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ICRA: Muted growth in revenue - Views on News from Equitymaster

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ICRA: Muted growth in revenue

Jun 18, 2013

ICRA declared its results for the fourth quarter and financial year 2012-13 (FY13). The institution has reported a 6.6% YoY growth in revenues while net profits have grown by 18.6% YoY during FY13. Here is our analysis of the results.

Performance summary
  • Total revenue grows 6.9%% YoY in 4QFY13 on the back of debt ratings and NSIC/SME ratings.
  • The operating profit margin falls marginally to 48% in 4QFY13 from 51% in 4QFY12.
  • Other income increases by 4.7% YoY in 4QFY13; however, declined on annual basis.
  • Net profit grows by 21.6% YoY for 4QFY13 and equally strong by 18.6% YoY on annual basis primarily due to lower taxes.
  • The net profit margins at 59.4% for 4QFY13 improved from 52.2% in 4QFY12.
  • Declared dividend of Rs 22 per share for FY13 (dividend yield 2.2%).

Standalone financial performance
(Rsm) 4QFY12 4QFY13 Change FY12 FY13 Change
Totalrevenue 433 463 6.9% 1,394 1,486 6.6%
Expenditure 214 241 12.6% 815 898 10.3%
Operatingprofit (EBIDTA) 219 222 1.3% 579 587 1.5%
Operatingprofit margin (%) 50.7% 48.0%   41.5% 39.5%  
Otherincome  97 101 4.7% 197 162 -17.7%
Interest   -  -    -   -   
Depreciation  5  6 21.1% 19 21 11.1%
Profitbefore tax 311 318 2.1% 757 729 -3.8%
Tax  85  43 -49.9% 248 125 -49.7%
Extraordinaryitems**  -  -     -   -  
Profitafter tax/ (loss) 226 275 21.6% 509 604 18.6%
Netprofit margin (%) 52.2% 59.4%   36.5% 40.6%  
No. ofshares (m)          10.0  
Dilutedearnings per share (Rs)*          60.4  
P/E ratio(x)          16.7  
* on a trailing 12 months basis

What has driven performance in FY13?
  • Though not very encouraging, the total revenue for the last quarter of FY13 grew 6.6% YoY primarily on the back of debt ratings followed by increased traction in NSIC/SME business ratings. Surge in number of fresh instruments and the volumes of fresh debt rated by ICRA are indicative of debt markets are gradually picking up. However, the bank loan ratings remained tepid during the year due to sluggishness in bank loan rated volumes. More importantly, despite 29% increase in number of ratings, the fresh bank loan ratings suffered on account of reduced ticket size and competitive pricing pressures. Witnessing traction since 3QFY13, debt market related business reported modest growth. Further, overall growth expansion was led by financial sector and non-traditional products (NTP). Going ahead, NTP would continue to remain an important growth driver.

  • The revenue mix continues to be tilted towards corporate sector ratings; however this segment declined by 5 bps in a year's time. The financial sector ratings have picked up marginally from 26% in FY12 to 27% in FY13 whereas ratings revenue from structured finance and public finance remained 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
    (%) FY12 FY13
    Corporate Sector 67% 62%
    Financial Sector 26% 27%
    Structured Finance 4% 4%
    Public Finance 1% 1%
    Other Ratings 2% 6%

  • The operating profit margins have grown steadily during the entire year FY13 and stands at 48% at the end of fourth quarter FY13. Higher employee costs and other expenses have restricted further margin expansion for ICRA. Reportedly, net profit margins have improved substantially to 59% in 4QFY13 from 52% a year ago.

  • The liquid investments of the company have been effectively deployed in safe assets; namely, debt funds, fixed maturity plans and fixed deposits of banks.

  • The consolidated PAT for 4QFY13 reported mere 2% YoY growth and the consolidated operating profits declined by 8% YoY on account of challenges in the respective businesses. While the consolidated group revenue went up by 21% YoY, the net profit grew by modest 9% annually. But without accounting for impact of ESOS amortization, the consolidated year end PAT for FY13 declined by 1%. Additionally, the overall performance of subsidiaries has remained subdued for major part of the year. The major setback came from the advisory services that reported lower profits and moderate revenue growth. Although It-related services and Outsourcing services did record decent revenue growth, they have their own challenges to encounter.

What we expect?
At the current price of Rs 1009, the stock is trading at 12.5 times our estimated FY15 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. Regulatory hurdles such as restriction on any fee-based services except credit ratings and research have kept the revenue growth subdued for the agency. 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.

Increased investments in small scale business rating and scaling up of other businesses such as research activity is expected to 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. Moreover, strong market position, potential growth prospects and rich parentage (of Moody's) reinforces our belief in the company's growth potential and we expect ICRA to mop up its revenue base and report healthy returns. Taking advantage of lower price, we recommend a BUY on the stock at current valuations.

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