CBay Systems (India) Private Limited Rating History Amount Outstanding Rating Outstanding Previous Ratings - February 2010 - - Rs. 216.5 million, term loans - LBBB- - - Rs. 10.0 million, long term, fund based facilities* - LBBB- - - Rs. 120.0 million, short term, fund based facilities - A3 - - * Sub-limit of Rs. 120.0 million short term, fund based facility ICRA has assigned an LBBB- (pronounced L triple B minus) rating to the Rs. 216.5 million, term loans and the Rs. 10.0 million, long-term, fund-based facilities of CBay Systems (India) Private Limited (CSIL). The outlook on the long-term rating is stable. ICRA has also assigned an A3 (pronounced A three) rating to the Rs. 120.0 million, short term, fund based bank facilities of CSIL. CREDIT STRENGTHS Established presence of the parent company as the largest medical transcription provider in the world. Large and diversified client base of parent company. Growth in sales of CSIL through increased off-shoring by MedQuist and organic growth. CREDIT WEAKNESS Captive nature of company; heavy dependence on fellow subsidiary companies to source business. Profitability vulnerable to volatility in foreign exchange rates. Pricing pressures faced by fellow subsidiary companies due to heavy competition could be passed on to CSIL. Fellow subsidiary (MedQuist) which was acquired in August 2008 has faced considerable legal For complete rating scale and definitions, please refer to ICRA's Website www.icra.in or other ICRA Rating Publications issues in the past; however, most of the legal cases have been resolved. Off-shoring of medical transcription (MT) facing resistance from some customers who are hesitant to share medical records of patients The assigned ratings factor in the established presence of the parent company- CBay Systems Holdings Limited (CSHL) as the largest medical transcription service organisation (MTSO) in the world, having a large and well diversified customer base including leading medical centres and universities. CSIL has witnessed a strong growth in sales in FY 2009 on account of the acquisition of MedQuist Inc. in August 2008 by the parent company, resulting in higher volumes off-shored to CSIL. The ratings are, however, constrained by the heavy dependence of CSIL on the fellow subsidiary companies to source business for MT, significant pricing pressures faced by the fellow subsidiary companies leading to their weak profitability and financial profile, legal issues faced by MedQuist Inc. and vulnerability of CSIL s profits to volatility in foreign exchange rates. Scale diversification and market position CSIL, a wholly owned subsidiary of CSHL, is the back end hub for medical transcription. A majority of CSIL s revenues are sourced from CBay Systems and Services Inc. (CSS) - the US arm responsible for activities including sales, marketing and business development for CSHL. CSIL handles ~40% of the MT business of CSS, with the remaining work distributed amongst the various third party vendors. CSS has a well diversified customer base with University of Michigan, Hershley Medical Centre and University of Virginia Health Systems being among the top customers. CSIL also handles MT work off-shored by MedQuist (a subsidiary of CSHL) which has been increasing its proportion of MT work off-shored to India. Historically, a majority of medical transcription work was performed inhouse by hospitals, while the balance was outsourced to medical transcription service organizations (MTSO). These MTSOs either get the work done in their own centres or sub-contract the work to smaller medical transcription companies within the US. A part of the outsourced work is also off-shored by these MTSOs to countries such as India, Philippines and other Asian countries. Presently, the percentage of outsourced work has increased and MTSOs have also begun offshoring a greater proportion of MT to countries like India to achieve greater cost benefits. Revenue growth CSIL s revenues have grown at a robust five year CAGR of 42% on account of capacity additions through organic and inorganic investments. Over the past year, the company s revenues grew 137% largely on account of increased volumes arising from MedQuist, following its
acquisition by CSHL in August 2008. At the time of acquisition only about 6%-7% of the MT business of MedQuist was off-shored, which has now increased to about 27%, all of which is handled by CSIL. Going forward, MedQuist plans to off-shore around 40% of its MT business which will be handled by CSIL and other third party vendors. Additionally, wholly owned subsidiaries- CBay Remote Services Limited, Infokey Solutions Private Limited and CKar Systems Private Limited were merged with CSIL, thereby increasing the overall revenue of the company. These subsidiaries were production centres of the company. Cost Structure and profitability The company s operating margins have been declining over the past few years from 25% in FY 2006 to 17% in FY 2009, largely due to the ramp up of capacity at various locations and increasing employee costs. In FY 2009, the company s net margins were affected by a onetime additional depreciation charge of Rs. 27.3 million on account of change in the estimated useful life of the fixed assets and amortization of goodwill (Rs. 104.7 million) over a period of five years amounting to Rs. 20.9 million. The company also reported a forex loss of Rs. 51.5 million due to foreign exchange fluctuation. Contractual terms with the parent company stipulate that any loss arising out of foreign exchange fluctuation at the time of payment should be borne by CSIL. However, the company has begun taking plain vanilla covers on their foreign exchange exposures in an attempt to mitigate these risks. Capital structure and financial policy The company s capital structure is moderate with a gearing of 0.74x as on March 2009, while debt servicing indicators have strengthened over the past few years on account of lower interest charges. In 2006-07, the company had taken a Rs. 150.0 million term loan from EXIM Bank and Rs. 330.0 million loan from IL&FS to help raise finance for the acquisition of the patient financial services business of Certus Corporation. These loans raised through CSIL were in turn routed through Mirrus Systems (an associate company) to acquire Certus. The loan from IL&FS was repaid in the subsequent year. As per contractual terms with the fellow subsidiary companies, CSIL should receive payments in 45 days. However, payments are received mainly to help cover overheads and excess cash is not parked in CSIL; hence duration of payments from the fellow subsidiaries tends to be erratic. In FY 2009, the company generated stronger fund flow from operations as a result of increased revenues and lowering of working capital intensity. MedQuist A fellow subsidiary company has faced a variety of litigations which largely pertain to incorrect billing practices, underpayment of employees and shareholder litigation relating to the acquisition of MedQuist. However, as on date, most of the legal cases have been settled. Company Profile CBay Systems (India) Pvt. Ltd. (CSIL) is the wholly owned subsidiary of CBay Systems Holdings Limited (CSHL), the world s largest provider of medical transcription to hospitals, healthcare networks and physician practices. CSIL is the off-shoring arm of the parent company and is the back end hub for transcription, training, quality assurance, software development and information management. CSHL was established in 1998 in Annapolis, Maryland to provide medical transcription services to the US healthcare industry. CSHL was founded by Venu Raman Kumar, Donald Conover, Ashutosh Bhatt and Mahidhar Reddy, with the intention of providing technology-enabled healthcare business process outsourcing. CSHL is listed in AIM (Alternate Investment Market) of the LSE. February 2010
Key Financials 2008-09 2007-08 2006-07 2005-06 Net Sales Rs Million 904.5 382.7 309.9 206.9 Operating Income (OI) Rs Million 907.5 383.1 310.0 207.2 OPBDIT Rs Million 156.8 82.1 96.6 52.7 Profit After Tax (PAT) Rs Million 12.9 47.9 59.7 30.1 Net Cash Accruals Rs Million 111.9 75.3 87.3 47.8 Total Debt Rs Million 217.6 229.3 518.0 225.1 Tangible Net worth Rs Million 295.3 276.3 228.5 169.4 OPBDIT/OI % 17.3% 21.4% 31.2% 25.5% PAT/OI % 1.4% 12.5% 19.2% 14.5% PBIT/Average (TD+TNW+DTL) % 2.5% 12.7% 20.8% 13.5% Total Gearing times 0.7 0.8 2.3 1.3 OPBDIT/Interest & Finance Charges times 5.5 2.4 1.7 10.4 (GCF+ Interest)/Interest times 4.7 0.1 1.7 14.6 NCA/Total Debt % 51.4% 32.8% 16.9% 21.2% Total Debt/OPBDITA times 1.4 2.8 5.4 4.3 Debtor days days 92 173 121 78 Inventory days days 0 0 0 0 Creditor days days 23 15 41 26
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