Financial Daily from THE HINDU group of publications
Saturday, Feb 11, 2006
Info-Tech - Credit Rating
TCS gets Moody's Baa1 rating `Downgrade pressure unlikely to emerge in next 12-18 months'
Mumbai , Feb. 10
MOODY'S Investors Service has assigned its A3 issuer rating and an indicative foreign currency debt rating of Baa1 to Tata Consultancy Services (TCS). The ratings outlook is stable. This is the first time that Moody's has assigned ratings to TCS, said a statement.
The only other Indian company to get a Baa1 rating from Moody's is Oil & Natural Gas Corporation.
The indicative foreign currency debt rating of Baa1 is the rating that would be assigned to any foreign currency bonds sold under foreign law. However, at this point in time, Moody's has not assigned this rating to a specific debt issuance.
The ratings reflect the company's four-core credit strengths: dominant domestic market position and major global presence; a favourable long-term IT industry trend, which involves off-shoring and business-process outsourcing; good growth prospects, including proven ability to win and handle large-scale projects globally; and the support provided to its business growth by healthy recurrent cash flow and a strong balance sheet.
At the same time, the ratings reflect the company's four credit challenges: A highly competitive market with aggressive global and domestic competitors and which continues to rapidly evolve; large exposure to fixed-price contracts; possibility of moderate margin pressure over the longer term; and exposure to the US economic environment, where 60 per cent of its revenue is generated.
The ratings outlook is stable, reflecting the expectation that TCS will continue to execute its business model and maintain its competitiveness against its global peers, while preserving its sound financial profile with a net cash position.
The ratings could experience upward pressure if the company continues to develop a track record for executing its business model with sustainable large contract wins so that it clearly has a long-term position as a leading global player; if it maintains its current revenue growth, while sustaining profitability over time.
On the other hand, downward ratings pressure could evolve if there is evidence of support being provided to affiliated companies, causing Moody's to re-assess TCS's independence from group operations; or if material debt-funded acquisitions or share repurchase programmes emerge, and which significantly undermine its credit profile.
In this context, indicators Moody's would look for include whether the company exhibits negative free cash flow (after dividends, capex and acquisitions) and whether balance sheet liquidity weakens significantly.
Moody's also notes that TCS currently retains significant financial flexibility.
Accordingly, neither of the above factors is likely to prompt negative pressure in the next 12 to 18 months, assuming the absence of any very large acquisition.
In addition, negative ratings pressure could emerge if evidence emerges that TCS's business model is losing traction, due to a change in industry dynamics, leading in turn to concerns that its competitive position and ability to grow will erode materially.
Again, this is unlikely to cause negative pressure in the next 12 to 18 months, according to Moody's.
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