Q4FY23 Review: ICRA: Positive outlook after a healthy FY23

26 May 2023 , 11:12 AM

After witnessing a healthy FY23 with 20% EPS growth and announcing 90%+ dividend payout ratio, ICRA’s management stated that the outlook for bond issuances is improving. ICRA will focus on growing the Rating business profitably, rather than chase market share. While investments in people and technology will continue, there will be tighter cost control. Moody’s related business has benefited from higher ESG analytical support and transition to value-added tasks.

Healthy revenue growth in key segments; cost pressures visible: 

ICRA matched its pre-IL&FS crisis rating revenue in Q4 on a TTM basis. It witnessed 14% rating revenue growth YoY in FY23, similar to listed peers but better than ~11% for the overall industry. Though Knowledge Services reported ~28% revenue growth, analysts of IIFL Capital Services estimate that growth was still healthy at ~18% after removing FX tailwinds (though CC revenue growth slowed down to 11% in Q4). FY23 saw 20% EPS growth; the company’s ~90% payout ratio (including special dividend) is a step in the right direction amid rising cash balance.

Optimistic management commentary: 

Key takeaways from the earnings call: 1) Domestic demand, NBFCs, and HFCs will drive corporate growth and increase working capital requirements. Despite potential moderation in bank credit growth, bond issuances are anticipated to rise. 2) ICRA’s endeavour is to ramp-up the Domestic Analytics business while maintaining efforts in the Ratings business. 3) Focus is on improving margins through revenue growth, appropriate pricing, and cost management. 4) Dividend policy entails a payout ratio of 25-50%.

Maintain EPS estimates; new TP Rs5,504: 

ICRA’s Ebit margin in the Knowledge Services segment was ~42% in Q4, sharply down from a peak level of 54% in Q2. The company attributed this to quarterly fluctuations and suggested that FY23 level (~49%) is a better benchmark. Analysts of IIFL Capital Services model 45% Ebit margin going forward. They largely maintain ICRA’s EPS estimates as higher interest income offsets the lower Ebit margin assumed for the Knowledge Services segment. Analysts of IIFL Capital Services estimate 16% EPS Cagr over FY23-25.

Analysts of IIFL Capital Services new TP based on 28x target PE rises to Rs5,504 (19% total return) from Rs5,151; mainly due to rolling forward to June’24. ICRA remains our preferred play in the Rating agency space.