India Ratings has downgraded HCL Infosystems' (HCLI) Long-Term Issuer Rating to A+ from AA- and placed it on Rating Watch Negative (RWN). Additional rating actions are provided at the end of this commentary.
The downgrade follows HCLI's breach of a negative rating guideline. Consolidated EBITDAR /net interest cover failed to exceed 3x in Q1FY13 (quarter ended September 2012) as well as in the June 2012 and September 2012 quarters on a combined basis. This was because of the company's continuous deterioration in profitability (EBITDAR margin; Q1FY13: 2.1%, Q4FY12: 2.9%) which in turn was led by forex losses on committed contracts, lower revenue/locked working capital, cost overruns in the systems integration business and continued margin compression in the telecom distribution business. The ratings are based on a consolidated view of HCLI.
According to the proposed restructuring scheme, the company’s hardware solution business (23% of FY12 consolidated revenue) is to be transferred to a wholly owned subsidiary HCL Systems Integration. Its learning business (1% of FY12 revenue) is to be transferred to a wholly owned subsidiary HCL Learning and services business (6% of FY12 revenue) to a wholly owned subsidiary HCL Care. HCL Infocom, an existing wholly owned subsidiary, shall be merged with HCLI. The telecom distribution and channel business (67% of FY12 revenue) would remain under the parent company and the non-telecom distribution business (2% of FY12 revenue) under the wholly owned subsidiary Digilife Distribution and Marketing Services. The scheme will be effective from January 1, 2013, once approved.
Shares of the company gained Rs 0.65, or 1.79%, to trade at Rs 37.05. The total volume of shares traded was 66,652 at the BSE (3.18 p.m., Wednesday).