Press Release UST Global Technology Services (India) Private Limited April 05, 2019 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) Revised from CARE BBB+ CARE A-; Stable Long-term Bank (Triple B Plus) 35.00 (Single A Minus) Facilities (Under credit watch with Outlook: Stable developing implications) 35.00 Total Facilities (Rupees Thirty Five crore only) Details of facilities in Annexure-1 Detailed Rationale & Key Rating Drivers CARE had earlier placed the rating of UST Global Technology Services (India) Private Limited (USTSPL) under ‘credit watch with developing implications’ following the acquisition of around 20% stake in the ultimate holding company of UST group by Temasek Group. CARE now understands that about USD 250 million was infused in the company by way of primary equity infusion of which a certain portion has been used for buy back of existing shareholders and the rest has been made available for acquisitions. CARE also notes that group has completed three acquisitions using a part of these proceeds which is expected to expand the company’s offerings. Further with these funds available, CARE believes that this gives the group room to pursue inorganic growth opportunities and upskill its service offering. In light of these developments, CARE has removed the ratings from Credit watch with developing implications and revised the ratings. The rating revision also takes into the consistent growth in scale of operations of the Indian entities, comfortable profit margins, capital structure and debt coverage indicators maintained. The ratings continue to derive strength from the global presence of the parent UST Global, its established relationship with reputed clients. The ratings are, however, constrained by client concentration risk, elongated working capital cycle with high receivables position. The ratings are also constrained by the group’s business prospects being closely linked to global economic scenario and the highly fragmented & competitive nature of the global IT industry. Going forward, the ability of UST group to increase its scale of operations with successful integration of newly acquired companies, diversify its client base and improve its working capital cycle while maintaining profitability margin and capital structure would be the key rating sensitivities Detailed description of the key rating drivers Key Rating Strengths Global presence of the parent and professionally managed group UST Global’s operations are spread across four continents with 23,000+ associates globally. In terms of employee head count, USA has around 4,000 employees, UK has around 500 employees, Singapore has around 300 employees, and UST Group (India) has more than 14,000 employees. UST Global was established in 1999. It is a part of the Comcraft group, a $6 Billion conglomerate consisting of over 200 companies with operations in more than 45 countries. The Comcraft group, promoted by Kenya-based Mr Manu Chandaria, produces steel, plastics and aluminium products from manufacturing facilities in 45 countries. The group has made investments in diversified fields including IT and Entertainment & Media. UST group companies are managed by experienced professionals with long experience in the IT industry. Being the largest employer in the IT sector in the state of Kerala, USTIPL also works closely with the Government of Kerala in its various initiatives. 1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release Investment by Temasek Group MacRitchie Investments Pte. Ltd., part of Temasek Group, has invested USD 250 Million to acquire around 20% stake in UST Holdings Limited, Bermuda the ultimate holding company of the UST Group. Temasek is a Singapore-based sovereign wealth fund which owns a USD 308 billion portfolio as at March 31, 2018 with significant exposure to Singapore and rest of Asia. The investment by Temasek group will enable the UST group to grow in an inorganic manner and UST group has acquired some companies in the recent past and is expected to do a few more. Reputed clientele albeit with moderate client concentration Clients of UST Global are spread across healthcare, retail, banking and financial services (BFSI), technology, manufacturing, insurance, etc. During the calendar year 2018 (CY18), Healthcare sector contributed 24% of the total revenues of the UST Group, while Retail and BFSI contributed 17% and 15% of the total revenues, respectively. The UST Global group has a moderate client concentration risk, with its top 10 clients contributing to around 48% of its overall revenues in CY18 (refers to the period April 01 to March 31). However, the group has a long standing relationship with most of its clients. Growing scale of operations offering multiple IT services UST has a diversified presence across various execution platforms and industry verticals enabling the group to provide end to end solutions to its customers. In terms of services offered by UST Group, during the CY 2018, income from technology services (application development) contributed about 36% of its total income, followed by digital at 18% and business services (application managed services) at 13%. In terms of geographical distribution of clients, Americas contributed 64%, UK contributed 11%, Singapore contributed 9% and India contributed 13%. Over the years, the group has reduced its exposure to Americas from 83% in CY2014 to 64% in CY2018, by increasing its business from Europe and Asia Pacific regions. The total income of UST Global improved from US$803 million during CY17 to US$946 million during CY18. On a combined basis, the Total Operating Income (TOI) of the UST Group in India increased by about 10% from Rs.1,552 crore in FY17 to Rs.1,708 crore in FY18. Financial risk profile marked by comfortable capital structure and debt coverage indicators The profitability levels of UST Group continue to remain healthy with PBILDT margin of 27.31% during FY18 as compared with 25.65% during FY17. The capital structure of the group also remains comfortable with overall gearing of 0.52 times as on March 31, 2018 as compared with 0.55 times as on March 31, 2017. The coverage indicators for the group are also comfortable with PBILDT interest coverage of 9.44 times as on March 31, 2018 and total Debt / GCA of 2.06 years for FY18. Key Rating Weaknesses Liquidity - Elongated working capital cycle with high receivables position The operating cycle of India Combined remained elongated with a collection period of 199 days during FY18 as compared with 155 days during FY17. Most of the receivables are from UST Singapore and the payments are made on a mutually agreed basis. The group as a strategy keeps cash at the Singapore level for acquisitions. With the money coming in from Temasek, the company expects to bring down the receivables in India. In order to meet its working capital requirements, UST Group has availed fund based working capital limits aggregating Rs.385 crore, in form of export packing credit, packing credit in foreign currency and cash credit/book overdraft limits. The average maximum utilization for the cash credit facility during the past 12 months period ended December 2018 remained high at around 95%. At India Combined level, the group had a cash balance of Rs.74 crore as on March 31, 2018 and Rs. 65.80 crore as on September 30, 2018. Highly fragmented and competitive industry The IT/ITES industry in India is highly fragmented and dominated by a large number of large and medium players. In India, UST Group is much smaller than established players like TCS, Infosys, Cogizant, Wipro, Tech Mahindra etc. Globally, it faces competition from big companies like IBM, Accenture, and several other companies, big and small. The industry faces intense competition due to low entry barriers. The IT industry also faces challenge from rapid technological changes, which may lead to obsolescence of certain software/services. The group must adapt to these changes to stay relevant in the business. The prospects of IT services industry are closely linked to the global economy. The uncertain global economic situation has slowed down business for the IT/ITeS sector. 2 CARE Ratings Limited Press Release Analytical approach: Combined CARE has taken a combined view on four UST group companies, namely, US Technology International Private Limited (USTIPL), US Technology Resources Private Ltd (USTRPL), UST Global Technology Services (India) Private Ltd (USTSPL) and UST Global Information Technology Parks Private Ltd (USTGPL) as all the four companies have synergies in operations, exhibit cash flow fungibility, are owned and managed by common promoters with cross- holding in few of the entities. A. Applicable criteria Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition Criteria for Short Term Instruments Rating Methodology: Factoring Linkages in Ratings Rating Methodology – Service Sector Companies Financial ratios – Non-Financial Sector About the company: Kerala-based UST Group, is engaged in the business of providing software development and support services majorly to multinational customers of UST Global and also to domestic clients. USTIPL and USTSPL provide off-shore development services for the clients of UST Global, USTRPL provides services primarily to the other clients based in India. Apart from these three companies, USTGPL is engaged in development and leasing of Technology Park for the group companies based in India. The group leased out about 9 acres of land from Infopark SEZ, Kochi in 2010 and established a delivery centre there. UST Global Technology Services (India) Private Limited (UST Services) was incorporated to segregate the Kochi SEZ operations into a separate entity for ease of availing tax and other incentives. UST Services has about 980 employees as on December 2018 and has operations only in Kochi. UST Services receives orders from UST Singapore directly and executes the same. A part of its operations are subcontracted to UST International.