Wipro is stable, while for TCS the outlook on the foreign currency rating is negative and that on its local currency rating is stable.
We upgraded TCS because we believe the company has the business and financial flexibility to withstand a significant period of sovereign stress and still have enough liquidity to honour all its obligations in a timely manner, explained Abhishek Dangra, credit analyst at Standard & Poors.
A similar argument was cited for upgrading the ratings of Infosys and Wipro. The negative outlook on TCS foreign currency rating is a reflection of the negative outlook on Indias sovereign credit rating. S&Ps sovereign rating for India currently stands at BBB- with a negative outlook. However, Indias Transfer & Convertibility (T&C) assessment stands at BBB+. A T&C assessment is the rating associated with the likelihood of the sovereign restricting non-sovereign access to foreign exchange needed to service debt.
The three IT majors join a handful of companies that are now rated higher than the sovereign rating. Reliance Industries, which was upgraded to BBB+ by S&P in May this year, also enjoys a rating two notches above the sovereign rating.
There has been a change in S&Ps corporate criteria which stipulates stress test for rating any Indian corporate above Indias T&C of BBB+. Hence, the Indian companies which clear the stress test can be upgraded up to two notches above this level, Dangra told FE.
The agency stress test includes a hypothetical scenario under which the companies see a 20% fall in Ebitda and a 10% loss in the value of the companies bank deposits in India. The three firms passed this stress test, allowing them to be rated above the sovereign. In addition, the companies also showed resilience under a separate stress test which assumed a scenario where the companies can access only 25% of their export revenues and had no access to cash flows and assets in India.
Infosys and Wipro will be upgraded if they improve in terms of scale and size. Other factors will include improvement in Ebitda margins to over 27%. Wipro currently has an Ebitda margin between 22% and 23% and Infosys is at 26%, Dhangra told FE.
S&P has assessed the financial risk profile of the three firms as minimal, reflecting their significant surplus cash, healthy cash flows and minimal debt. The rating agency added that the firms are expected to maintain a strong competitive position with healthy cash flows.
Indian IT firms have grown faster than their global counterparts but differentiation will come in terms of global competition increasing and the small and medium-sized firms, in particular, facing margin pressure. Large IT firms in India will fare better because of their proven business delivery model, high margins despite wage inflation and availability of English-speaking manpower, Dhangra said.
The TCS share closed 1.18% lower on the BSE, while Infosys and Wipro gained 0.3% and 1.63%, respectively.