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Earnings growth and RoE to pick-up from FY26

Traction in Ratings to continue; business margins to improve further

Rating industry’s revenue growth can sustain above 10-12% over the coming years aided by ongoing infrastructure investments, pick-up in private sector capex cycle, sustained growth of NBFCs/HFCs, widened participation (including more issuers) in bond markets with country’s inclusion in global indices and incremental funding shift and refinancing through bond markets (much better yielding than BLR) with easing of rate/liquidity conditions. After witnessing moderate growth in ratings revenue during Q1 FY25 (9% yoy v/s 12%%/14% yoy in FY24/23), ICRA could see an improvement in ensuing quarters underpinned by its strong position in bond ratings, infrastructure ratings and financial sector ratings including structure finance. Constant endeavor for appropriate fees and a more rational pricing approach by competition have been supplementing ratings revenue growth of ICRA. ESG ratings business is building gradually for rating agencies; however, increasing push by investors and improvement in ESG related data/information is likely to make this business significant in few years. ICRA has witnessed a significant margin recovery in ratings business from the low point in FY21, driven by improvement in rated volume and pricing, stabilization of employee cost inflation and automation/tech initiatives. In our view, ratings margins can significantly improve further with continuance of growth triggering incremental operating leverage, expected stronger growth in bond ratings, persistent push on pricing and increased base of surveillance fees.

Still hazy growth outlook for Knowledge Services; margins managed well

Knowledge Services revenue growth was meek at 3% in FY24 (after growing by 25- 30% in FY22/23), reflecting a) uncertain global macroeconomic environment, b) growth headwinds in ESG related business and c) tilt towards insourcing and automation by Moody’s. Outsourcing trend from the parent Moody’s is unlikely to change much in FY25, but in longer run the growth outlook hinges on additional outsourcing volumes from the parent and ICRA’s engagement on new areas. Key levers supporting company’s resilient margin delivery in Knowledge Services through recent quarters despite aforesaid growth challenges have been swift headcount management as per business requirement and lower fixed cost of operations.

D2K could witness significant growth but break-even may take time

A significant scale-up of D2K’s revenue (acquired in Nov’23) is expected over the coming years, reflecting realization of the envisioned synergies on ICRA’s platform. Incremental investments on integration, products, and marketing/outreach would propel growth. D2K acquisition has allowed ICRA to build capability in solutions for risk analytics/management and regulatory compliance, a segment which complements well given strong relationships with banks and other financial institutions. This business which is reporting loss currently could take some time to breakeven due to investments and longer sales cycles. The long-term margins are likely to be much lower than Ratings and Knowledge Services.

Maintain constructive view on the stock

We estimate 14-15% revenue CAGR for ICRA over FY24-27 assuming sustained growth in credit ratings, moderate scale-up of ESG Ratings and some growth recovery in Knowledge Services. PAT growth/RoE expansion would likely be much faster from FY26 with resumption of margin improvement. Our estimates do not factor any new revenue opportunities that company could be exploring and inorganic growth through compatible acquisitions. ICRA is trading at 29x P/E on FY27 earnings. We increase 12m PT to Rs7500 by rolling over valuation to FY27.

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