ICRA : assigns rating of A- (Stable) for the bank facilities of 24/7 Customer Private Limited

June 09, 2017

24/7 Customer Private Limited

Summary of rated instruments

Instrument*	Rated Amount (in crore)	Rating Action
Long-Term Non Fund Based- LC/BG	2.00	[ICRA]A- (Stable) Assigned
Long-Term Non Fund Based - BG	30.00
Long-Term Non Fund Based - LER	58.00
Total	90.00

*Instrument details are provided in Annexure-1

Rating action

ICRA has assigned a long-term rating of [ICRA]A- (pronounced ICRA A minus) to the Rs. 90-crore non fund-based facilities of 24/7 Customer Private Limited (24/7 India). The outlook on the long-term rating is 'Stable'.

Rationale

The assigned rating factors in the established track record of the parent company- 24/7 Customer Inc. (24/7 USA) in the business process outsourcing (BPO) segment; and the diversified client base of the 24/7 Group along with long-term association with reputed customers. The rating also factors in the company's consistent growth in revenues over the past few years along with healthy operating profitability supported by fixed transfer pricing arrangement with 24/7 Customer Philippines Inc (24/7 CPI). The rating also considers the company's strong financial risk profile, characterised by debt-free position; albeit significant customer advances which has moderated the total outside liabilities to net worth ratio from 0.10 times as on March 31, 2014, to 0.95 times as on March 31, 2016 and 0.75 times as on March 31, 2017. However, the customer advances support the overall liquidity position of the company to a great extent as seen from the cash balance of Rs. 102.87 crore as on March 31, 2017. ICRA notes that any adverse changes in the payment arrangement could affect the cash flows of the company, going forward. The rating is also constrained by the dependence of 24/7 India on the performance of and workflow from 24/7 CPI; and the concentration of revenues in the US markets, exposing the operations to cyclicality and macro-economic conditions prevalent in the region. The rating is also constrained by the high competitive pressure for the group from companies in India as well as other low-cost countries, wage inflation, employee attrition and foreign currency fluctuations. ICRA also notes the ongoing dispute with tax authorities regarding certain tax liabilities, which might result in additional cash outflow. Going forward, the regular flow and expansion in the business from the end customers and 24/7 CPI and the developments regarding the on-going litigation with the tax authorities would remain the key rating sensitivities.

Key rating drivers Credit strengths

• Strong parentage with established track record of 24/7 USA and the company in the BPO industry

• Diversified client base of 24/7 Group and long-term association with reputed customers

• Steady increase in operating income of 24/7 India, along with healthy operating profitability supported by fixed-transfer pricing arrangement with 24/7 CPI

• Strong financial profile characterised by debt-free position of the company; albeit significant customer advances received from 24/7 CPI

• Liquidity supported by rental income of ~Rs. 5.36 crore per annum from the Bangalore facility

  Credit weaknesses

• Significant dependence of 24/7 India's revenues on workflow from international clients through 24/7 CPI, exposing the operations to cyclicality and macro-economic conditions prevalent in those regions

• Challenges pertaining to wage inflation and employee attrition in an intensely competitive BPO industry

• Revenues and margins exposed to foreign exchange fluctuations, however, the company undertakes hedging which provides comfort to a certain extent

• Uncertainty regarding cash outflow for the ongoing dispute with tax authorities regarding certain tax liabilities

Description of key rating drivers:

Established in 2000, 24/7 USA is a privately-held company, employing over 15,000 people worldwide. It operates six delivery centres around the world and has grown via organic as well as inorganic route in the past. 24/7 India is involved in the business of providing IT-enabled services, and is entirely dependent on its fellow subsidiary - 24/7 CPI for business as it provides customer engagement solutions to the customers of this entity. The company operates through three offices in India, one owned premises in Bangalore and two rented facilities in Hyderabad. The company has recently finished a sizeable capex of

~Rs. 410 crore towards the Bangalore office building, of which it has rented out two floors, resulting in additional rental income of Rs. 5.36 crore per year. Over the past few years, the company has received tax demands from the income tax authorities aggregating to Rs. 58.32 crore from transfer pricing adjustments, against which the company has paid Rs. 22.59 crore under protest. The company has witnessed healthy growth in operating income over the years along with stable operating profitability supported by cost-plus-margins-based billing done to 24/7 CPI. Going forward, the 24/7 India unit expects the business volumes to witness growth primarily for technology-based support services, with the 24/7 Group focusing on the same.

Analytical approach: For arriving at the rating, ICRA has applied its rating methodologies as indicated below. Links to applicable criteria

Corporate Credit Rating -A Note on Methodology

Rating Methodology for Entities in the Information Technology (Services) Industry

About the company:

Incorporated on March 22, 2000, 24/7 India, is a subsidiary of 24/7 Customer Inc., USA (24/7 USA). The entity 24/7 USA, incorporated in April, 2000, is promoted by Mr. P V Kannan and Mr. Shanmugam Nagarajan. In 2003, 24/7 USA was privately funded in part by Mr. Michael Moritz and his venture capital firm, Sequoia Capital. This company is headquartered in Campbell, California and provides cloud-based customer engagement solutions through its six back-office units (BPO/KPO), two of which are located in

India (Bangalore and Hyderabad), two in Philippines and one each in Guatemala and Nicaragua. The firm caters to several reputed MNCs in the fields of telecommunication, financial services, retail, technology, and travel industries. 24/7 India provides servicing of customers through various interactive platforms such as IVR, chat and email as well as call support to the customers of 24/7 CPI. The company is a 100% export-oriented unit (EOU) operating from Bangalore and Hyderabad with aggregate employee strength of about 6010.

Based on provisional results for FY2017, 24/7 India had achieved a profit after tax of Rs. 74.86 crore on an operating income of Rs. 514.92 crore. In FY2016, the company reported a net profit of Rs. 34.52 crore on an operating income of Rs. 442.0 crore.

Status of non-cooperation with previous CRA: CARE Ratings has in its rationale published on 24/7 Customer Private Limited, dated March 22, 2017, stated the following:

"CARE has been seeking information from [24]7 Customer Private Limited to monitor the ratings vide e- mail communications/letters, (latest email dated March 10, 2017) and numerous phone calls. However, despite of our repeated requests, the company has not provided the requisite information for monitoring the ratings. Further, 24/7 has not paid the surveillance fees for the rating exercise as agreed to in its Rating Agreement. In line with the extant SEBI guidelines, CARE has reviewed the ratings on the basis of the available information which however, in CARE's opinion is not sufficient to arrive at a fair rating. The ratings on 24/7 Customer Private Limited's bank facilities will now be denoted as CARE BBB+/CARE A3+; ISSUER NOT COOPERATING."

Any other information: Not applicable Rating history for last three years: Table:

S.No	Instrument	Current Rating			Chronology of Rating History for the past 3 years
		Type	Rated amount (Rs. Crore)	Month-year & Rating in FY2018	Month-year & Rating in FY2017	Month-year & Rating in FY2016	Month-year & Rating in FY2015
June 2017
1	LC/BG	Long Term	2.0	[ICRA]A- (Stable)	-	-	-
2	BG	Long Term	30.0	[ICRA]A- (Stable)	-	-	-
3	LER	Long Term	58.0	[ICRA]A- (Stable)	-	-	-

Complexity level of the rated instrument:

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the websitewww.icra.in

Annexure-1 Instruments details

Name of the instrument	Date of Issuance/ Sanction	Coupon rate	Maturity Date	Size of the issue (Rs. crore)	Current Rating and Outlook
Long-Term Non Fund Based- LC/BG	-	-	-	2.0	[ICRA]A- (Stable)
Long-Term Non Fund Based - BG	-	-	-	30.0	[ICRA]A- (Stable)
Long-Term Non Fund Based - LER	-	-	-	58.0	[ICRA]A- (Stable)

Source: 24/7 India