Hcl Comnet Cpr

7/28/2019 Hcl Comnet Cpr

1/5

HCLCOMNETSYSTEMS&SERVICESLIMITED

Relationship Contact

Vivek [email protected]+91-124-4545 310

Analytical Contact

Subrata Ray

[email protected]+91-22-3047 0027

Anupama [email protected]+91-124-4545 303

Jitin [email protected]+91-124-4545 368

Harsh [email protected]+91-124-4545 842

Website:

www.icraratings.com

Rating

ICRA has reaffirmed the long term rating of [ICRA]AA (pronounced asICRA double A) for the Rs. 13.0 crore fund based facilities of HCLComnet Systems & Services Limited (HCSSL).ICRA has also reaffirmedthe short-term rating of [ICRA]A1+ (pronounced ICRA A one plus) for theRs.264.0 crore non fund based facilities of HCSSL. The outlook on thelong-term rating is reaffirmed as Stable.

(Refer Annexure for Rating History)

Key Financial Indicators

Rs. Crore 2008-09 2009-10 2010-11

Net Sales 700.9 667.4 711.9

Operating Income 700.9 667.4 711.9

OPBDITA 284.7 256.1 222.6

PAT 203.0 154.2 163.5

Equity Capital 12.8 12.8 12.8

Net Worth 541.8 696.0 859.5

OPBDITA/Operating Income (%) 40.6% 38.4% 31.3%

PAT/Operating Income (%) 29.0% 23.1% 23.0%PBIT/avg. (Total Debt + TNW +DTL CWIP) (%) 49.8% 35.6% 25.8%

OPBDIT/Interest & FinanceCharges (Times) 281.7 684.3 515.6

NCA/Total Debt (%) 320.3 18.7 300.7

Total Debt/(TNW + MinorityInterest) (Times) 0.0 0.0 0.0

CWIP: Capital Work-in-Progress; DTL: Deferred Tax Liability; OPBDITA:Operating Profit before Depreciation, Interest, Tax and Amortisation; PAT:Profit after Tax; PBIT: Profit before Interest and Tax; NCA: Net Cash Accruals;TNW: Tangible Net WorthP=Provisional

ICRACreditP

erspective

December2011
mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.icraratings.com/http://www.icraratings.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]


2/5

ICRA Credit Perspective HCL Comnet Systems & Services Limited

Credit Strengths

Strong parentage, being the subsidiary of HCL Technologies Limited (HCL Tech; Rated [ICRA]AA+, Positive,

[ICRA]A1+)

Established player in Remote Infrastructure Management (RIM) and Very Small Aperture Terminals (VSAT-

Satellite communication based) services market with strong brand image and proven client service record

Favorable capital structure and negative net debt position

Strong liquidity position reflected in unutilized bank limits and sizeable cash balances

Credit Concerns

Subdued revenue growth in 2010-11 on account of lapsed Software Technology Park Incentive (STPI)

scheme resulting in shift of incremental business to HCL group companies based out of Special Economic

Zones (SEZs).

Expected pressure on margins in view of likely increase in operating costs going forward coupled with limited

scope for incremental revenue growth

High working capital intensity in business in view of a prolonged receivable cycle

Rating RationaleThe reaffirmation of ratings take into account HCSSLs strong parentage, its proven track record of providing RIM(offshore IT management) and VSAT (satellite based communication) services to its customers and its reputedclient portfolio. The ratings draw comfort from HCSSLs favorable capital structure with gearing of 0.00x times ason June 30, 2011 and its strong liquidity position characterized by large cash balances of Rs. 74.6 Crore as onJune 30, 2011. The long-term rating however is constrained by HCSSLs limited incremental revenue growthopportunities following the discontinuation of the STPI scheme w.e.f. March, 2011 resulting in shift of incrementalbusiness to other HCL Group companies based out of SEZs. This, coupled with likely increase in operating costsgoing forward, is expected to put pressure on the companys profit margins over the short to medium term. Also,HCSSLs business growth remains vulnerable to the risk of slowdown in key markets and increasing competitivepressures. Going forward, the companys ability to demonstrate a steady revenue growth and sustain itsprofitability will be the key rating sensitivities.

HCSSL is engaged in providing Remote Infrastructure Management services, VSAT bandwidth services andNetwork Solutions to its customers. The company is a 100% subsidiary of HCL Tech, a leading IT solutionservices player.

A large part of the Remote Infrastructure Management (RIM) services offered by the HCL group are done throughHCSSL. HCSSL provides these services from India to the clients based in offshore locations (US, Europe, MiddleEast and Asia Pacific regions). The companys RIM services include End User Computing, Datacenter, NetworkServices, Information Security Services, Pioneer IOMC and IT Service Management. In line with industry trends,HCSSLs RIM service forms an essential part of the bundled service offerings of HCL Technologies Limited.

Demand for RIM service has witnessed steady growth despite the economic slowdown owing to its non-discretionary nature of spends. HCSSLs strong execution capabilities have enabled it to sustain its businessposition with most of its customers. However, following the discontinuation of the STPI scheme w.e.f. March,2011, the incremental RIM services business is getting shifted from HCSSL to other companies in the HCL Group

based out of SEZs. This shift of incremental business to group companies had resulted in subdued revenuegrowth for HCSSL in 2010-11 and is likely to remain a limiting factor to the companys revenue growth prospectsgoing forward.

The communication equipment and network installation services business of HCSSL is provided by its 100%subsidiary, HCL Comnet Limited (HCL Comnet). While HCSSL caters mainly to global clients, HCL Comnetprovides communication equipment (both for VSAT and leased lines), maintenance, software and relatedtechnical services within India. Although the hardware is provided by HCL Comnet, the VSAT bandwidth isprovided by HCSSL to the local clients. HCL Comnet is amongst the top three VSAT communication players interms of subscriber base within India and with the VSAT market expected to grow, HCL Comnet is likelystrengthen its position in the market.

In 2010-11, HCSSLs standalone net sales at Rs. 711.9 Crore reported a growth of 6.7% over the previous yearas incremental business in RIM services is being shifted to SEZs under the HCL group after the lapse of the STPI

incentive scheme. Going forward, while the growth in HCL Techs (consolidated) revenues from RIMbusiness is expected to be strong, the trickle down benefit of the same for HCSSL is expected to remainmoderate.


3/5


ICRA Rating Services Page 3

HCSSLs operating profit margin (OPM) has been declining during the previous three years, having declined from

40.6% in 2008-09 to 31.3% in 2010-11, mainly on account of increasing employee costs. With most major ITplayers hiking employee salaries by 10-15% on an average in 2011, the company followed trend by hikingits salary levels to keep check on employee attrition resulting in a decline in operating margins. Goingforward, the company plans to increase the proportion of freshers vis--vis laterals in its employee mix whichshould partially mitigate the increase in cost burden due to salary hikes. Overall, HCSSLs OPM is expectedto come under pressure over the short term with the company taking up projects like the smart grid projectwhich are relatively low margin projects in the initial phases. However, the success of such a project will helpHCSSL build in capabilities which could be utilized for winning such complex projects in future and add to itscompetitive strengths in the medium term.

HCSSLs RoCE decreased to 19.7% in 2010-11 (29.1% in 2009-10) on account of decline in profitability andsimultaneous increase in gross block. HCSSLs capex in 2010-11 was on account of supplying network equipmentto its clients on a finance lease basis. The equipment is provided via subsidized interest rate loans by the networkequipment provider. HCSSLs RoCE however is expected to remain stable as the company does not have anysignificant capex plans over the medium term.

HCSSL has a comfortable capital structure and has substantial cash and liquid investments of Rs. 74.6 Croreas on June 30, 2011 and its 100% subsidiary HCL Comnet has cash and liquid investments of Rs. 211.0

Crore as on June 30, 2011. While HCSSL has no external debt outstanding on a standalone basis, HCLComnets external debt outstanding of Rs. 24.3 Crore as on June 30, 2011 comprises of term loans availedfrom vendors for the network equipment supply it undertakes. Thus, HCSSL s overall financial profileremains strong with a comfortable capital structure and strong debt coverage indicators and negative netdebt position.

HCSSL has strong cash accruals with free cash flows of Rs. 254.2 crore in 2010-11 on a standalone basis and

HCL Comnets free cash flows in 2010-11 stood at 65.7 crore in 2010-11. A significant proportion of thecompanys debtors and creditors comprises of receivables and payables to group companies. Better workingcapital management within the group reflected in an improvement in the working capital intensity of HCSSLin 2010-11.With no major capex plans in the medium term, the liquidity position of the company is expected toremain comfortable.

Company Profile

HCL Comnet Systems & Services Limited (HCSSL), a wholly-owned subsidiary of HCL Technologies Limited(HCL Tech), is engaged in offering remote (IT) infrastructure management (RIM) and Satellite BasedTelecommunication Services through VSAT. HCL Tech offers integrated portfolio of services including software-led IT solutions, remote infrastructure management (RIM), engineering and R&D services and BPO, with its RIMservices portfolio managed entirely by HCSSL. RIM services provided by HCSSL essentially consist of offeringremote support and the management of various IT services of the client that are related to infrastructure supportfrom global delivery sites, thereby ensuring superior infrastructure performance and significant cost reduction. Thescope of RIM includes managing and monitoring network security, database administration, ERP operations, andtechnical support/helpdesk operations on a continuous basis. HCL Comnet Limited, a wholly owned subsidiary ofHCSSL, is engaged in System Integration Services including supply and maintenance of related equipment.HCSSL seeks to provide infrastructure solutions by delivering services for distributed infrastructure environmentsencompassing the Internet, Client and legacy based infrastructures.

December 2011


4/5



Annexure

Rating

AmountRated

MaturityDate

Rating Outstanding

December 2011

Cash Credit Facilities 13.0 [ICRA]AA, Stable

Letter of Credit / Bank Guarantee Facilities 264.0 [ICRA] A1+


5/5



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Hcl Comnet Cpr