200m guaranteed senior notes due 2018, except that in the proposed notes the
interest reserve account is removed, the fixed charge coverage ratio is lowered
to 2.5x from 3.0x, and Rolta's guarantee on the notes is reduced to 1.5x the
bond issuance amount from 2.0x. Fitch believes that the lower fixed charge
coverage ratio does not affect the proposed bond's rating given that the
agency's negative rating guidance on leverage is effectively tighter than the
revised terms. The removal of the interest reserve account and the lowering of
the guarantee amount, while potentially negative for bondholders in the event of
default, are not viewed as material in light of the company's current
profitability levels, ability to generate positive FCF going forward, and rating
level of 'BB-'.
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 a negative rating action. We expect its leverage to
remain stable 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 from a
high-margin but capital-intensive model to a lower-margin, lower-capex model.
Fitch expects annual capex to decrease 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 relatively lower operating EBITDAR margin of 28%-30%. The
geospatial segment, which generates margins of 50%-55%, contributed 28% of FY14
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 with limited competition in geospatial services including 3D
mapping, surveying and image processing to various federal and local
governments, utilities, telcos, and infrastructure and defence agencies.
Subordination of Notes: Fitch views positively Rolta's financial strategy to
raise unsecured debt at Rolta LLC to refinance existing secured debt at
operating companies. The agency notes that Rolta's existing 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 one level down
from the IDR given reasonable recovery on unsecured debt, growing cash
generation and management's stated strategy to replace secured debt with
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 is 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 on capex. Rolta is
likely 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. However, Fitch expects the company to
maintain leverage below 4.0x during FY15-18, driven by a decrease in capex and
stable FFO growth.
- 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.