ICRA

Investors with a three-year horizon can be consider accumulating the stock of ICRA, a credit rating agency with a presence in consultancy, advisory, information and IT services. The company may continue to deliver strong earnings growth with the revival in India Inc's capital raising plans, directly adding to rating revenues. Implementation of base rate and possibility of increased volumes in securitised issuances may also help maintain good earnings growth. A major portion of ICRA's current earnings comes from rating services, and being one of the prominent players, it is well-equipped to take advantage of any opportunities in this sector.



The company has strong profitability coupled with superior operating profit margins. Even as ICRA managed operating profit margin for the ratings segment at 60 per cent, lower margins in subsidiaries have brought down the operating margin to 42 per cent for the year-ended March 31 2010.

At current price of Rs 1,190, the stock trades at 23 times its trailing one-year earnings. ICRA also has Rs 180 per share in the form of cash and equivalents. Investors can accumulate the stock in lots given the low trading volumes.

Business

The company's consolidated net profit grew at 38 per cent during the period FY07-10 with total income growing at 40 per cent. Around 65 per cent of the revenues and 99 per cent of the consolidated operating profits for the quarter ended June 30, 2010, came from the ratings segment. ICRA's financials, thus, rely heavily on growth in credit rating mandates. For the quarter ended June, 2010, the consolidated net profits and revenues (excluding the reversal in diminution in the carrying value of investment ) grew at 31 per cent and 19 per cent year-on-year.

ICRA's operating margins, though still high, have seen some moderation due to the falling size of issuances and rising operating costs. Despite slight shrinkage in margins, the operating profit growth may however, be maintained due to high growth in volumes. The return on equity for ICRA for the year ended March 2010 stood at 24 per cent, despite its liquid investments yielding low returns.

In addition to rating revenues reviving in the June quarter, the losses of other businesses such as consultancy, IT and information services moderated. All the segments witnessed revival in their revenues for the current quarter and as these businesses scale up, the contribution from these segments will improve. Consultancy and IT services hold promise as the company acquires new clients. Even the outsourcing business is starting to acquire non-Moody's clients.

Outlook

After 15 months of de-leveraging its balance-sheet , India Inc has once again started to raise debt resources in a significant way. Apart from the incremental credit growth which is expected at 24 per cent for the banking system, un-rated smaller bank loans offer Basel II-related growth opportunities. The various debt resources raised by the commercial sector over the last quarter rose to Rs 2,20,000 crore (inclusive of the bank loans). The total funds expected to be invested by private companies in infrastructure is more than Rs 3,42,000 crore. The sheer volume of issuances would increase the rating revenues significantly over the next few years. The public finance rating opportunities are also high.

In addition, banks raise both long-term (Tier-II bonds) and short-term (certificate of deposits), which require credit rating. The implementation of base rate would also give a fillip to the commercial paper market, with more rating opportunities. Corporate bond issuances have surged 38 per cent year-on-year for the six months ended June 2010 period. Securitised volumes are also expected to go up after falling significantly over the last two years.

via BL