Fitch assigns HCL Tech first-time A-minus IDR, outlook stable
Apr 05, 2021
Hong Kong, Apr 5 : Fitch Ratings on Monday assigned HCL Technologies first-time long-term foreign- and local-currency issuer default ratings of A-minus.
The outlook is stable. "We have also assigned a senior unsecured rating of A-minus to the 500 million dollar senior notes due 2026 issued by HCL America Inc and guaranteed by HCL.
The ratings reflect HCL's strong market position in the global and Indian IT services industries, leadership in the engineering and R&D segment, buoyant industry growth, robust profitability and cash generation, and a highly conservative capital structure.
Fitch expects HCL to maintain its net cash position over the medium term.
HCL is the third-largest Indian IT services company by revenue after Tata Consultancy Services and Infosys. It overtook Wipro to become the third largest from financial year ended March 2019.
HCL has a strong globally diversified presence and provides comprehensive IT services to an established customer base. It has strong expertise in engineering and R&D services, and was the third-largest engineering services provider globally by revenue in 2020 and first among Indian peers.
HCL has low customer concentration with its five-largest and 10 largest clients contributing to 14 per cent and 21 per cent of total revenue respectively in 9M FY21. Its end-customers are also spread across industry segments.
Financial services clients accounted for 22 per cent of revenue in 9M FY21 followed by manufacturing (18 per cent), technology services (17 per cent) and life sciences & healthcare (14 per cent).
Fitch said the diversified exposure gives HCL a more stable revenue pipeline than peers who mostly have higher customer or industry concentration.
HCL's rating is supported by strong profitability and solid operating cash generation. EBITDA margin was stable at 22 to 24 per cent over the past four years, given its reasonable pricing power, high switching costs for customers, and its intent to limit staff-related expenses at around 50 per cent of total revenue.
Fitch expect FY21 EBITDA margin to improve to around 26 per cent, benefitting from pandemic-related savings like travel costs and a larger portion of higher-margin offshore project delivery as customers increasingly work remotely.
However, it expects EBITDA margin to return to about 25 per cent in the medium term due to competition and as business travel resumes.
