Scope’s rating upgrade is driven by Scope’s view on the credit profile of Tecnocom’s (Tecnocom, Telecomunicaciones y Energía, SA) new 100% shareholder Indra Sistemas SA. The full takeover of Tecnocom by Indra has reduced Tecnocom’s major credit weaknesses in terms of limited outreach and diversification. Indra’s credit profile is strongly supported by the company’s market position as the leading information and communication technology (ICT) provider in the Spanish-speaking world, its wide outreach in ICT services in different industries and robust financial credit profile with a leverage of between 2-3x and an EBITDA interest coverage of above 6x. Indra’s rating is constrained by the cyclicality inherent in the industry, resulting in persisting dependence on economic developments, as well as continued pressure on achievable margins.

Key rating drivers

Following the integration of Tecnocom in 2017, but also the most recent acquisition of Paradigma Digital, Indra further strengthened its leading market position for ICT services in the Spanish-speaking world, widening the gap to its closest competitor. Scope notes that the two business models were largely complementary in terms of industry exposure, allowing for scaling effects and synergies. In the agency’s opinion, Indra is in a good position to widen its service range both organically and dynamically through the acquisition of smaller competitors with a competitive edge in complementary services or with different sector exposure, as in the case of Tecnocom or Paradigma Digital. It is Scope’s view that Indra’s business profile greatly mitigates some of the business risks, e.g. limited diversification, which constrained Tecnocom’s rating on a standalone basis. This refers to Indra’s very broad range of ICT services for application management and process management which enables the group to provide its services to a wide array of industries (defence and security 20%, financial services 20%, transport and traffic 19%, energy and industry 16%, as well as Public administration and healthcare 17%, among others in 2017). Scope believes that Indra will be able to develop Tecnocom’s former core strengths relating to process management for financial institutions. Scope also views Indra’s strong geographical outreach across more than 100 countries and remaining exposure to its core market of Spain of 46% (compared to Tecnocom’s 2016 exposure to Spain of more than 80%) to enhance its market position.

Indra greatly benefits from the increasing digitalisation of businesses. This is reflected by the group’s strong order intake and order book (EUR 3.6bn at YE 2017), resulting in a book-to-bill ratio which constantly stands above 1.0x (with the only exception of 2015 due to corporate restructuring). Based on the aforementioned broad diversification of Indra’s client base and sector exposure (including very robust sectors such as traffic, defence, governmental authorities, energy, traffic and healthcare), the high portion of recurring business and resilience to economic cycles, Scope regards Indra’s business to be sufficiently well-established to weather periods of economic slowdown or recessions. Moreover, Scope believes that Indra can largely benefit from its relationship with Spanish state holding company Sociedad Estatal de Participaciones Industriales (SEPI) as one of its shareholders (18.7% at YE 2017) and its network to blue chip companies such as Grupo Correos, Ensa, Red Electrica, IAG, Enagas, which increases the likelihood of long-lasting business relationships.

Nevertheless, Scope points to the risks and challenges inherent in the highly fragmented ICT industry with low entry barriers placing constant pressure on margins. The agency believes that Indra’s margin profile has bottomed out at the current level of 8-10% (EBITDA margin of 12.5% from 2004-2010 compared to 8.8% in 2017), as a result of restructuring and cost cutting since 2015.

Indra’s indebtedness as measured by its Scope-adjusted debt/EBITDA (including off-balance sheet operating leases with a factor of 5x as indicated by average lease terms) stood at 2.4x in 2017. Scope points out that Indra’s leverage has continuously ranged between 2-3x since 2012 with the exception of 2015. After Tecnocom’s EUR 35m MARF bond was redeemed from cash two years ahead of its original maturity in 2019, Indra’s gross debt position (EUR 1.4bn at YE 2017) now comprises two convertibles, bank debt, public bonds, R&D loans, finance and operating leases. In conjunction with Indra’s debt protection measures (Scope-adjusted EBITDA/cash interest paid) which sustainably stand above 6x, Scope regards Indra’s financial risk profile to be commensurate with a low investment-grade rating. Scope believes that Indra will be able to maintain these credit metrics, given the company’s generally capex-light nature, good business prospects as indicated by its order backlog, and conservative financing policy (e.g. the equity-financed acquisition of Tecnocom, communicated focus on further deleveraging and dividend freeze from 2015-2017). Even a reinstated dividend payment would not severely hurt the company’s financial risk profile, in Scope’s assessment.
Scope considers Indra’s liquidity profile to be sound. The company is required to redeem/refinance around EUR 650m from 2018-2020. Taking into account the company’s cash cushion of EUR 699m at YE 2017, access to committed undrawn credit lines of more than EUR 200m and expected positive free operating and discretionary cash flows, Indra is expected to be able to cover the upcoming debt maturities comfortably.

Outlook

Given the withdrawal of the rating, Scope does not provide rating triggers.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating(s) and/or rating outlook(s) Corporate Rating Methodology is available on www.scoperatings.com.
 Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents did not participate in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Zank, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 24.03.2014. The ratings/outlooks were last updated on 04.04.2018

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

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