Tera Software affirmed at 'Fitch BBB(ind)'/ stable

The ratings continue to reflect Terasoft's operational track record of over 10 years in executing e-governance projects. The ratings also reflect the company's strong revenue visibility and divisional EBITDA margins of over 20% due to the long-term nature of its contracts.

Fitch also notes the strong improvement in Terasoft's financial profile in FY12, with revenue increasing 72% to INR2,150m and EBIDTAR margin to 21.2% (FY11: 15.8%). This is attributed to contribution from new orders during FY12, amounting to nearly 40% total revenue. Credit metrics remain comfortable despite deterioration; interest coverage declined to 5.77x (9.09x) and gross adjusted debt/EBIDTAR increased to 2.02x (1.62x) due to an increase in debt levels to INR792m from INR192m.

The ratings are, however, constrained by Terasoft's tight liquidity position, as illustrated by its working capital utilisation averaging 95% during FY12. Cash flow from operations (CFOs) also turned negative due to a large increase in receivables to 313 days in FY12 (FY11: 274 days) and inadequate available liquidity (cash & equivalents: INR159m in FY12).

Positive rating action may result from an improvement in Terasoft's business profile leading to fewer receivables days and positive CFOs while maintaining leverage below 1.5x. Conversely, deterioration in receivable days and financial leverage above 2.5x may result in negative rating action.

Rating actions on Terasoft's bank loans:

• INR430m fund-based working capital limit: affirmed at National Long-Term 'Fitch BBB(ind)'
• INR1,080m non-fund-based working capital limit: affirmed at National Long-Term 'Fitch BBB(ind)' and National Short-Term 'Fitch A3+(ind)'
• Outstanding INR385.3m long-term loans: affirmed at National Long-Term 'Fitch BBB(ind)'