ICRA: Rating steady; working on diversification

16 Feb 2024 , 01:21 PM

Analysts of IIFL Capital Services hosted the management of ICRA at IIFL’s Enterprising Bharat Conference. Management expects 11-13% rating revenue growth in the medium term though there could be some election-related lull in capex in the next 1-2 quarters. ICRA has been making investments in tech which have impacted rating Ebit margin (25- 26% now vs. 35%+ before FY19. These tech investments may continue for 1-2 years. Margins should subsequently expand though ICRA refrained from providing guidance. The company would focus on growing non-rating and non-Moody’s business which entails risk analytics (~7% of revenue). 

11-13% rating revenue growth in the medium term: 

At the industry level, 60-70% of the revenue is surveillance revenue (annuity). Between BLR and market-linked instrument rating, share is 25:75 (industry level). Some of the larger banks have moved to Internal Rating Based (IRB) approach for loans below a certain ticket size. However, the risk weight is higher if the bank does not get its exposure rated by a rating agency. 

Knowledge services revenue saw slowdown in FY24 but should recover going forward: 

Knowledge services FY24 revenue growth saw slowdown as compared to FY22/23. FY22/23 was also aided by ESG assignments from Moody’s. Some transformation project-based kicker (such as ESG) is required for revenue growth to improve to double-digits. This segment makes 40%+ margins since: 1) it is based in Kolkata where employee costs are relatively low; and 2) the building is owned. The bulk of the work done for Moody’s (under ICRA’s knowledge services segment) entails rating assistance. It is a function of global macro. Moody’s itself saw revenue decline in CY22 but saw recovery in CY23. ICRA saw 20%+ growth in FY23 followed by mid-single digit growth in 9MFY24. This is largely due to timing issues. 

Focus on growing risk analytics: The focus is on growing non-rating and non-Moody’s business (currently ~7% of revenue) which is risk analytics (software and data). Software includes tools for banks to evaluate and manage their credit risk. In the software part, ICRA made a small acquisition (D2K) recently. Data includes valuation metrics for MF industry. The company would also focus on ESG rating though it is still in early days.