Fitch assigns TCS first-time 'A-' IDR, outlook negative2 min read . Updated: 21 Dec 2020, 04:47 PM IST
- The ratings reflect TCS' weak linkage with Tata Sons Pvt. Ltd (TSOL), which holds 72% of TCS.
New Delhi: Fitch Ratings has assigned Tata Consultancy Services Ltd (TCS) long-term foreign-currency and local-currency Issuer Default Ratings (IDRs) of "A-" with a negative outlook.
The ratings reflect TCS' weak linkage with Tata Sons Pvt. Ltd (TSOL), which holds 72% of TCS. Fitch said that it rates TCS by notching up from TSOL's credit profile, in line with Fitch's Parent and Subsidiary Linkage rating criteria.
Also Read | Inside the rumble in India’s coding jungle
TCS' standalone credit profile (SCP) of "a" is underpinned by the company's strong global market position, technology leadership in key industry verticals, buoyant industry growth, robust profitability and operating cash generation, and highly conservative capital structure.
Fitch's outlook for TCS' SCP is stable because the company has enjoyed a V-shape recovery after the hit from the coronavirus pandemic in the quarter ended 30 September 2020, and stronger deal wins, driven by resurgent demand for cloud migration, cybersecurity, analytics and operations outsourcing.
The key rating drivers include weak parent-subsidiary linkage. Fitch says that TSOL is an investment holding company with no operations of its own. There is no operational overlap with TCS, which operates independently and is managed by professionals. TSOL does not have strong influence on TCS' board of directors. There are no inter-company loans and only very limited related-party transactions. To date, shareholder returns have not impaired the SCP of TCS, but Fitch believes that should TSOL require additional capital, it has sufficient influence over TCS via its 72% stake to increase shareholder returns.
Fitch believes that TCS' SCP is underpinned by its position as the world's third-largest IT service provider by revenue. It has a strong global presence and deep domain expertise in multiple industry verticals, and differentiates itself in contextual knowledge, proactive investments in new capabilities and reskilling its workforce, a large portfolio of products and platforms, and its customer-centred strategy, which allows it to stay relevant and close to customers. Fitch expects the company to continue to strengthen its market position with rising share of customer spending and service consumed.
Fitch expects Indian IT services companies, including TCS, to benefit in the medium term from accelerated cloud migration and digital transformation by their business customers. Fitch forecasts the industry revenue will rise by a high-single digit percentage in the financial years ending March 2022 and 2023 (FY22-FY23), after a relatively flat year in FY21 due to business disruption caused by the global coronavirus pandemic.
The SCP is supported by TCS' strong profitability and solid operating cash generation. TCS has the highest margins among global peers. It benefits from pricing power, the high costs to customers of switching vendors, as well as the high degree of integration and flexibility offered by its location-independent agile delivery model. Its staff attrition rates are below the industry average while it has tight cost controls. All these should help TCS counter price pressure and mitigate cost increases from wage hikes.
Fitch believes the credit impact on TSOL, should it buy back SPG's stake, would depend on the valuation and structure. Any deterioration in TSOL's credit profile will weigh on TCS' ratings, as TCS' ratings are notched up from TSOL's credit profile.
If TSOL chooses to acquire the stake from SPG, it may fund the transaction through increased special dividends from investees, partial sale of stakes in listed companies, private equity, and debt. Progress on the matter will take time as both parties negotiate on transaction valuation, deal structure and timelines. Nevertheless, this factor has led to a negative outlook on Fitch’s view of TSOL's credit strength, which leads to a negative outlook on TCS' IDRs.