Q1FY24 Review Rating healthy; non-rating sees some headwinds

21 Aug 2023 , 11:18 AM

All three rating agencies witnessed 15%+ rating revenue growth in Q1FY24, as they sustained the healthy momentum built in FY23. With private sector capex finally taking wings, the outlook for rating revenue growth has improved. However, CRISIL’s research segment and ICRA’s Knowledge services segment saw some slowdown due to global macro weakness, which may persist in the near term. Analysts at IIFL Capital Services have maintained their EPS estimates for CRISIL and ICRA as the rating segment upgrade offsets the cut in non-rating business. They have raised CARE’s EPS estimate by ~5%. They believe CRISIL’s rich valuation could limit upside. Their new September 2024 Target Prices for CRISIL/ICRA/CARE are Rs. 4,103/Rs. 6,705/Rs. 841, respectively.

Improving macro to benefit rating segment

FY23 saw capex growth of BSE 500 companies outpacing NGDP, which manifested in 11% rating revenue growth for the industry. Q1FY24 has seen sustained rating revenue growth momentum. Rising PAT to GDP in India and the US augurs well for global and local capex cycle. The steep fall in CP issuances due to HDFC-HDFC Bank merger may not impact rating revenue materially since these were large issuers on capped fee.

CRISIL Research: Lower discretionary spends of global banks may be a near-term headwind

Analysts at IIFL Capital Services estimate that CRISIL’s research revenue growth slowed down to 10% YoY in cc terms in the June quarter. Cutback in discretionary spending by global banks is likely to impact parts of the research segment even though other parts such as outsourcing and regulatory remediation may benefit. With USD-INR hovering around 82-83 during CY23, FX tailwind is likely to abate after the 8% INR depreciation seen during CY22.

ICRA: Knowledge services may see a gradual recovery after a sharp slowdown in Q1

ICRA’s Knowledge Services revenue growth (largely pertaining to Moody’s) slowed down sharply to 5% YoY in Q1FY24 from 20%+ in preceding quarters. The company attributed this to weak global macro. Analysts at IIFL Capital Services note that Moody’s own performance improved in the June quarter after a few weak quarters and believe that ICRA’s weakness is transient considering a fair degree of correlation between ICRA’s knowledge services and Moody’s overall revenue in the past.