India Ratings & Research (Ind-Ra) has downgraded Megasoft long-term issuer rating to 'BB+' from 'BBB' and placed the ratings on Rating Watch Negative (RWN).

The downgrade reflects the steep deterioration in Megasoft's credit metrics with gross adjusted leverage increasing to 5.3x in 2012 (2010: 3.3x) and EBITDA interest cover falling to 2.03x (3.43).

This is the result of the loss of a key customer in June 2011 and the company's inability to ramp up revenue. Consolidated revenue declined to Rs 1.15 billion in 2012, 30% down from 2010 levels and EBITDA margins dropped to 18.6% from 27.2%.

Customer concentration remained high with revenue from top five customers being about 90% in 2012. The company lost another key customer in August 2013 (51.5% of its revenue for 2012), reducing revenue visibility substantially.

The loss of two key customers in the US is mainly attributed to changing cellular prepaid market dynamics towards unlimited bucket plans which has resulted in vendor consolidation by telcos.

The RWN reflects Megasoft's tight liquidity position and lack of clarity on its ability to repay/ rollover the USD 3.2 million (Rs 200 millio) short-term loan due in June 2014.