ICRA Ltd Management Discussions

(Annexure to the Directors? Report)

A. Industry Structure and Developments Ratings

Domestic credit market continued to have favourable tailwinds in FY2024 as the global interest rates continued to harden rendering overseas debt options costlier.

With muted external commercial borrowings, both bond issuance as well as bank credit surged ahead.

Going ahead, in FY2025, bond issuances would benefit further if a rate cut were to happen with a faster drop in rates than that is likely on bank loans. Further, reduced ticket size of Corporate bonds to Rs. 1 Lakhs in private placement and Banks being allowed to hold corporate bonds in Held-to-maturity [HTM] bucket can potentially increase demand for bonds. Bank credit growth, on the contrary, may face some headwinds with regulatory action of higher risk weights on loans to Non-Banking Finance Companies (NBFCs) and consumer segments and soft directive to Banks to moderate their credit deposit ratios.

Your Company would continue its focus on all key growth segments of the economy in FY2025. Governments continued thrust on infrastructure, private sector capex in select sectors, pick-up in exports and improved viability of projects on easing of interest rates would be critical for a sustained growth in credit market. Geo-political issues, including the heightened conflict in the Middle East, would continue to be a risk factor and any sharp rise in energy prices could weigh in on inflation and, hence, the trajectory of interest rate cycle as well as the growth momentum.

Your Company is a preferred Credit Rating Agency (CRA) given its robust ratings performance in terms of rating stability and accuracy, which is a testimony to its analytical rigor and superior processes. Your Company is well placed to benefit from the growth in the economy and the anticipated pick-up in bond market.

Analytics

The Analytics business performance was supported by growth in the Knowledge Services (KS) and Banking verticals with stable market data performance. Growth in KS was driven by expansion in value-added financial services segments across functions, while the Banking Segment saw addition of new clients with introduction of our upgraded risk rating solution for Banks - IRS3.0. Leveraging domain expertise and functional competence, your Company successfully designed and implemented products, services, and solutions in Risk Management, Data Management, Financial and Accounting Analysis, Bond Valuation, and Financial & Risk Advisory.

In addition to expanding its reach to previously untapped client segments, ICRA Analytics introduced new as well as upgraded offerings to the portfolio, such as stress testing tool in the Market Data Vertical and IRS 3.0 in the Banking vertical. Keeping pace with the evolving landscape, your Company enhanced capability with cutting-edge technologies like analytics, automation, and cloud, utilising them to launch contemporary cloud-hosted products with heightened analytical proficiency for all client segments.

ICRA acquired D2K Technologies Pvt Ltd (D2K) in November2023. D2K is an established provider of software solutions to banks and other financial institutions in India. Backed by deep domain expertise, D2K helps financial institutions meet regulatory compliances, enhance their business processes, improve customer acquisition and retention and build robust analytical platforms. The proposed acquisition is subject to closure of customary conditions. D2K acquisition is expected to increase our value proposition of our offerings in risk and analytics space.

(A detailed overview of the businesses is presented in the section titled Review of Operations in the Directors Report.)

B. Opportunities and Threats Opportunities

The Ratings business continues to benefit from a favourable regulatory environment. The Securities Exchange Board of India (SEBI) and Reserve Bank of India (RBI) continue to support enhanced financing through the capital market route. The risk appetite across rating levels is a constraining factor and it would augur well to have newer classes of investors like Alternate Investment Funds that may invest in credit-enhanced structures as well as high-yielding credits.

SEBI has announced a regulatory framework for Environment Social Governance (ESG) ratings, which presents an opportunity at the Group level for ICRA. ICRAs wholly owned subsidiary, Pragati Development Consulting Services Limited (PDSCL), has been granted registration as a Category-I ESG Rating Provider (ERP) under the SEBIs Credit Rating Agencies Regulations, in April 2024.

ICRA is well placed to benefit from each of the opportunities stated above, given its competitive strengths and strategic initiatives. We believe that your Companys competitive strengths primarily includes demonstrated track record of its ratings, experienced talent pool, , strong brand recognition, rich and diverse client profiles, in addition to your Companys close association with the Moodys Group.

With increasing regulatory oversight, greater need of data driven analytics by market participants and increasing use of ESG parameters in decision making, the market for risk analytics, data, research, financial analysis, consultancy, and related support services remains attractive. The recent inclusion of India in global emerging market indices augurs well for our business. Your Company is steadfast in its efforts to enhance market access through digital means, upgrading technology infrastructure, and expanding product and services portfolio to cater to customer requirements.

Threats

The threats confronting the business have been discussed in Section D of this report.

C. Segment-wise or Product-wise Performance

Details on segment-wise performance have been discussed in Section F of this report.

D. Risks and Concerns (1) Business Risks

Any economic slowdown in India may impact the volume of bank credit or debt securities issued in the domestic capital markets, and may, have an adverse impact on the rating business. Any adverse movement in interest rates and credit spreads, foreign exchange fluctuations, defaults by significant issuers/borrowers, and other market and economic factors, both domestic and global, may negatively impact the issuance of credit-sensitive products and other financial services. A sustained period of volatility or weakness or a downturn in the financial markets domestically or internationally could have a materially adverse effect on your Companys business and financial results.

To mitigate business risks arising from changes in economic and market conditions and in regulations, your Company constantly monitors developments, including automated early warning signals to identify stress, and remains focused on maintaining the robustness of its ratings and gradings while at the same time promoting brand ICRA through webinars, seminars and conferences, apart from the publication of research reports and thematic notes.

The Knowledge Services (KS) vertical relies on global clients and revenues may be impacted by any adverse global macroeconomic event. Also, increased adoption of Gen-AI and other AI/ML driven automation initiatives at client end may impact key business segments in KS. The pace of adoption of risk management solutions in Banks and NBFCs is driven by increasing regulatory requirements. While there could be short term deferrals related to volatility in Banks performance, the long term potential of Banking and Risk Management vertical should remain intact. A sustained period of downturn in the financial markets domestically or globally could have an adverse impact on Market Data vertical.

To mitigate business risks arising from changes in economic and market conditions and in regulations, your Company constantly monitors developments on these fronts and adjusts its business strategies accordingly and remains focused on maintaining the robustness of its analytics business. Your Company is also expanding offerings bouquet in the Banking and Risk Analytics, Market Data, ESG and Customized Research segments as a counter to stem adverse impact of these risks.

(2) Operational Risk

Your Company has to rely on clients/third parties for the adequacy and accuracy of information (relating to such clients), which may not always be independently verifiable. It may also rely on representations as to the accuracy and adequacy of the information obtained.

The Company has robust checks in place to ensure accuracy in sourcing, processing and delivering quality information and has been investing in upgrading technology and related infrastructure to automate process and minimise manual intervention.

(3) Policy Risk

Material changes in the regulations that govern us or our businesses could affect the results of our operations. Most of your Companys revenues come from rating services, which are influenced by regulatory requirements. SEBI has enhanced disclosure and monitoring requirements for credit rating agencies with an objective of bringing in more transparency in the capital market.

The Company keeps a close watch on key regulatory developments to anticipate changes and their potential impact on its business. ICRA continues to enhance its system and process to keep pace with the evolving regulatory environment.

The Banking and Risk Management vertical as well as Market Data vertical rely on adopting their products to meet the changing regulatory norms. We have robust mechanisms in place to track all such Policy changes and take necessary actions well in time.

(4) Client Concentration

The Knowledge Services segment in ICRA Analytics has significant dependency on a single client for revenue and margins. High client concentration may expose the business for sudden loss of revenue or margins.

The Company has put in place a strategy which aims to reduce the dependence on a single client and focus more on diversification of revenue streams. The strategy and related plan for reducing client concentration are periodically evaluated by the management.

(5) Investment Risk

Your Company has made, and may continue to make, investments in mutual funds, corporate deposits, and other marketable securities, the returns on which would be impacted by changes in interest rates and volatility in the financial markets.

It has a well-defined investment policy with specific guidelines on investments which is duly approved by the Board. All investments are periodically reviewed and assessed for compliance with policy and market risks.

(6) Information and Cyber Security Risk

Your Companys ability to conduct business may be adversely impacted on account of cyber incidents resulting in financial loss, disruption or damage to the reputation of an organisation. Lack of information security controls, both with respect to process and technology, may lead to a breach of confidential data, data privacy and in turn cause loss in business.

ICRA has a well-designed Information Security Management System (ISMS) with various policies, procedures and guidelines in place to set the security controls. The Company has invested in various security tools and infrastructure to strengthen monitoring. Employee training and awareness sessions are conducted to remain vigilant against cyber incidents.

(7) Regulatory Risk

Your Company complies with all the applicable laws, rules and regulations, and makes business decisions based on comprehensive advice, provided both by its internal counsels and by acknowledged external counsels. A complex and dynamically-evolving regulatory environment may expose the Company to regulatory risk.

Your Company has put in place a compliance framework and tool to proactively monitor regulatory requirements. Periodic reviews are undertaken by compliance team to assess effectiveness of the compliance framework.

The Compliance team provides periodic training to users to ensure adherence to policies, the Code of Conduct, and applicable laws. All employees are mandatorily required to undergo compliance assessment.

(8) Talent Risk

Your Companys performance and success depend largely on its ability to attract, nurture, engage and retain best-in-class talent on a continuous basis. The ‘war for talent continues but in addition to hiring the ‘right talent, we are also focused on further developing the quality of new hires through extensive training and development - of campus as well as lateral hires. There is significant competition for talent and a pick-up in the job market created a shortage of talent resulting in hiring challenges.

The Company has a compensation framework aimed at attracting and retaining high performers. Periodic benchmarking of compensation is undertaken to ensure employee benefits are aligned to industry benchmarks. Employee engagements are undertaken periodically with an intent to increase awareness on the Companys value proposition and thereby reduceattrition.

E. Internal Control Systems and their Adequacy

The Management is responsible for establishing and maintaining controls and procedures for the Company, following the review by the Audit Committee and the Board of Directors. Accordingly, the Management designed such controls and procedures or caused such controls and procedures to be designed under its supervision to ensure that material information relating to your Company, including its subsidiaries, is made known to the Management by others within those entities. It has also designed such internal control over financial reporting or designed such internal control over financial reporting under its supervision, to provide reasonable assurance regarding the reliability of the financial statements.

(An overview of Internal Control Systems and their adequacy, is presented in the section titled Internal Control System and their Adequacy in the Directors Report.)

F. Discussion on Financial Performance with respect to Operational Performance

The key features of your Companys financial performance for the year ended March 31, 2024 are presented in the accompanying financial statements, which have been prepared in accordance with the Indian Accounting Standards (referred to as IndAS) as prescribed under Section 133 of the Companies Act, 2013 (the "Act") read with the Companies (Indian Accounting Standards) Rules, 2015 and other relevant provisions of the Act. The Companys Management accepts responsibility for the integrity and objectivity of these financial statements.

The financial information discussed in this section is derived from the consolidated financial results of the Company.

I. Results of operation

The financial performance of the ICRA is summarised below:

(Rs. in lakhs)

Particular	Consolidated	Standalone
	FY24	FY23	FY24	FY23
Revenue from operations	44,611	40,323	25,124	22,254
Other income	7,497	4,955	9,096	6,557
Total income	52,108	45,278	34,220	28,811
Total expenses	32,122	27,157	19,536	17,097
Profit before tax	19,986	18,121	14,684	11,713
Total tax expense	4,762	4,449	2,368	2,120
Profit after tax	15,224	13,673	12,316	9,593
Total other comprehensive (loss)/ income, net of tax	(149)	(163)	(49)	(42)
Total comprehensive income for the year	15,075	13,510	12,267	9,551

(a) Revenue from operations

ICRA earns revenue primarily from rating, research, analytics, data and information services. During the year, the revenue from operations shows 11% growth to Rs. 44,611 lakhs, against Rs. 40,323 lakhs from FY23. Revenue from operations was driven by strong growth in rating, consulting, and knowledge services.

Rating revenue grew by 12% to Rs. 25,715 Lakhs and was supported by strong Bond issuances and with softening of yields in the later part of the year. Strong bank credit growth resulted in banks tapping infrastructure, tier II bonds and Certificates of Deposits [CDs]. As mutual funds (MFs) preferred to invest in CDs, the Commercial Paper (CP) outstanding remained flat in FY24. ICRA Ratings was able to grow revenue in all the key segments, namely corporate, infrastructure and financial.

ICRA analytics growth was moderate driven by consulting segment along with a muted growth in KS. Several new assignments and initiatives were undertaken across all the businesses, leading to growth in business and capabilities. Grading of energy services companies, vendors & dealers and SMEs, developing a framework for stress testing of securities portfolio, upgraded internal risk rating solutions (IRS 3.0), complex analytical support work for ESG, corporate finance, etc. are examples of new work executed in analytics. The consulting segment includes results of D2K consolidated for 5 months in the current year. D2K acquisition in the current year, strengthen our offerings in the risk and analytics space.

(b) Other income

Other income primarily consists of interest income on fixed deposits and investments, gain on financial assets carried at fair value through profit or loss and rental income. Other income has grown by 51% in FY 24 over FY 23 due to improved returns on investments.

(c) Expenses

Employee benefits expenses growth is largely due to merit increase, annualization impact of headcount investments done for critical roles in the previous year and one time accrual impact for litigation expenses and consolidation of D2K for 5 months in the current year Headcount at end of FY24 was 1,440 compared with 1,281 for FY23, headcount increased primary on account of D2K acquisition.

Other operating expenses increases are largely linked to technologies investments, infrastructure and utility costs associated with initiation of return to office for employees. Finance costs are higher on account of discounting impact for D2K purchase consideration payouts. Depreciation and amortisation costs are higher due to consolidation of D2K for 5 months and amortisation of intangibles for D2K acquisition.

Particulars	FY24	FY23	Growth
a) Employee benefit expenses	24,036	20,756	16%
b) Operating and other expenses:
Other operating expenses	5,699	5,276	8%
Finance costs	1,041	141	638%
Depreciation and amortization	1,346	983	37%
Total operating and other expenses	8,086	6,401	26%
Total Expenses	32,122	27,157	18%

Group segmental profit was Rs. 13,758 lakhs driven by strong performance in Ratings. The rating segment results for the current year also includes additional impact of amount provided towards legal matter. KS segmental margins were lower due to a muted revenue growth as the business segment was impacted on account of slowdown in global economy. Consulting segment margins were lower due to cost of D2K acquisition costs in the current year.

II. Property, plant and equipment and Intangible assets

a) During the year, the Group capitalized Rs.1,073 Lakhs to its gross block and deducted Rs. 686 Lakhs on disposal of various assets. Capitalized assets include building, office equipment, computer, software, Right-of-use, leasehold improvements, and other intangible assets.

During the year Group acquired Net tangible assets of Rs. 571 Lakhs and Net Intangible assets of Rs. 1,424 Lakhs (including computer software, customer relationship) by virtue of acquisition of D2K Technologies India Private Limited (Refer note no 48 Business combination of the consolidated financials).

The Groups Property plant and equipment and Intangible assets at the end of the year were as follows.

(Rs. in lakhs)

Particulars	FY24	FY23	Growth
Property, plant, equipment etc	6,122	5,356	14%
Less accumulated depreciation	3,095	2,604	19%
Net Block	3,027	2,752	10%
Right-of-use assets - Buildings	2,362	2,465	(4%)
Less accumulated depreciation	1,340	1,225	9%
Net Block	1,022	1,240	(18%)
Particulars	FY24	FY23	Growth
Intangible assets	2,932	1,215	141%
Less accumulated depreciation	868	619	40%
Net Block	2,064	596	246%
Intangible assets under development	79	134	(41%)

b) Goodwill on consolidation

Goodwill of Rs. 2,896 Lakhs recorded during FY24 on account of acquisition D2K Technologies India Private Limited ("D2K"). It represents excess of purchase consideration over the net asset value of acquired subsidiaries on the date of acquisition. Goodwill is tested for impairment annually or more frequently, if there are indications of impairment.

III. Financial assets

Financial assets mainly consist of investments, loans, trade receivables, cash and cash equivalents, bank balances and interest accrued on deposits etc.

(a) Treasury: Treasury includes investment in mutual funds, corporate Deposits, fixed deposits and cash and cash equivalents

The Group deploys its internal accruals and surplus funds primarily in mutual funds and fixed deposits as per its investment policy approved by the Board of Directors.

(b) Other financial assets: Other financial assets includes trade receivables, other contract assets, loans, security deposits etc.

(Rs. in lakhs)

Particular	FY24	FY23	Growth
Trade receivables	5,301	3,805	39%
Others	982	968	1%
Total	6,283	4,773	32%

Trade receivables grew in line with revenue growth. Overall DSO for the year was 37 days compared with 29 days in FY 23.

IV. Equity

(a) Equity share capital

ICRA has only one class of equity shares having a par value of Rs. 10 each. The issued, subscribed and paid-up capital stood at Rs. 965 lakhs into 96,51,231 equity shares of Rs. 10 each.

(b) Other equity

(Rs. in lakhs)

Particulars	FY24	FY23	Growth
Capital reserves	3,316	3,302	0.4%
Capital redemption reserves	65	65	0%
Share based payment reserve	151	-	100%
Treasury shares	(105)	(105)	0%

Particulars	FY24	FY23	Growth
General reserves	8,281	8,281	0%
Foreign currency translation reserve	(35)	(60)	(42%)
Other comprehensive loss	(469)	(306)	53%
Retained earnings	85,480	82,886	3%
Total other equity	96,684	94,063	3%

Other equity increased by 3% as on March 31, 2024 in comparison to March 31, 2023. During the year FY 24 Group have granted 6,914 options to eligible employees. The options would be vested as defined in the Scheme.

V. Financial liabilities

(Rs. in lakhs)

Particulars	FY24	FY23	Growth
Lease liability	1,088	1,303	(16%)
Trade payables	748	838	(11%)
Others*	4,697	723	550%
Total financial liability	6,533	2,864	128%

*As part of the acquisition of D2K Technologies India Private Limited, the Group has committed to buy-out the balance 40% equity shares from the remaining shareholders. Accordingly, Rs. 3,328 lakhs have been recognised by the Group as deferred consideration as on March 31, 2024 (Refer Note 48 Business combination of the consolidated financial statements)

VI. Other liabilities and provisions

Other current liabilities consist of unearned revenue, statutory dues payable and advances received from customers.

Total other current liabilities increased by 13% as on March 31, 2024, as against March 31, 2023 mainly due to increase in unearned revenue.

Provisions consists of provision towards employee related liabilities such as gratuity, compensated absences, variable pay etc., and provision towards litigations. Total provisions increased by 23% in FY24, majorly due to increased provision towards variable pay to employees and litigation matters. Refer note 47 of consolidated financial statements for provision on pending litigations.

VII. Key financial ratios

Key financial ratios are provided in the table below.

Particular	FY24	FY 23
Debtor turnover (no. of days)	37	29
Current ratio	4.3	4.3
Operating profit margin (%)	28%	33%
Net profit margin (%)	34%	34%
Return on net worth (%)	16%	14%

Material Developments in Human Resources/Industrial Relations, including Number of People Employed

ICRA Group, with a total employee strength of 1,440 as of year-end 2023-24, continues to accord high priority to human resource development, with emphasis on improving skill, competence and knowledge through regular virtual/online training and in-house/external professional development programmes.

	On behalf of the Board of Directors
	(Arun Duggal)
Place: Kolkata	Chairman
Date: May 23, 2024	DIN: 00024262