S&P downgrades credit rating on Rolta India

If you are still betting on Rolta India, now be alert after Standard and Poor’s (S&P) downgrades the long-term corporate credit rating on Rolta India to ‘B+’ from ‘BB- . Rolta, an India-based information technology (IT) products and solutions provider, guarantees the notes.

S&P kept the outlook as stable and at the same time it expects the company's leverage to rise and its free operating cash flows to be negative over the next 12 months and a ratio of funds from operations (FFO) to debt below 20 per cent until FY17.

In April 2015, a California-based company named Glaucus Research Group issued a “strong sell” recommendation on the stock. It claimed that Rolta India did not produce free cash flow and could not repay offshore bondholders without refinancing. Glaucus again came out with a report which stated that its analysts “continue to value the junk bonds at the recovery value of Rolta’s offshore assets, which we estimate to be USD 0.16 on the dollar”.

S&P stated in its report, uncertainty is increasing over Rolta’s rising uncollected government receivables and capital expenditure for India’s defence and security related projects. Therefore it believes the recovery is uncertain and will be gradual.

The rating agency said in a media release, we may lower the rating on Rolta if we expect the company's FFO-to-debt ratio to fall significantly below 15 per cent over the next two years. This may happen if: (1) the company's uncollected receivables or unplanned capital expenditure are significantly higher than our base case; or (2) in an unlikely situation, EBITDA margins fall materially below 32 per cent.

It may also downgrade Rolta if the company's credit standing or banking relationships weaken unexpectedly, resulting in increased refinancing risks over the next 18-24 months.

It may raise the rating if Rolta: (1) wins a significant share of India's defense battlefield management system contract; and (2) maintains its healthy revenue growth, steady receivable cycle with positive FOCF, and a FFO-to-debt ratio sustainably above 20 per cent without significant refinancing risks.