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ICRA: 'Ratings' revenue boost performance
Jan 27, 2014

ICRA declared its results for the third quarter (3QFY14) of the financial year 2013-14. The institution has reported a 10.6% YoY growth in revenues and the net profits have witnessed a growth of 15.6% YoY during 3QFY14. The profits for 9mFY14 have gone up by 20.8% YoY. Here is our analysis of the results.

Performance summary
  • Total revenue grows by 10.6% YoY in 3QFY14 on the back of growth in bank loan ratings and structured finance ratings coupled with SME business ratings.
  • The operating profit margin moves up to 43.8% YoY in 3QFY14 from 40.3% in 3QFY13.
  • Other income declines by 31.4% YoY in 3QFY14.
  • Decent ratings revenue boost the profits for the company reporting 15.6% YoY profitability growth for 3QFY14.
  • The net profit margins therefore were seen higher at 28.6% for 3QFY14 from 27.4% in 3QFY13.

Standalone financial performance
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Total revenue 385 425 10.6% 1,023 1,133 10.7%
Expenditure 230 239 4.2% 658 707 7.4%
Operating profit (EBIDTA) 155 186 20.0% 365 426 16.7%
Operating profit margin (%) 40.3% 43.8%   35.7% 37.6%  
Other income 7 5 -31.4% 61 137 123.8%
Interest - -   - -  
Depreciation 6 7 17.2% 15 18 20.3%
Profit before tax 157 184 17.7% 411 545 32.5%
Tax 51 63 21.9% 82 148 79.2%
Extraordinary items** - -   - -  
Profit after tax/ (loss) 105 122 15.6% 329 397 20.8%
Net profit margin (%) 27.4% 28.6%   32.2% 35.1%  
No. of shares (m)          10.0  
Diluted earnings per share (Rs)*          39.7  
P/E ratio (x)         19.2  
* on a trailing 12 months basis

What has driven performance in 3QFY14?
  • ICRA Ltd reported decent earnings performance for 3QFY14. The revenue for the quarter grew 10.6% YoY on the back of bank loans ratings and structured finance ratings accompanied by healthy growth from the NSIC/SME business ratings segment. The revenues for the quarter propelled primarily due to increased demand for credit ratings to access bank loans. This in turn provided boost to the operating profits of the company.

  • The other income performance; however, disappointed during the quarter with a decline of 31.4% YoY. Whereas for the 9mFY14, the other income performance grew more than 100% YoY.

  • The depreciation and amortization expenses stood higher and spiked 17.2% YoY on account of amortization of deferred employee compensation during the third quarter.

  • Therefore, while the revenue growth stood decent, the amortization expenses and weak other income growth restricted the profitability for ICRA Ltd. The profits for the quarter grew 15.6% YoY and were largely supported by the robust earnings growth across all the ratings segments.
What to expect?

At the current price of Rs 1514, the stock is trading at 19.2 times our estimated FY16 adjusted earnings per share.

While the revenue mix for ICRA Ltd stands highly contingent upon macro-economic factors, improvement in market conditions help boost the earnings for the company. The bank loan ratings during 3QFY14 augured well for the revenue base of the company.

Going forward, the outlook on pick-up in debt markets issuance remains bleak as cited by the management. That said, the diversified revenue base of ICRA Ltd would keep the earnings intact for the company.

While we concede that the company's business model stands sustainable, the current scenario offers limited upside in valuations. Therefore, we recommend investors to SELL the stock at current levels and book their profits.

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