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ICRA: Rating proves margin kicker - Views on News from Equitymaster
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ICRA: Rating proves margin kicker
Feb 6, 2009

Performance summary
  • Operating income grows by 34% and 31% YoY in 3QFY09 and 9mFY09 respectively, primarily on the back of growth in rating and outsourcing services.
  • Other income grows by 95% YoY in 9mFY09 due to higher incremental investments and returns from the same.
  • Operating margins improve by 4% in both the periods under review.
  • Depreciation costs multiply due to provision for diminution in the value of investments. Net profit margins remain stable in the quarter and improve by 1% for the nine month period.


Consolidated financial performance
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Operating income 245 327 33.5% 706 925 31.0%
Expenditure 155 195 25.5% 459 564 22.9%
Operating profit (EBDITA) 90 132   247 361  
EBDITA margin (%) 36.7% 40.5%   35.0% 39.0%  
Other income 18 59 230.7% 54 104 94.6%
Depreciation 10 68 589.9% 27 87 221.4%
Interest - -   - -  
Profit before tax 98 123 25.9% 274 378 38.3%
Tax 30 33 9.0% 80 117 45.9%
Effective tax rate 31% 27%   29% 31%  
Profit after tax/(loss) 68 91 33.4% 194 262 35.2%
Net profit margin (%) 27.7% 27.7%   27.4% 28.3%  
No. of shares (m)         10.0  
Diluted earnings per share (Rs)*         35.3  
Price to earnings ratio (x)         12.6  
(*On a trailing 12-month basis)

What has driven performance in 3QFY09?
  • Riding on the back of higher demand for rating services across corporates seeking to raise capital and banks willing to offer better rates to rated ones for compliance with Basel II, ICRA clocked a good performance during both the periods under review. The profit margins on the rating business also improved by 1% (to 64%) in 3QFY09 as the company managed to derive better pricing from SME (small and medium enterprises) clients as well. However, given that the ratings business is dependent on the volume and number of debt securities issued in the capital markets, the current growth rate in the same may be unsustainable going forward. With credit off-take remaining relatively subdued and lower capital being mobilised by corporates to meet their funding requirements, the growth in rating business could be commensurately impacted.

  • The other business segments that continued to do well in terms of growth and profitability even in times of economic stress were the consultancy and outsourcing businesses. While the former grew by 16% YoY, the growth in the latter was higher at 33% YoY. Growth in the consultancy business was due to a larger portfolio of services being outsourced from parent Moody’s to ICRA. In fact, the profit (PBIT) margin in the outsourcing business was substantially higher at 35% in 3QFY09 as against 20% in 3QFY08.

    Segmental revenues
    Services (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Rating 429 60.8% 596 64.4% 38.9%
    PBIT margin 63.4%   64.4%    
    Consultancy 122 17.3% 141 15.2% 15.6%
    PBIT margin 7.2%   8.9%    
    Information 19 2.7% 18 1.9% -5.3%
    PBIT margin -11.6%   -19.4%    
    Outsourced 45 6.4% 60 6.5% 33.3%
    PBIT margin 20.4%   34.8%    
    Professional 91 12.9% 110 11.9% 20.9%
    PBIT margin 6.3%   -2.6%    

  • Although ICRA witnessed substantial growth in other income due to higher returns on its investments (largely liquid mutual funds), it had to also provide higher for diminution in the value of investments.

What to expect?
At the current price of Rs 446, the stock is valued at 12 times our estimated FY11 earnings. While we like ICRA’s business given the fact that it has high entry barriers, is sustainable, scalable and profitable, the same does not seem to offer very lucrative returns to its shareholders. At the same time it is susceptible to changes in policies and economic cycles and has delivered very ordinary return on equity, compared to its operating and net margins. We reiterate our negative view on the stock. However, in the event of the company managing to reaffirm its pricing power in the rating business and there being policy developments which favour rating agencies to take up additional lines of consultancy business, we might see an upside to our estimates.

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