Low Nortel ratings to affect IT firms

Mumbai: The downgrading of ratings on Nortel Networks' long-term securities by Moody's is likely to have a negative impact on some of the US company's Indian IT services vendors, including Infosys and Wipro.

The rating of the company has been downgraded to Baa3 from Baa2, and the rating for the commercial paper to Prime 3 from Prime 2. This rating is one level above the junk bonds ratings. Approximately $8.5 billion of debt securities will be affected by such a reduction.

Nortel outsources mainly from Indian companies like Wipro, Infosys, Digital and some unlisted companies. Infosys, Wipro and TCS operate dedicated development centres (DDC) for Nortel. Market sources say Nortel outsources software worth about $60 million to $90 million from India.

This could be less than 3 per cent of its research and development (R&D) spending, and less than 1 per cent of its revenues. Nortel's CY00 revenues were $30 billion and its R&D spending was $4 billion (13.2 per cent of the revenue). Wipro is the largest Indian vendor for Nortel.

Considering that Wipro's average debtor receivable days are about 70 days, its receivables from Nortel could be about $5 million. The downgrade by Moody's is due to the concerns over weaker-than-anticipated demands and an increased focus on liquidity at Nortel's customers, which has resulted in a material cut-back in the customers' spending plans, at least through 2002.

These ratings are on review for a possible further downgrade. But Moody's also notes that Nortel currently maintains a solid liquidity position, with $3.5 billion of cash at the end of 2001, no on-balance-sheet short-term borrowing, and a reasonable headroom in the financial covenants in its bank agreements.

Infosys operates a DDC for Nortel, which has been among its top 10 customers. Infosys' revenues from Nortel grew at 42 per cent CAGR over FY96-01. Nortel constituted about 2.6 per cent of Infosys' 3Q02 revenues. Considering that Infosys' average debtor receivable days are at 44 days, its receivables from Nortel could be about $2 million, an analyst says.