ICRA - Ratings On Firm Wicket, Analytics May See Choppiness: Yes Securities

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Yes Securities Report

Notwithstanding strong revival in ratings revenue growth in past couple of years, the trend in ratings margin has been modest due to employee cost/attrition challenges, industry benchmarking of compensations and lag in transmission through pricing.

ICRA Ltd.'s margins, however, could improve from hereon on account of-

stabilised attrition and peak employee cost challenges behind,
pursuit of better remunerative mandates and pricing increases,
shifting revenue mix towards initial rating business,
strong traction in more profitable segments of bond ratings and securitization and
benefits from operating leverage and productivity improvements through tech investments.

In Analytics, the margin trajectory would be determined by growth trends in Moody’s business and quick scaling-up of market data and risk analytics offerings.

Based on our management interaction, we believe that ICRA’s soft performance of Q1 FY24 is not reflective of its likely full-year performance.

Over next two years, we see sustained strong growth in ratings, healthy albeit moderated growth in analytics and reasonable margin expansion.

At consolidated level, we estimate 14%/17%/18% compound annual growth rate in revenue/Ebitda/profit after tax over FY23-25 and return on equity expansion of 2% despite significant accretion of balance sheet liquidity.

Our estimates do not factor revenues from environmental, social and governance offerings and any acquisitions which company has been evaluating in non-ratings segment.

Stock trades at 32 times one-year roll forward price/earning and it has traded at higher multiples in preceding rating cycle.

We continue to prefer ICRA over CRISIL.

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Yes Securities ICRA Ltd Sept 2023.pdf

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