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ICRA Ltd: Robust standalone operations - Outside View by Luke Verghese

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ICRA Ltd: Robust standalone operations
Apr 1, 2014

(An Associate of Moody’s Investors Service)

As a standalone entity the company is in fine fettle but it does not all add up when one takes into account the performance results of the many siblings that it has incorporated.

A many sided operation

This is my second take on this company. Group ICRA as it calls itself is a multipronged organisation-with siblings and step down siblings thrown in for good measure. The group focuses on four key areas --- Credit rating/grading, management consulting, software solutions and services and, Information services/KPO. The latter stands for knowledge process outsourcing. The revenues accrue from 14 companies within the group. The siblings and their affiliates are ten in number and seven of them are owned outright by the parent. ICRA Nepal is a 51% owned sibling. Three of the siblings are incorporated in the USA, and yet three others are offspring spread across Indonesia, Lanka and Nepal. The book value of its investments in group companies add up to a very picture at Rs 927 m, up from Rs 424 m previously.

Against revenues from operations of Rs 1.49 bn clocked by the standalone company in 2012-13, the consolidated entity registered revenues of Rs 2.5 bn. Including other income of Rs 162 m and Rs 179 m respectively that the two entities in turn rolled in, the total revenues amounted to Rs 1.64 bn and Rs 2.69 bn respectively. But what is coming across very clearly is that the consolidated entity has very little to show for it at the bottom-line level. The standalone company registered a pre-tax profit of Rs 729 m while the consolidated entity had to make do with a pre-tax profit of Rs 720 m. The figures speak for themselves. Both the standalone company and the consolidated entity suffered a drop in profitability on higher revenues.

A Moody’s affiliate

Through an associate of Moody’s Investors Services --Moody’s Investment Company India Pvt Ltd -- the collaborators have only a minority stake of 28.5% (though they have the largest single stake holding) in the paid up equity capital of Rs 100 m in the company. Among shareholders holding more than 5% stake in the company, principal domestic institutional investors are State Bank of India (9.7%), Life Insurance Corporation of India (6.7%) and General Insurance Corporation of India (5.2%) and a single foreign institutional investor, Franklin Templeton Mutual Fund (5.6%).

The company’s biggest asset --and as it should be --is its ownership of intellectual property rights which helps to generate the revenues that it does. Consequently employee benefit expenses take top spot at Rs 641 m in the revenues expenses schedule. For the matter of record, the gross fixed asset base amounts to a piffling Rs 347 m. It also has a squeaky clean balance sheet with plenty of reserves, and lots of cash to spare. It has also advanced sums, albeit small, to group companies on a short term basis. A part of the surplus cash of Rs 303 m is invested in debt securities There are no borrowings either. But the massive investment in non current investments brings no succour to the other income schedule. There is also very little interaction between the parent and its siblings on the revenue front. The trade receivables on paper are much larger than the trade payables, but if one factors in the advances that the company has received from its clientele then the two almost even out. In similar vein the current liabilities and current assets almost even out if one excludes the cash balances from the reckoning. The reserves of Rs 3.1 bn tower over the paid up capital of Rs 100 m. Probably it is time then that the board of directors’ thought of opening the purse strings and issuing bonus shares.

How the revenues pan out

The revenues from operations grew 6.6% to Rs 1.48 bn during the year while the other income fell to Rs 162 m from Rs 197 m previously. Other income accounted for 22.3% of pre-tax profit against 26% previously. This is not a percentage to be sniffed at. The main body of the revenue accretals are classified under a single head, while the vast bulk of the ‘other income’ comes from a source called ‘profit on sale/redemption of investments’. The company appears very adept at buying and selling debt securities in its portfolio and making money in the bargain. It bought securities worth Rs 1.85 bn and sold debt securities worth Rs 2 bn during the year. There is however no continuity in this source and hence the other income component is basically a game of chance though the company is able to pull it off somehow.

The cash flow statement reveals a company which generates far more cash from operations than it knows what to do with it. It generated net cash of Rs 408 m in 2012-13 and could spend but Rs 23 m on fixed assets. The balance dosh is money for jam. The surplus cash that it generated was looking askance on what is to be done. Service sector companies such as ICRA suffer severe disadvantages on investment options that they can take to grow - given their charter. The option of funding yet more companies in allied activities as ICRA has done has its own limitations in terms of outlays and areas of coverage. And herein lies the nub. This is not to suggest that that there are limitations on growth prospects in what they excel in. The operating revenues of ICRA rocketed from Rs 329 m in 2003-04 to Rs 1.48 bn in 2012-13 a compounded growth of 350% over nine years from the base year. The growth in other income was more disproportionate over the period. The good news is that the growth in pre-tax profit beat the growth in overall revenues - growing 391%. But, unlike the revenues which grew steadily almost every year over the nine years from the base year period, the pre-tax profit took a more circuitous route.

The siblings

But unlike the performance results of the standalone company, the financials of the several siblings is not as rosy. The company has furnished the financials of 10 siblings including step downs. Fully six of the 10 siblings have reported a pre-tax loss. The company with the largest paid up capital is its 100% offshoot ICRA Techno Analytics Ltd. It has a capital base of Rs 214 m (the Rs 10 face value shares were subscribed to at a premium of Rs 18 per share) and reserves and surplus of Rs 487 m-the premium paid on the shares is reflected in this figure. Why were the shares subscribed to at a premium to the face value? On a turnover of Rs 181 m it registered a pre-tax profit of Rs 31 m.

The company with the highest revenues among the India based entities however is ICRA Management Consulting Services Ltd with revenues of Rs 250 m and a miniscule pre-tax profit of Rs 3 m. This is followed by ICRA Online Ltd with revenues of Rs 235 m and a pre-tax profit of Rs 35 m. The subsidiary based out of Indonesia and the two offspring located in the USA are however haemorrhaging. One of the US based siblings, ICRA Global Capital, boasts the largest turnover overall with revenues of Rs 302 m.

As the results of the siblings aver, those that have their heads above water have also posted poor margins. The end result is that none of them have declared any dividend. It would help if the management of the parent gives a detailed account of the need to promote offspring in the manner that they have sought to do, and the value addition that they bring to the group, if any, in the process.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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