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‘Encouraging traction in rating and analytics revenues; margin decline not structural’

Our view

ICRA’s financial performance in Q2 FY22 was a mixed-bag wherein better-thanexpected revenue growth performance in both domestic ratings and analytics businesses was offset by a steep EBITDA margin fall in domestic rating segment. We don’t see latter as a structural issue, as higher opex was driven by employee increments/incentives and ICRA has been emphasizing on pushing pricing in its stronghold rating areas.

Despite the margin reduction in Q2, the consolidated H1 FY22 margin was significantly higher than H1 FY21. EBITDA margin should be even healthier in H2 FY22 with business traction in domestic rating segment likely to improve further. ICRA has strong/lead position in NBFC-HFC segment incl. securitization, wherein volumes are likely to revive significantly in coming quarters.

In our interaction last month, ICRA expected growth recovery to sustain in the current year and was confident about franchise proposition driving full participation in the next rating cycle at healthy pricing. The management had emphasized on gaining wallet share in focused large and mid-sized clients by being the preferred rating agency from investor’s perspective. We expect 10-11% consolidated revenue CAGR, 400-500 ppt margin expansion, structural RoA/RoE expansion and higher dividend payouts over FY21-24. Valuation is below long-term mean, and thus can re-rate on our expected outcomes. Retain ADD and 12m PT of Rs3900.

Result Highlights

* ICRA’s revenue/EBITDA/PAT was at +4%/-6%/+1% variance to our estimates - Key positive highlights were continued revival in rating revenue growth (+10% yoy) and sustained strong traction in ICRA Analytics (+22% yoy) - Key negative highlight was significant fall in rating business margin (from 24% in Q1 FY22 to 15%).

* 10% yoy growth in domestic rating revenue (~60% of consolidated revenue) was achieved mainly due to traction in fresh business, which was supported by market share gains in financial sector and pick-up in the securitization volumes, both of which are stronghold business segments for ICRA.

* ICRA Analytics (~40% of consolidated revenue) witnessed strong revenue growth of 22% yoy - Outsourced & Information Services (~90% of ICRA Analytics revenue) grew by 28% yoy with increase in business from existing and new clients - Consulting Services revenue declined by 10% yoy due to challenges in external environment and co. de-focusing on certain unprofitable segments of business.

* Sequential decline in consolidated EBITDA margin by 4ppt to 27% disappointed a tad, and was entirely driven by a sharp fall in domestic rating EBITDA margin (from 24% to 15%) - there was a steep 17% qoq jump in employee cost on distribution of annual increments and one-time special incentives - ICRA Analytics’ EBITDA margin improved qoq and stood much higher yoy.

* Other exp. remained benign on lower legal costs - other income (34% of PBT) was lower 2.7% qoq due to lower interest rate environment – cash & liquid investments on BS grew 12% yoy to Rs7.9bn.

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