ICRA Ltd (Rs 790)
(BSE Code- 532835 NSE Code- ICRA)
(P/E- 15, Market Cap- 790 cr., Moody's Group stake-28.5%)
ICRA, incorporated as Investment Information and Credit Rating Agency of India Ltd in 1991, is one of the recognized credit rating agencies in India with a wide portfolio of products and services. In close association with the Moody's group of the US, the company is engaged in the business of providing rating and grading services, research-based information services and also outsourcing services. ICRA has three wholly owned subsidiaries: ICRA Management Consultancy Services (IMaCS), ICRA Techno Analytics Ltd (ICTEAS), and ICRA Online Ltd (ICRA Online). IMaCS provides management consulting services to clients based in India and abroad. ICTEAS provides business solutions and computer-aided engineering services. ICRA, the No. 2 credit rating agency in the country enjoys a strong market position, brand recognition and creditability. Moody's Group, one of the global credit rating majors, holds a 28.5% equity stake. This will help ICRA to leverage the US company's expertise in newer products. Also, ICRA provides certain outsourcing services to Moody's Investors Service. The credit rating business in India is in a sweet spot as it is on the cusp of robust growth potential driven by three triggers a) strong CapEx cycle in Indian economy b) lower penetration of corporate bond market and c) regulatory push due to implementation of Basel II norms. ICRA, one of the four leading rating agencies in India, is likely to benefit from this favorable scenario with its strong parentage (Moody) and its domain expertise.
The near-term revenue driver for Indian rating agencies is the mandatory requirement of ratings for bank loan exposures. Industry estimates suggest that about 30 per cent of the current loan exposures of banks by value and about 55% in number remain unrated as of now. The RBI requires all commercial bank loans of above Rs 10 cr. to be rated by end of 2008-09. Alternatively they will have to set aside more capital for such un-rated loans (through higher risk weights). That may prompt banks to obtain ratings on the residual loans to free up capital for lending. ICRA has already signed MoUs with more than 23 banks, including SBI, Canara Bank, Central Bank of India and Andhra Bank for providing rating services and can be expected to reap revenues from their mandates. With India's corporate debt market in a nascent stage, corporate credit ratings will be the key medium to long-term revenue driver for rating agencies such as ICRA.
On consolidated basis for the Q1 ended June 09, ICRA has reported topline growth of 30.5% to Rs 33.2 cr.. Net Profit surged 72% to Rs 12.36 cr.. Margins at the EBITDA and PAT levels have increased considerably to 60% and 37% in Q1 FY10 as compared to 44% and 28% for Q1FY09 respectively. On the segmental front, ICRA's rating business for Q1FY10 stood at Rs. 20.9 cr., showing a growth of 28%. IT Services and Outsourced Services business have also seen high Y-Y growths, increasing by 43% and 69% respectively as against the corresponding quarter of last year. During the period under review, Current Investments have been marked to market as on June 30, 2009 and a reversal of 6.63 cr. has been made to reflect the diminution in the carrying value of the investments. This has been credited to the P&L account and is not on a recurring basis. In the consolidated performance for the year ended March 09, top line grew 36.6% to Rs 135.8 cr.. Net profit was up 36.6% to Rs 38.89 cr.. On a equity of 10 cr. the EPS stood at Rs 38.9 and the dividend declared was 120%(Rs 12 per share).
ICRA has over past three years used its strong cash flows and domain expertise to expand its services offering beyond main bread and butter rating business. The IT and outsourcing services have given further boost to revenues. The boost to profitability will be more meaningful as once it achieves commendable scale in these new businesses. Being an established player in rating industry, ICRA is raising its presence in other business segments like consultancy, information technology service and outsourcing activities. Having consistently delivered a high rate of earnings growth, ICRA is expected to manage growth at a fair clip over the next two-three years, given the sizeable opportunities in the credit rating business. The sector's oligopolistic nature, strong brand equity and higher demand for rating services likely from India Inc's increased domestic capital raising plans, offer a sizeable opportunity for the company. The strong cash flows and low debt requirements of the business, impressive operating profit margins for the ratings business (51 per cent), also make the stock a stable addition to one's portfolio, despite a small cap status.
At CMP of Rs. 790, the stock is trading at 15.8x FY10E earnings of Rs. 50 and at 12.7x FY11E earnings of Rs 62, at a discount to the lone listed competitor CRISIL. The discount may be justified by CRISIL's more diversified business profile, even as ICRA is highly reliant on rating services. Considering the growth potential in the ratings business and ICRA's presence in high growth consulting and outsourcing services, the company is well placed for future growth. With Moody's Investor Services as the sole promoter of ICRA, with a 28.5% stake, the possibility of new business opportunities from an expanding relationship with Moody's, and a possible stake hike by the promoter at a later date, also remain possibilities. Investors can accumulate the ICRA stock at this level and add more on declines.
Source: Internet (Valuenotes by Sanjay Chhabria)
