Capex cycle delay; non-rating may save the day for rating agencies: IIFL Capital Services

27 Mar 2023 , 10:59 AM

CRISIL is yet to see any pronounced weakness in global banks’ discretionary spending; but analysts at IIFL Capital Services believe that the recent global banking turmoil could pose near-term risks. ICRA continues to benefit from higher engagement with Moody’s, even as it seeks to expand its Non-rating, Non-Moody’s business. Analysts at IIFL Capital Services have cut EPS estimates for CRISIL by 4-5%, while largely maintaining EPS for ICRA and CARE. ICRA remains their top pick, while CARE’s recent revenue performance has been encouraging. CRISIL’s rich valuation could limit upside. Their new March 2024 TPs for CRISIL/ICRA/CARE are Rs3,391/Rs5,151/Rs711, respectively.

Capex recovery may be further delayed

Analysts at IIFL Capital Services note the slowdown in industrial bank credit growth in recent months. Deterioration in global growth outlook and a potential fall in commodity prices, may delay global capex cycle. Recent taxation changes in India may favor bank borrowings over bonds — a negative for rating agencies from a profitability perspective. Analysts at IIFL Capital Services expect low double-digit rating revenue growth from FY25, assuming a pickup in capex cycle.

CRISIL Research: Global banking turmoil poses risk

Though management has not called out any weakness, outlook for global banks has deteriorated with the collapse of a few US banks and the UBS-CS merger. This could affect CRISIL’s GBA sub-segment (estimated at 35-40% of research revenue) linked to discretionary spending, though higher spend on outsourcing/compliance/risk management in challenging times for banks could benefit GR&RS (also estimated at 35-40% of research revenue).

ICRA: Moody’s business on a strong footing

Knowledge Services has delivered 25%+ revenue growth in past two years; the segment continues to benefit from increased engagement with Moody’s (>80% of this segment’s revenue comes from Moody’s). Outside Moody’s, ICRA targets to expand presence in adjacencies such as Analytics, Early Warning Systems and Market Data services targeted at BFSI vertical.