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ICRA: Ideally suited to issue credit ratings - Outside View by Luke Verghese

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ICRA: Ideally suited to issue credit ratings
Oct 10, 2012

A slow and steady plodder with a triple AAA plus rating to boot

A Moody's affiliate

ICRA is the younger by four years - incorporated in 1991 and is also the less exalted country cousin of CRISIL, the prima donna of the credit rating services agencies (CRAs) operating in India. (The third competitor in the fray is CARE Rating Services which was incorporated in 1993 and claims to be the second largest in the business. Its principal promoter is IDBI Bank Ltd. It is also a closely held company I believe). And like CRISIL, ICRA too boasts of a big ticket international brand - Moody's Investors Service as its primary shareholder. The shareholding of the Indian promoter group is shown as 28.5%, while that of public shareholding institutions amounts to 49.69% and that of the public shareholding-non institutions is given as 21.8%. The 28.51% holding in the company is held by Moody's through an India promoted company - Moody's Investment Company India Pvt. Ltd. How does this shareholding get classified as Indian promoter shareholding please?

And like CRISIL it too makes do with a number of subsidiaries - it has 9. Three of the siblings are country specific entities-Indonesia, Sri Lanka and Nepal. The parent and its offspring offer a spate of value adds ranging from rating services, to consulting services, IT solutions, KPO services, and, financial information products and services to the mutual funds industry, banks, financial institutions etc. The step down subsidiary offers programme management services in the Development Consulting sector. In short it offers what could be high funda value added services.

The company is listed for trading on the Bombay Stock Exchange and the National Stock Exchange. Over the past 52 weeks (April '11-March '12) the share price oscillated between a high of Rs 1,374 in July 2011 and a low of Rs 797 in January 2012. During 2011-12 it made do with very low volumes of trade on either exchange - barring in January and February this year when the share fell sharply, and the combined volumes of trade in both the exchanges together rose as a result to a high of 9.95 lac shares in January. The paid up capital for the matter of record was Rs 100 m consisting of 10 m equity shares of Rs 10 each paid up.

Its ten year financials

The ten year financials that the company has appended to the annual report makes for interesting reading. The operating income has shown an almost steady growth each year in the last ten years barring one year. Operating income grew from Rs 309 m in 2002-03 to Rs 1.4 bn in 2011-12. The non operating income has almost kept a similar pace growing from Rs 57 m to Rs 197 m. In similar vein was the growth in the profit before depreciation and interest which grew 420% to Rs 776 m from Rs 150 m previously. The depreciation provision each year added up to a very marginal sum, and with no interest provision - barring a very minor hiccup in one year - the tax provision averaged 27% of the pre-tax profit initially, slowly growing to 30% by 2007-08 and settled at around 32.7% by the latest year end. Inspite of the escalating tax provision the growth in the post tax profit by 416% was only marginally lower than the growth in the profit before interest and depreciation. The percentage dividend payout has also risen steadily from 30% to a high of 200% in the latest year. In the last two years the company has adopted a dividend payout policy of around 45% of the net post tax profit. The paid up capital has only inched up from Rs 88 m to Rs 100 m in the interim. Quite obviously then, the company does NOT believe in issuing free shares to its shareholders or some such. The additional capital issued was apparently in the form of a further issue of shares at a considerable premium to the face value as the share premium reserves moved up from Rs 268 m in 2005-06 to Rs 651 m in 2006-07, in the year of the capital accretion.

The year just past

It also boasts of a rock solid annual report for sure. A paid up capital base of Rs 100 m, reserves and surplus of Rs 2.7 bn, NIL debt, current investments and non-current investments together totalling Rs 2.8 bn against Rs 2.3 bn, and separately, a cash reserve at year end of Rs 208 m. The current assets, loans and advances of Rs 883 m at year end were only marginally higher than the current liabilities and provisions. (The current liabilities schedule includes an item called 'Unearned Revenue' amounting to Rs 151 m. But then shouldn't unearned revenue be classified as an asset to start with?). It may be noted that the securities premium reserve of Rs 694 m at year end accounted for 25.5% of all reserves. And, for some cockeyed reason the 'surplus retained in the P&L account' is as high as Rs 989 m. This surplus comes in handy when the post tax profits fall in any year which allows the company to part use this reserve for dividend payment purposes.

The company per-se generates revenues from two product lines - Rating Services, and Information Services as per the segmental revenues schedule. The rating services business accounts for over 99.9% of all operational revenues, and the latter revenue stream seems to be some sort of an add-on or some such. The company rakes in maha margins on its Rating services - it generated a net margin of 48% in 2011-12 against a margin of 53% previously. The Information services segment on the other hand managed to tote up a loss of Rs 4.6 m on revenues of Rs 0.2 m. Other income at Rs 197 m (against Rs 125 m previously) makes for a generous contribution of its own to the bottom-line. It is made up of eight separate income streams. Its contribution of 26% to pre-tax profit was substantially more than the 18% that it wrought in previously. The rise in 'other income' in the latter year was primarily due to a steep increase in the 'profit on sale and redemption of its liquid debt investments'. But more on this side show later on in this copy.

The largest single item of expense by far is employee handouts. This expense grew by 22.2% to Rs 605.7 m. Juxtapose this with the 7.8% increase in operating revenues. Employee costs are an omnibus item of expenditure, and consist of six separate expense items. It includes profit sharing (the first time that I have come across such a descriptive heading), amortisation of deferred employee compensation (whatever this means), staff welfare, training costs, and the like. It looks like this company would be a much preferred employer of choice if placements are available with it. The other two expense heads - depreciation and, other expenses actually declined. (Thankfully ICRA does not appear to be paying any tithes to Moody's for allowing ICRA to adorn the Moody's name on to the ICRA name plate). So the company's ability to grow or diminish its margins depends on the twin factors of a rise in operational income, and a containment of its employee handouts.

Its cash flow statement

That the company is revving in margins is quite evident from the cash flow statement. The net cash generated from operations amounted to Rs 390 m or 51% of the profit before taxation, against a much higher 62% that it recorded previously. With abundant cash generation, and limited investment opportunities at that, the company resorted to buying and selling debt securities in large amounts. It bought securities valued at Rs 2.9 bn and sold securities valued at Rs 2.6 bn.This led to a net accretion in portfolio investments to the tune of Rs 316 m. In the preceding year there was a much larger accretion to its portfolio at Rs 1.1 bn. This extra portfolio accretion also led to a fall in cash resources by Rs 776 m in the preceding year. There was also a complete change in the company's strategy to generate moneys from its humungous portfolio of liquid debt securities. At end 2011-12 the book value of investments amounted to Rs 2.3 bn against Rs 1.9 bn previously. In 2011-12 it generated interest income of Rs 19 m and a profit on sale of Rs 135 m. In the preceding year the respective figures were Rs 65 m and Rs 22 m.

The Siblings

Separately, it also has investments in several subsidiaries. The book value of its investments in the siblings amounted to Rs 424 m against Rs 400 m previously. The siblings appear to be a motley bunch. The inter-se transactions between the parent and its siblings are kept to the very minimum. It has six direct siblings and three of the step down variety. The youngest of the six is the sibling based out of Nepal which has just commenced operations. The largest of the lot, paid up capital wise and revenue wise, is ICRA Management Consulting Services. It boasts of a paid up capital of Rs 150 m, revenues of Rs 241 m and a pre-tax profit of Rs 23 m. Collectively speaking, the gang of nine toted up revenues of Rs 771 m and a pre-tax profit of a mere Rs 35 m. But the poor showing on the bottom-line front was basically because four of the nine siblings collectively registered losses of Rs 38 m. Its Indonesian operation is particularly down and under. On revenues of Rs 4 m it registered a pre-tax loss of Rs 28 m. And its accumulated losses almost equal its paid up equity. Not a bad start at all for a company in the credit rating business.

None of the siblings or even the step downs has thought it necessary to pay any dividend tithes during the year. But the parent has booked dividend income from subsidiaries of Rs 4.5 m. This inflow may then be pertaining to a previous year, but there is no knowing for sure. In any event the parent's capital outlay in its siblings is minimal so to speak.

Future perfect

Credit raters per-se are steady plodders given their limited charter- and the point that issuers of capital have to get themselves rated (on their ability to pay interest and repay the capital on due dates) before a debt offering. This is the primary purpose of their existence. All other value adds that they offer are mere offshoots of this service, and have their limited value too. The whole idea of getting a rating is that the more glorified its standing, the higher is the public image of the company, and hence the issuer's ability to offer very fine rates on their debt offerings, and still get full subscription to the issue. Expect ICRA to show a slow but steady increase in revenues and earnings over the years to come-barring any unforeseen hiccups that is. The additional benefit that the company has to offer is the relatively low level of floating stock. Besides the 28.51% holding of Moody's in its equity capital, another 33.7% is held by PSU banks, insurance companies, and the ICRA Employees trust that are unlikely to divest their stake.

This is a share worth taking a look at.

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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