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ICRA: Consultancy bleeds

Nov 9, 2009

Performance summary
  • Operating income grows by tepid 16% and 6% YoY in 1HFY10 and 2QFY10 respectively, primarily on the back of lower margin in rating and consulting services.
  • Other income grows by 65% YoY in 1HFY10 due to higher incremental investments and returns from the same.
  • Operating margins drop by 5% YoY and 8% YoY during the half year and second quarterly respectively.
  • Depreciation costs reduce due to write-back of provision for diminution in the value of investments.
  • Net profit margins increase primarily due to depreciation write-backs and higher other income.

Consolidated financial performance
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Income from operations 343 363 5.8% 598 695 16.2%
Expenditure 202 243 20.3% 389 493 26.7%
Operating profit (EBDITA) 141 120   209 202  
EBDITA margin (%) 41.1% 33.1%   34.9% 29.1%  
Other income 11 32 190.9% 45 74 64.4%
Depreciation / (writeback) -   (20)   -   (86)  
Interest -   -     -   -    
Profit before tax 152 172 13.2% 254 362 42.5%
Tax 54 65   84 131  
Effective tax rate 36% 38%   33% 36%  
Profit after tax/(loss) 98 107 9.2% 170 231 35.9%
Net profit margin (%) 28.6% 29.5%   28.4% 33.2%  
No. of shares (m)       10.0 10.0  
Diluted earnings per share (Rs)*         46.0  
Price to earnings ratio (x)         16.7  
(*On a trailing 12-month basis)

What has driven performance in 2QFY10?
  • Despite the higher demand for rating services across corporate seeking to raise capital and banks willing to offer better rates to rated ones for compliance with Basel II, ICRA clocked a disappointing performance during both the periods under review. The profit margins on the rating business dropped by 8% (to 58%) in 1HFY10 as the company failed to derive better pricing from SME (small and medium enterprises) clients. 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 may improve going forward. Having said that with credit off-take remaining subdued and lower capital being mobilised by corporate to meet their funding requirements, the growth in rating business could be commensurately impacted.

    Segmental performance
      1HFY09  1HFY10  Change
    Rating 386 456 18.1%
    % of revenue 65% 66%  
    PBIT margin 65.0% 57.7%  
    Consulting 91 77 -15.4%
    % of revenue 15.2% 11.1%  
    PBIT margin 8.7% -18.2%  
    Information 14 16 14.3%
    % of revenue 2.3% 2.3%  
    PBIT margin -50.0% -31.3%  
    Outsourced 35 53 51.4%
    % of revenue 5.9% 7.6%  
    PBIT margin 28.6% 34.0%  
    IT 72 93 29.2%
    PBIT margin 2.8% -5.4%  

  • The worst impacted in terms of growth and profitability in times of economic stress was the consultancy business. Besides a 15% drop in revenue, which can be attributed to the formation of a separate consulting company, the negative margins indicate that the consulting business is eating into ICRA’s profits. Growth in the outsourced 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 34% in 1HFY10 as against 29% in 1HFY09.

  • Although ICRA witnessed substantial growth in other income due to higher returns on its investments (largely liquid mutual funds), we believe that its move to write-back the provision for diminution in the value of investments due to better capital market conditions was a little premature.

What to expect?
At the current price of Rs 770, the stock is valued at 21 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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Aug 7, 2020 09:49 AM


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