December 01, 2020 Vellore Institute of Technology: Ratings reaffirmed at [ICRA]AA-; outlook revised to Positive from Stable Summary of rating action Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) Fund Based -Term loan facilities 124.75 - - [ICRA]AA- reaffirmed; outlook Long term – Proposed facilities 195.25 200.00 revised to Positive from Stable Total 320.00 200.00 *Instrument details are provided in Annexure-1 Rationale The revision in outlook to Positive on the long-term rating reflects the expectation of Vellore Institute of Technology’s (VIT) continued strong financial performance, despite the impact of the pandemic. The Trust reported healthy performance in FY2020 with revenue growth and improvement in operating margin, supported by steady growth in student strength by 9.6% (aided by a 6.9% and 19.4% growth in Vellore and Chennai campuses, respectively). While student growth in FY2021 (YTD) has been muted, fee collections (barring hotel fees) and placements have been strong. The Trust continues to maintain negligible debt, with strong liquidity marked by large cash balances of Rs. 512.1 crore as on March 31, 2020 and Rs. 665.9 crore as on August 26, 2020. The stabilising operations of the group Trusts—VIT Trust, Bhopal (Madhya Pradesh; VITB) and VIT Trust, Amaravati (Andhra Pradesh)—have led to a reduction in donation payouts to them, which has aided in earnings improvement. The ratings favourably factor in the established brand equity of VIT of over three decades, experience of the promoter group, and the institute’s strong academic and placement track record. The university attracts students across geographies (India and overseas), which reflects favourably on the strong demand potential of its courses as well as its reputation indicated by a low student enrolment ratio (students admitted viz-a-viz number of registrations for the VITEEE). The recognition of VIT as an Institution of Eminence (IoE) by the Government of India (GoI) gives it autonomy to take independent quality initiatives and is likely to further enhance its world ranking. The rating is, however, constrained by the high reliance of the university’s revenues on engineering courses, which accounted for around 77% of the revenues for the AY2019–AY2020. The outlook for engineering courses in India is currently muted with several colleges closing/running the course at low occupancies. Further, the significant competition in higher education could add pressure in attracting and retaining faculty as well as talented students in the long term. However, VIT’s reputation and established presence has supported strong offtake of its engineering courses. The Trust has sufficient teaching staff, with an average of one faculty for every 18 students. 1 Further, more than 65% of the faculties hold doctorate degrees, reflecting the quality of education imparted by the Trust. The education sector is highly regulated in India, which exposes the university to significant regulatory risks associated with the stringent compliance requirements. The risks, however, are partly mitigated by the deemed university status of VIT. The ratings also note the university’s need to incur capital expenditure (capex) to maintain its own infrastructural facilities and capex-funding of Group trusts through donations. Nonetheless, ICRA notes that the university’s internal cash accruals will be able to support the expected scale of capex over the next two to three years and the dependence on external borrowings will remain minimal. Further, ICRA expects the donations over the next three years to remain rangebound between Rs. 110 crore and Rs. 130 crore per annum; this remains a key rating monitorable. Key rating drivers and their description Credit strengths Established presence of university for more than three decades; flexible curriculum and international accreditation aid in healthy enrolments – Founded in 1984, VIT is one of the well-established education institutions offering higher education in India. VIT is accredited by Accreditation Board for Engineering and Technology (ABET), USA, and “A” by National Assessment and Accreditation Council (NAAC). Some of its subjects are rated among the top eight by The World University Ranking by Subject, 2020 and it is the only private institution in India in the Shanghai World University Ranking (ARWU), 2020. Moreover, the recognition of VIT as an IoE by the GoI gives it autonomy to take independent quality initiatives and is likely to further enhance its world ranking. VIT offers flexible curriculum to students with a choice of any interdisciplinary course from other engineering schools, resulting in healthy enrolment across the wide range of courses offered. Strong geographic diversity of students and healthy placement track record reflect favourably on university’s reputation – The university attracts students across geographies (India and overseas), which reflects favourably on the strong demand potential for its courses as well as its reputation. The university has a placement track record of over 80% with 4,867 students placed in AY2019–AY2020, of which 892 students are recruited on internship programmes. A total of 713 companies visited VIT in AY2019–AY2020 for placements, with Information Technology (IT) companies dominating the recruitments. Strong financial profile – VIT’s financial profile is strong with stable growth in earnings and cash flows. Its revenues grew 16.4% to Rs. 1,010.9 crore (as per provisional financials) during FY2020, supported by 9.6% growth in student strength. The revenue growth also aided in margin expansion to 44.8% in FY2020 from 42.2% in FY2019. The Trust has a debt outstanding of Rs. 5.5 crore as on March 31, 2020 (provisional) as against cash and liquid investments of Rs. 512.1 crore as on March 31, 2020. VIT has extended a letter of comfort (LOC) to support the capital expenditure of a sister Trust—VIT Trust, Bhopal (VITB) —which is currently constructing a state private university. VITB has a debt outstanding of Rs. 151.3 crore as on March 31, 2020 (provisional). Further draw down of debt in VITB is expected to support the construction of the 2 newly established university in Madhya Pradesh. With nil debt-funded capex plans, moderation in donations and strong cash balances, the liquidity position is expected to remain comfortable going forward. Credit challenges Course-concentration risk – There is high course-concentration risk with the engineering stream contributing to 77% of the intake. However, VIT offers diversified courses within the engineering streams, which is evident from the fact that none of the streams (schools) have more than 23% of total number of students admitted in AY2019— AY2020. That said, VIT’s continued efforts have resulted in non-engineering streams to account for 14% and research programmes to account for 9% of the total student intake in in AY2019—AY2020. The B.Tech courses offered by VIT is accredited by ABET, an international accreditation agency based out of the US and the same helps in attracting foreign students and facilitates in improving student diversity. Intense competition puts pressure on attracting and retaining talented students and faculty – VIT faces intense competition from other reputed public institutes (like Indian Institute of Technology, National Institute of Technology, etc.) and private institutes (like Manipal Academy of Higher Education (MAHE); Birla Institute of Technology and Science (BITS) Pilani; and SRM University) in India and the same puts pressure on attracting and retaining talented students and faculty. Nonetheless, supported by its established brand, the university attracts students across geographies (India and overseas), which reflects favourably on the strong demand potential for its courses as well as its reputation characterised by a low student enrolment ratio (students admitted vis-a-vis number of registrations for the VITEEE) of less than 3%. Large donation payouts to Group Trusts to fund capex requirements may lead to earnings deterioration – To increase its geographic reach, the university set up two new campuses (VITB and VIT AP) under new Trusts to comply with the statutory requirement. The capital needs for expansion for these campuses are partly met through the donations from VIT. The university will continue to support the two new campuses over the next few years in the form of donations. This apart, it donates to Rajeswari Educational and Charitable Trust, and Vellore Education and Charitable Trust, which are in the process of setting up international schools in Vellore and other cities. In the case of VITB, VIT has provided a LOC confirming it will meet the debt obligations of VITB in case the latter is not able to meet the same. ICRA expects that the donations over the next three years will remain rangebound between Rs. 110 crore and Rs.130 crore and any cash outflows beyond the stated amount shall remain a key rating monitorable. Liquidity position: Strong VIT has a strong liquidity profile with sizable cash balances of Rs. 512.1 crore as on March 31, 2020 (provisional) and Rs. 665.9 crore as on August 25, 2020. The Trust has Rs. 200.0-crore fund-based working capital limit, where the average utilisation was 0.2% of sanctioned limits for 12-months that ended in June 2020. Going forward, with capital spend is expected to be funded through internal accruals and the liquidity position of the Trust is expected to remain healthy. There are nil repayment obligations in the absence of any long-term debt. Under the LOC extended to VITB, Rs. 151.3 crore of debt is outstanding with repayment obligations of Rs. 4.0 crore, Rs. 9.2 crore and Rs. 14.0 crore in FY2021, FY2022 and FY2023, respectively. VIT is expected to support its sister Trusts with donations of ~Rs. 110—130 crore per annum. 3 Rating sensitivities Positive triggers – The ratings may be upgraded if the Trust’s scale of operations and accruals continue to grow at a healthy rate while it achieves diversification in revenues through expansion of programmes.