Rating Agencies: Rating steady; non-rating close to bottoming out

13 Mar 2024 , 11:10 AM

All three rating agencies witnessed double-digit rating revenue growth in M9FY24. The decline in bond and CP issuances by corporates in the past two quarters has been offset by higher borrowings by the Financial sector. The likely wait-and-watch stance adopted by private corporates in the run-up to elections may keep Rating revenue growth modest in the next one to two quarters, but medium-term prospects are healthy. Global macro challenges are likely to weigh on non-rating businesses of both CRISIL and ICRA in the near term. Analysts of IIFL Capital Services raise CRISIL’s and CARE’s EPS by 3%- 4% and cut ICRA’s FY24 EPS by 3% (no change in FY25 and FY26). ICRA remains analysts of IIFL Capital Services top pick. Their Mar’25 TPs for CRISIL/ICRA/CARE for ₹5,029/6,610/1,303.

Rating revenue resilient in M9FY24, but may moderate a bit in the next two quarters:

Rating revenue growth in M9FY24 was in double digits for all three agencies vs ~13% seen in FY23. Moderation in the corporate credit off-take was offset by a sharp rise in borrowings by banks (with deposits struggling to keep pace with credit growth). After taking a breather pre-elections, the investment activity should subsequently pick up. Inclusion of Indian bonds in the JP Morgan EM Index and SEBI rules on ESG rating are medium-term positives.

CRISIL Research: Some softness in discretionary spends by banks:

CRISIL’s RAS revenue growth moderated to ~12% in CY23 (from 20%+ in CY21 and CY22) as global banks turned cautious on discretionary spending. Within RAS, GR&RS has seen a soft landing, but the GBA sub-segment has been relatively more resilient, driven by banks’ need to assess the performance of competition and customers’ wallet share. CRISIL has taken revenue maximisation and cost reduction initiatives, while ensuring that it is in a position to capitalise on the upcycle.

ICRA: Knowledge Services may see a gradual recovery after a sharp slowdown in M9:

ICRA’s Knowledge Services revenue growth (largely pertaining to Moody’s) slowed down sharply to 5% YoY in M9FY24 from 20%+ in FY22 and FY23. This is despite an improvement in Moody’s own numbers. Timing issues and more ESG assignments in prior years partly explain the divergence. Analysts of IIFL Capital Services estimate 10%/12% organic growth for ICRA’s Knowledge Services segment in FY25/26.