(The following statement was released by the rating agency)
Nov 12 -
Summary analysis -- Wipro Ltd. ------------------------------------ 12-Nov-2012
CREDIT RATING: BBB+/Negative/-- Country: India
Credit Rating History:
Local currency Foreign currency
02-Apr-2012 BBB+/-- BBB+/--
26-Oct-2009 BBB/-- BBB/--
The rating on India-based information technology (IT) service provider Wipro Ltd. reflects the company's "modest" financial risk profile and stable cash flows. Wipro's business and customer diversity in the IT services business supports its good competitive position. The weaker business profile of Wipro's non-IT services business compared with the IT business and constraints of the company's largely India-based operations partly offset these strengths. Wipro is also exposed to exchange rate fluctuations.
We expect Wipro to maintain its financial risk profile over the next two years. The company's healthy and stable cash flows--with 97% revenues from repeat business--support its financial risk profile. We forecast that Wipro's ratio of debt to EBITDA will be less than 1x and its ratio of funds from operations (FFO) to debt will be more than 90% over the period.
Wipro has lower client, sectoral, and geographic concentration than its larger Indian peers, Infosys Ltd. (BBB+/Negative/--) and Tata Consultancy Services Ltd. (BBB+/Negative/--). However, over 50% of Wipro's revenue comes from the U.S.
Wipro's service delivery capabilities and cost competitiveness support its "satisfactory" business risk profile. The company's workforce of over 1,40,000 employees is largely based out of India, which provides low-cost and skilled manpower. The IT services business contributes about 86% of Wipro's revenues and more than 90% of operating income. The company's EBITDA margins compare favorably with global IT services peers', although they are weaker than larger Indian peers'. Wipro's non-IT businesses include consumer care and lighting, infrastructure, and eco energy. We believe the non-IT businesses have a weaker profile and lower margins than the IT services business. The company recently decided to demerge its non-IT businesses into a new company. We view the process, which is likely to be completed by the end of the fiscal year ending March 31, 2014, as a positive.
Wipro's 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. Delays in approvals and extensions have also increased. This can affect Wipro, which derives more than 50% of its revenues from on-site services that largely Indian employees provide. Wipro derives more than 90% of its revenues from exports. Indian exporters are exposed to strict regulatory requirements to remit export revenues back to India.
Wipro's management of its foreign exchange earnings is more conservative than that of larger Indian IT peers, with relatively higher hedging. A 1% appreciation in the Indian rupee (INR) could lower the company's operating margins by about 30-40 basis points.
We expect Wipro's revenues in fiscal years 2013 and 2014 to grow in line with the Indian IT services industry. We expect the company's EBITDA margin for fiscal 2013 to fall slightly due to a weak pricing, moderate wage inflation (high single-digit), and utilization rates (excluding trainees) stabilizing at about 78% to 80%. However we expect the margin to be more than 19% for fiscal years 2013 and 2014, compared with 20% in fiscal 2012. Wipro's revenue growth and EBITDA margins for the first half of fiscal 2013 were in line with our expectations.
The Wipro management is conservative, in our view. However, the management is not averse to pursuing mid-sized ($100 million-$500 million) acquisitions in the IT and consumer goods businesses. We expect the company to maintain its net cash position, even with possible future acquisitions.
We expect Wipro's 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 Wipro is likely to be able to service its obligations even if the sovereign comes under severe stress.
Wipro's liquidity is "strong," as defined in our criteria. We expect the company's ratio of sources to uses of liquidity to exceed uses by 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, Wipro has cash and investments of INR131 billion. It largely deploys surplus funds in India in bank fixed deposits and in some mutual funds.
-- Wipro's surplus funds exceed its debt and debt-like obligations, capital expenditure, and costs of possible small to mid-sized acquisitions.
-- We expect the company to generate funds from operations of more than INR60 billion in fiscal 2013.
-- Wipro 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 Wipro if any of the following events occur:
-- Wipro's revenue growth and profitability are materially lower than its peers'.
-- We lower the transfer and convertibility risk assessment of India to 'BBB'.
-- Wipro's business risk profile weakens due to a material increase in the share of non-IT services businesses in total revenues (to more than 35% from about 24% now); However, this is unlikely now due to the proposed demerger.
-- The company undertakes debt-funded acquisitions that significantly weaken its cash flow protection measures, including a gross debt-to-EBITDA ratio of more than 1.5x.
We could revise the rating outlook on Wipro to stable if the outlook on sovereign credit rating is revised to stable.