(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-December 21, 2020: Fitch Ratings assigned Tata Consulting Services Limited (NS 🙂 Long-Term Foreign-Currency and Local-Currency Emitter Default Ratings (IDRs) of “A-“. The outlook is negative. The ratings reflect TCS ‘weak link with Tata Sons Private Limited (TSOL), which owns 72% of TCS. We rate TCS on the top of TSOL’s credit profile in accordance with Fitch’s parent and subsidiary link rating criteria. TCS’s Autonomous Credit Profile (SCP) of “ a ” is underpinned by the company’s strong position in the global market, technology leadership in key verticals, sustained industry growth, profitability and generation strong operating cash flow and very conservative capital structure. The negative outlook does not reflect our view on the underlying TCS SCP, but does incorporate the risk to TSOL’s credit profile related to the legal dispute associated with the 18.4% stake of Shapporji Pallonji Group (SPG) in TSOL. Fitch’s outlook for TCS’s SCP is stable as the company experienced a V-shaped recovery from the coronavirus pandemic during the quarter ended September 30, 2020, and stronger deals won, thanks to the growing demand for cloud migration, cybersecurity, analytics and outsourcing operations. Key factors of the rating Weak parent-subsidiary link: TSOL is an investment holding company with no own activities. There is no operational overlap with TCS, which operates independently and is managed by professionals. TSOL does not have a strong influence on the board of directors of TCS. There are no business-to-business loans and only very limited related party transactions. To date, shareholder returns have not affected TCS ‘PCS, but we believe that if TSOL needed additional capital, it would have sufficient leverage over TCS through its 72% stake to increase returns for TCS. shareholders. Therefore, we do not consider the credit quality of TCS to be independent from that of TSOL. We allow TCS to be rated above our opinion on TSOL’s credit strength, which reflects TCS’s operational independence and the lack of legal ties between the two. Our view of TSOL’s credit strength also depends on TCS PCS, as the subsidiary is the largest, most successful and most solvent company in the group. TCS represents 90% of TSOL’s dividend income. No country limit constraint: the IDR in foreign currency is equal to the IDR in local currency because we assess the applicable country limit for the TCS as “AAA”. We believe that TCS’s profits on its overseas subsidiaries in countries with national “AAA” ceilings are sufficient to support a reasonable amount of FC debt, even if the company has no intention of incurring a debt. such debt. Strong PCS: TCS’s PCS is built on its position as the world‘s third largest supplier of IT services in terms of revenue. It has a strong global presence and in-depth domain expertise in several industry verticals, and differentiates itself through its contextual knowledge, proactive investments in new capabilities and re-qualification of its workforce, a broad portfolio of products and platforms and its customer-centric strategy, which to stay relevant and close to customers. We expect the company to continue to strengthen its position in the market with an increasing share of customer spending and services consumed. Digital transformation drives growth: Fitch expects Indian IT service companies, including TCS, to benefit in the medium term from the accelerated cloud migration and digital transformation of their business customers. Fitch predicts industry revenue to grow by a high single digit percentage in fiscal years ending March 2022 and 2023 (FY22-FY23), after a relatively flat year in FY21 due to business disruption. caused by the global coronavirus pandemic. Robust Profitability and Cash Generation: The SCP is supported by TCS’s strong profitability and strong operational cash generation. TCS has the highest margins among its global peers. It benefits from the power of pricing, high costs to change vendor customers, and the high degree of integration and flexibility offered by its agile, location-independent delivery model. Its workforce attrition rates are lower than the industry average while it has strict cost controls. All of these should help TCS counter price pressure and mitigate cost increases due to wage increases. We expect the EBITDA margin to remain stable at 25% -27% over the next few years. Very conservative capital structure: We expect TCS to maintain a large net cash position despite its generous shareholder return policy. We expect TCS ‘free cash flow (FCF) before dividend (FCF) margin to remain high at around 21% -22% over the next several years, which will support its investor-friendly cash flow policy while by maintaining a net cash position. TCS will continue to return the majority of its FCF before dividend to shareholders through regular and special dividends and share buybacks. The company does not intend to raise domestic or foreign debts. Risk related to the exit of SPG: We believe that the impact of the credit on TSOL, if it buys the participation of SPG, will depend on the valuation and the structure. Any deterioration in TSOL’s credit profile will weigh on TCS ‘ratings, as TCS’ ratings are rated higher relative to TSOL’s credit profile. SPG submitted a TSOL separation plan to the Indian Supreme Court on October 29, 2020, with TSOL preventing SPG from committing its stake in TSOL to raise funds. SPG claims the stake is worth INR 1.7 trillion, while TSOL is likely to say it is lower. Resolution to take time: if TSOL chooses to acquire the stake in SPG, it can finance the transaction by increasing the special dividends of the companies held, the partial sale of stakes in listed companies, private equity and debt. Progress on the matter will take time as both sides will negotiate on the valuation of transactions, structure of transactions and time frames. Nonetheless, this factor led to a negative outlook on our view of TSOL’s credit strength, leading to a negative outlook on TCS’s IDRs. Derivation Summary The Business Risk Profile (A + / Stable) of Accenture plc (NYSE 🙂 is a notch higher than TCS’s SCP because it has a larger operational scale and a stronger franchise in the advice. Accenture’s financial risk profile is similar to that of TCS. Accenture is more of a buyer with annual M&A budgets of $ 1.5-2 billion, but it has less appetite for shareholder returns because its dividend payout ratio is below 35% -40% and we expect it to spend around $ 2 billion on stocks. redemptions. Accenture’s FFO leverage is slightly higher than TCS’s, but remains very low and its net cash position is larger. The business profile of DXC Technology Company (BBB / Stable) is lower than that of TCS as evidenced by continued loss of market share, declining revenues and execution challenges. In addition, DXC’s financial profile is also lower due to lower profitability, tighter margins, the previous issuance to finance the $ 2 billion acquisition of Luxoft Holdings, Inc and a drawdown of $ 4 billion from the company’s revolver. DXC has committed to allocate $ 5 billion of net proceeds from its announced business divestitures to reduce debt. In comparison, TCS has no debt and $ 4.7 billion in cash at year-end 20. Key Assumptions Fitch’s key assumptions in our rating case for the issuer – Low revenue growth single-digit growth in FY 21, then acceleration towards high single-digit growth from FY 22 – Operating EBITDA margin 25% to 27% (FY 20: 25.7%) – Capex / Turnover at around 2% (FY20: 2.1%) – Distribution of the major part of the pre-dividend FCF via cash dividends and share buybacks RATING SENSITIVITIES Factors which may, individually or collectively, lead to a share / positive rating upgrade: – Substantial weakening of the links between TCS and TSOL – Strengthening of TSOL’s credit profile – The outlook may be revised to Stable if our credit view on TSOL changes from stable to negative due to a reduction in the risks associated with the dispute With the SPG factors which could, individually or collectively, leading to negative rating / downgrading action: – Deterioration of TSOL’s credit profile Best / worst-case rating scenario International credit ratings of issuers of non-financial companies have a best-case rating improvement rio (defined as the 99th percentile of rating transitions, measured in a positive direction) by three notches over a three-year rating horizon; and the worst-case rating downgrade (defined as the 99th percentile of rating transitions, measured in a negative direction) by four notches over three years. The full range of best and worst case credit ratings for all rating categories ranges from “AAA” to “D”. Best and worst case credit ratings are based on historical performance. For more information on the methodology used to determine industry-specific best and worst case credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and debt structure Abundant liquidity: TCS will maintain abundant liquidity over the next few years. The company had readily available cash of INR 450 billion at end-September 2020, compared to INR 355 billion at end-March 2020. The majority of cash is invested in government securities and treasury bills. The company has no debt. We expect the company to generate an annual pre-dividend FCF of over INR 300 billion over the next three years, which should be sufficient to fund its cash flow policy. Variation of criteria Please also refer to the variation of criteria sheet. The subsidiary is rated one notch higher than the parent company’s credit profile based on IHC, rather than the consolidated profile. The reason is that the parent company’s IHC rating already reflects the creditworthiness of the parent company and all of its subsidiaries, assets and investments. Date of the competent committee December 15, 2020 REFERENCES FOR THE SUBSTANTIALLY MATERIAL SOURCE CITED AS A KEY RATING FACTOR The main sources of information used in the analysis are described in the applicable criteria. Tata Consultancy Services Limited; Long-term issuer default rating; New note; A-; Negative rating outlook; Long-term issuer default rating in local currency; New note; A-; Rating Outlook Negative Contacts: Senior Rating Analyst Kelvin Ho, Director +852 2263 9940 Fitch (Hong Kong) Limited 19 / F Man Yee Building 60-68 Des Voeux Road Central Hong Kong Secondary Rating Analyst Keith Poon, Associate Director CFA + 852 2263 9996 Chairman of the Committee Steve Durose, Managing Director +61 2 8256 0307 Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: [email protected] Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: [email protected] Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: [email protected] Further information is available at www.fitchratings.com Numbers Applicable Template (s) in parentheses accompanying the applicable template (s) contain hyperlinks to criteria providing a description of the template (s). 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