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ICRA: Profits fall by a third in 4QFY14 - Views on News from Equitymaster
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ICRA: Profits fall by a third in 4QFY14
Jun 16, 2014

ICRA declared its results for the fourth quarter (4QFY14) and financial year 2013-14. The institution has reported a 7.2% YoY growth in revenues while net profits have declined by 30.9% YoY during 4QFY14. For full year, the profits were down by 2.7% YoY. Here is our analysis of the results.

Performance summary
  • Total revenue grows 7.2% YoY in 4QFY14 on the back of good traction in SSI/SME ratings and other services. For full year, the revenue went up by 9.6% YoY.
  • The operating profit margin rise marginally to 49.4% in 4QFY14 from 48.0% in 4QFY13.
  • Other income disappoints with 64.7% YoY decline in 4QFY14; however, improved on annual basis.
  • Net profit declines by 30.9% YoY for 4QFY14. For full year FY14, it reports a 2.7% decline YoY primarily due to disappointing income performance and steep rise in tax provisions.
  • The net profit margins fall drastically to 38.3% for 4QFY14 from 59.4% in 4QFY13.
  • Declared dividend of Rs 23 per share for FY14 (dividend yield 1.0%).

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Total revenue 463 496 7.2% 1,486 1,629 9.6%
Expenditure 241 251 4.5% 898 958 6.6%
Operating profit (EBIDTA) 222 245 10.1% 587 671 14.2%
Operating profit margin (%) 48.0% 49.4%   39.5% 41.2%  
Other income 101 36 -64.7% 162 173 6.4%
Interest  - -   - -  
Depreciation 6 6 6.3% 21 25 16.4%
Profit before tax 318 274 -13.6% 729 819 12.4%
Tax 43 84 97.9% 125 232 85.6%
Extraordinary items** - -   - -  
Profit after tax/ (loss) 275 190 -30.9% 604 587 -2.7%
Net profit margin (%) 59.4% 38.3%   40.6% 36.1%  
No. of shares (m)         10.0  
Diluted earnings per share (Rs)*         58.7  
P/E ratio (x)         40.0  
* on a trailing 12 months basis

What has driven performance in FY14?
  • Significant slowdown in the economic and investment growth impacted the revenue growth performance of ICRA Ltd during the fourth quarter and full year FY14. The sluggishness in the domestic debt markets, capital markets and poor bank credit lines hampered the business growth of the company. The business growth moderated at around 8% levels. The overall debt market issuance declined by 27% YoY. SSI/SME ratings were the only savior.

    Increased cost and pricing pressures coupled with higher share of small-ticket businesses hit the earnings performance of the company. The reported profitability has stood 8.8% below our estimates on account of weak revenue growth. Also the profits took a brunt on account of steep rise in tax provisions during the year as against tax reversals a year before,

  • The revenue mix continues to be tilted towards corporate sector ratings; and has remained stable YoY basis. The financial sector ratings were seen down marginally from 27% in FY13 to 26% in FY14 whereas ratings revenue from structured finance and public finance remained more or less at stagnant levels. With subdued investment climate and sensitivity with respect to interest rates and liquidity conditions have kept the debt market challenging.

    Revenue mix:
    Corporate sector ratings outshine others
    (%) FY13 FY14
    Corporate Sector 62% 61%
    Financial Sector 27% 26%
    Structured Finance 4% 5%
    Public Finance 1% 0%
    Other Ratings 6% 8%

  • The operating profit margins improved albeit marginally during 4Q FY14 and stands at 49.4% at the end of fourth quarter FY14. While the expenditure has remained benign, the top-line growth remained discouraging.

  • Maintaining a conservative approach, the liquid investments of the company have been effectively deployed in safe assets. Fixed Maturity Plans account for 84.4% of liquid assets

  • The company has reported 30.9% fall on YoY basis in net profits during 4QFY14 and 2.7% YoY decline during the full year. Weak revenue performance and higher tax expenses have marred the earnings performance of the company. Reportedly, net profit margins have also taken a toll and were down to 38.3% YoY in 4QFY14 from 59.4% YoY a year ago during 4QFY14.
What to expect?
At the current price of Rs 2352, the stock is trading at 29.8 times our estimated FY16 adjusted earnings per share.

ICRA's revenue mix is highly contingent upon macro-0economic factors. Poor macro performance, subdued debt market and sluggish investment climate have impacted the earnings and margins of ICRA. Subdued credit growth has impacted the bank loan ratings which stand as an important revenue driver for all rating agencies. Intense competition and pricing pressures and smaller size of rated entities have impacted revenues from bank loan ratings segment, but the volumes continue to be robust.

Only higher investments in small scale business rating and scaling up of allied businesses such as research activity can drive earnings growth for ICRA in coming periods. Further, with the revival in industry and anticipated pick-up in interest in the securitization market, which remained flattish for quite some time now, would also aid growth.

However, certain challenges stand inevitable for ICRA due to the nature of its business; despite the economic revival. The company will have to cope up with intense competition from other rating agencies, reputation related risks, ability to retain and attract quality manpower, increasing share of small-ticket business and adverse change in regulations.

But with the revival in investment climate, the company is expected to improve its revenue growth. Re-financing has opened new doors for ICRA's revenue stream in an event of flattish debt markets and big ticket investments in the system.

While we concede that the company's business model stands sustainable, the current scenario offers limited upside in valuations. Therefore, we reiterate SELL recommendation on the stock at current levels.

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