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Performance below expectations

ICRA’s Consolidated Rev. in Q2 FY24 was 5% below expectation and PBT was 13% below our estimate. The material miss on revenue came largely from Ratings segment, with Analytics segment revenue growth being moderate as expected. Consolidated EBITDA margin stood at 32.5% v/s estimate of 35.7%, leading to 14% EBITDA miss. The H1 FY24 margin at 33.1% stands 200 bps lower yoy. Slower growth in Ratings & Non-Ratings businesses, further increase in staff cost and structural investments in technology impacted margins. Ratings PBIT margin was 23% v/s 27% in Q1 FY24 and 25% in Q2 FY23, and it included 2% positive impact due to agreement on sharing of common expenses with ICRA Analytics. Ratings margin stands significantly lower than the long-term average. Higher tax rate in the quarter further dented earnings performance

Ratings growth decelerated; recovery key in H2 FY24

Growth in Ratings Rev. (57% of consolidated revenues) significantly came-off to 8% yoy from averaging 16% yoy in preceding four quarters. During Q2 FY24, there was a dip in rated volumes in both Bond Rating and Bank Loan rating segments due to volatile yields and tight liquidity conditions. ICRA’s market position/share was stable and there was no adverse pricing movement, as per the management. The co. continues to focus on better remunerative assignments and is endeavoring to push yields in sector/segments where it commands a strong rating preference. ICRA’s thrust has been on the faster growing segments of Infrastructure, NBFCs-HFCs and Securitization. Basis its view that credit activity would remain firm, ICRA expects the momentum in Ratings business to continue.

Another quarter of moderated growth in Knowledge Services

ICRA Analytics saw modest growth (6%/5% yoy in Q2/Q1 v/s 20% yoy in FY23) in Knowledge Services (37% of consolidated revenues) on moderated business volumes from parent Moody’s (contributes 80%+ of Rev.). Global slowdown/uncertainty impacted business flow/outsourcing of Moody’s Corporation and there was slight increase in insourcing by the parent. Management expects addition of value-added segments and new areas of engagements with Moody’s and developing of nonMoody’s business both globally and in India to be future growth drivers.

Acquires D2K Technologies in Risk Analytics space

ICRA Analytics has acquired a majority stake in D2K Technologies Pvt Ltd (FY23 Rev. of ~Rs150mn), an established provider of software solutions to banks and other financial institutions in India offering tools/services that enable meeting of regulatory requirements while providing business intelligence and analytics. D2K specializes in Early Warning Systems and Income Recognition and Asset Classification identifiers, which complement ICRA’s existing offerings. The acquisition is in-line with ICRA’s growth and diversification strategy and would augment company’s positioning in Risk Analytics/Solutions space. ICRA also plans to leverage D2K’s capabilities for its own technology transformation journey.

Prune estimates/PT but retain BUY; re-rating hinged on revenue growth improvement

With performance below expectation in Q2 FY24 and transient choppiness likely continuing in Knowledge Services, we have trimmed earnings estimates by 2-3% for FY24/25 (downward revision could have been higher if not for upward revision in other income). We still assume an improvement (over Q2 FY24) in Ratings revenue growth and margins in coming quarters on conducive business conditions, positive pricing approach and operational improvements. We now expect 13%/14%/17% CAGR over FY23-25 in consolidated Rev./EBITDA/PAT. ICRA’s overall growth and margin performance in H2 FY24 would be a key valuation catalyst for the stock. The company trades at 29x 1-year rolling fwd. P/E versus long-term average of 33x. Retain BUY with a lowered 12m PT of Rs6300 (earlier Rs6700). 

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