Q2FY24 Review: ICRA: Near-term headwinds; focus on diversification

25 Oct 2023 , 11:23 AM

After witnessing a slowdown in the revenues of Rating and Knowledge Services segments (largely Moody’s-related) in Q2 that led to 14% YoY PAT decline, management was cautiously optimistic on near-term prospects for both businesses. Analysts of IIFL Capital Services believe that inclusion of Indian bonds in JP Morgan Emerging Market Index would result in more inflows and enable a deepening of India’s bond market over time. Management stated that margins should improve, as employee investments are largely behind, while tech investments should lead to structural cost savings due to automation. ICRA also seeks to expand footprint in the Risk and Analytics space, as seen in its recently announced deal to acquire D2K Technologies. They cut FY24-26 EPS by 4-5% and build in 13.5% Cagr over FY23-26. The stock trades at 30x 1YF PE, in line with its long-term average. Analysts of IIFL Capital Services prune TP from Rs6,705 to Rs6,410. ICRA remains their preferred play in the Rating agency space. 

Single-digit revenue growth led to 14% PAT decline in Q2: 

Modest revenue growth, coupled with steady increase in costs, led to 4%/14% YoY Ebitda/PAT decline. ICRA also announced the acquisition of 60% stake in D2K Technologies, a software solution provider to banks — for Rs154mn. 

Healthy management commentary: 

Key takeaways from the earnings call: 1) Cautiously optimistic outlook on credit offtake, considering higher infrastructure outlay, industry’s working capital (WC) requirements and growth in NBFC and HFC partly offset by tight liquidity conditions. 2) In the medium term, Ebit margins of the Rating segment have significant room for improvement, both from operating leverage and improved cost efficiency. 3) The recent moderation in Knowledge Services is led by macro slowdown, the boost from ESG assignments somewhat receding, higher competitive intensity and higher insourcing. 4) Focus on value-added services should help offset some of the macro headwinds, which may persist in the near term. 

Cut EPS by 4-5%; new TP Rs 6,410: 

Analysts of IIFL Capital Services prune their estimates for the revenues of Rating and the underlying Knowledge Services segments; incorporate numbers from the acquisition of D2K Technologies into their estimates from Q1FY25 onwards. Underlying revenue cut and slightly higher costs (including higher losses in the Consulting segment, as seen in Q2) drive 4-5% EPS cut. Analysts of IIFL Capital Services estimate 13.5% EPS Cagr over FY23-26.