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RA’s full participation in the extant ratings cycle has been a function 1) reorganization of ratings team structure with sharpened sectoral rigor, 2) restructuring of business development team on lines of key sectors, 3) strong ratings performance and timely actions, 4) focus on remunerative and appropriate pricing/yields, and 5) inherent strength (leading market position) in faster growing sectors (Financial incl. Securitization, and Infra) and Bond Ratings (issuances have increased in recent quarters). After tuning around in FY22 (10% growth v/s 13% de-growth in FY21), ICRA’s ratings revenue growth has kept on strengthening (14% growth in FY23 and 16% growth in Q1 FY24). An evolved business approach (focus on revenue share and not volume share), raising of pricing threshold (aligned to ratings quality) across sectors/customers and transmission of employee cost inflation has also aided growth. As typically witnessed during ratings upcycle, the share of initial rating fees (IRF) has started to inch-up. With momentum in Financial and Infrastructure Sectors to continue and possibility of private capex picking-up and rates declining (triggering refinance business) in 12-18 months, the ratings growth should sustain. ICRA’s ESG offerings are ready, and it would be soon applying to SEBI under the prescribed set-up of separate entity. The subsequent go-to-market would create additional revenue opportunity.

Near-term volatility in ICRA Analytics, but Moody’s biz on strong footing

While the choppiness in global environment and uncertainty around short-term projects from parent Moody’s could transiently weigh on ICRA Analytics’ growth, further enlargement of engagement with Moody’s and scaling-up of Market Data and Risk Management Solutions is expected to support healthy growth in longer term. Growth deceleration in ICRA Analytics was sharp in Q1 FY24 (4% yoy v/s growth of 25-30% in FY22/23) owing to delay in renewal of a project (being in new area and evaluated for scale-up). In recent years, ICRA Analytics has become more ingrained within Moody’s Group by enlarging engagement of rating support, adding new areas of service (for instance, significant scale-up of ESG association) and supporting multiple entities of the Corporation. Moody’s business flows to ICRA based on capabilities, competitiveness, and delivery quality, as it also has two captive centers in India. The co. is keen on growing Market Data and Risk Management solutions businesses for the domestic market and Management’s time and efforts have been focused on it. The intent is to diversify revenues of ICRA Analytics and significantly increase the share of these domestic offerings in the next three years. Products & Services suite has been ready, and the focus now is on go-to-market and business development.

Multiple levers for an improved margin performance

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. Margins, however, could improve from hereon on account of 1) stabilized attrition and peak employee cost challenges behind, 2) pursuit of better remunerative mandates and pricing increases, 3) shifting revenue mix towards initial rating business, 4) strong traction in more profitable segments of bond ratings and securitization and 5) 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 consol level, we estimate 14%/17%/18% CAGR in Revenue/EBITDA/PAT over FY23-25 and RoE expansion of 2 ppt despite significant accretion of BS liquidity. Our estimates do not factor revenues from ESG offerings and any acquisitions which co. has been evaluating in non-ratings segment. Stock trades at 32x 1-yr roll. fwd. P/E and it has traded at higher multiples in preceding rating cycle. We continue to prefer ICRA over CRISIL.

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