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ICRA: Volatile markets hurt performance - Views on News from Equitymaster

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ICRA: Volatile markets hurt performance
Nov 21, 2013

ICRA declared its results for the second quarter (2QFY14) and first half (1HFY14) of the financial year 2013-14. The institution has reported a 6.9% YoY growth in revenues while net profits have witnessed a decline of 13.0% YoY during 2QFY14. The profits for 1HFY14 have gone up by 23.3% YoY. Here is our analysis of the results.

Performance summary
  • Total revenue grows by 6.9% YoY in 2QFY14 on the back of growth in debt ratings and structured finance ratings coupled with NSIC/SME business ratings.
  • The operating profit margin moves down to 36.8% YoY in 2QFY14 from 38.4% in 2QFY13.
  • Other income increases by whopping 268.8% YoY in 2QFY14.
  • However, net profit declines by 13.0% YoY for 2QFY14 primarily on account of higher tax outgo.
  • The net profit margins therefore were seen down at 32.0% for 2QFY14 from 39.3% in 2QFY13.
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Total revenue 361 386 6.9% 638 707 10.8%
Expenditure 223 244 9.7% 428 468 9.2%
Operating profit (EBIDTA) 139 142 2.4% 210 240 14.2%
Operating profit margin (%) 38.4% 36.8%   32.9% 33.9%  
Other income 11 39 268.8% 54 132 145.2%
Interest  - -   - -  
Depreciation 5 6 19.0% 9 11 22.3%
Profit before tax 145 175 21.3% 255 361 41.6%
Tax 2 52 2027.6% 31 85 174.5%
Extraordinary items** - -   - -  
Profit after tax/ (loss) 142 124 -13.0% 224 276 23.3%
Net profit margin (%) 39.3% 32.0%   35.0% 39.0%  
No. of shares (m)   10.0     10.0  
Diluted earnings per share (Rs)*   60.8     27.6  
P/E ratio (x)   20.0     20.0  
* on a trailing 12 months basis

What has driven performance in 2QFY14?
  • The total revenue for the second quarter remained subdued with mere 6.9% YoY growth. Debt ratings and structured finance ratings followed by NSIC/SME business ratings boosted the revenues for the quarter. However, bank loan ratings and public finance ratings were tepid during 2QFY14.

  • The operating margins dropped on YoY basis during 2QFY14 on account of subdued income growth and increased expenditure. The September quarter observed sluggish debt market performance and fall in investment demand. Therefore, operating metrics failed to make a mark during the second quarter of FY14.

  • Depreciation and amortization expenses have gone up 19% YoY in 2QFY14 due to accounting of deferred employee compensation.

  • But the disappointing part came with decline in profitability for the September quarter, 2013. The profits declined by 13.0% YoY in 2QFY14 as the tax expenses zoomed more than 2000% YoY. The income tax provisions pertaining to FY12 was reversed during 2QFY14 that primarily led to fall in profitability. Had it not been for these tax reversals, the profits for ICRA during 2QFY14 would have been higher by 15% YoY.
What to expect?
At the current price of Rs 1575, the stock is trading at 20 times our estimated FY16 adjusted earnings per share.

ICRA's revenue mix is highly contingent upon macro-0economic factors. Failure in business pick-up in debt market and lack of investment demand due to subdued market conditions impacted the earnings performance of ICRA during 2QFY14. Moreover, the nature of business being that of high operating leverage, pressures on profitability were imminent.

Going forward, the outlook on pick-up in debt markets issuance remains bleak as cited by the management. Monetary tightening measures and forex volatility may prove not very conducive to the business pick-up in 2HFY14. Moreover, regulatory hurdles and stiff competition from other top rating agencies remain.

That said, the diversified revenue base of ICRA Ltd is a saving grace. The company's IT and outsourcing business have done well and reported 26% and 21% YoY growth respectively. We believe the diversified nature of ICRA's business may aid the company to stand in good stead despite the tough market conditions.

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. Hence, we recommend investors to hold on to the stock at current valuations.

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