Rating agencies coiled for a capex spring: IIFL Capital Services

18 Nov 2022 , 10:11 AM

CRISIL’s Research segment has not yet seen any spending weakness by global banks, though a clearer picture will emerge in early 2023, especially with fears of a recession in developed countries. ICRA has continued to benefit from higher engagement with Moody’s. Analysts at IIFL Capital Services cut estimates for CRISIL by 3-8% (due to higher employee costs), maintain estimates for ICRA, and raise CARE’s EPS by 4-5% (on higher revenue). All three rating agencies should deliver FY22-25 EPS growth in high-teens. Analysts at IIFL Capital Services find the risk-reward to be most attractive for ICRA at 26x 1 year forward PE. CRISIL’s rich valuation could limit upside, while CARE’s re-rating depends on sustaining the revenue growth momentum. IIFL Capital Services’ new December 2023 target prices for CRISIL/ICRA/CARE are Rs3,375/Rs4,797/Rs619, respectively.

Drivers for capex cycle recovery falling in place

All three companies saw double-digit rating revenue growth in the September quarter. CRISIL and ICRA managements remain optimistic on capex cycle recovery, but refrained from attempts to predict its timing. With corporate PAT-to-GDP ratio looking up, better-capitalized banks and NBFCs, and a supportive policy environment, chances of a capex cycle recovery have brightened, believe analysts at IIFL Capital Services.

CRISIL Research: Global banks’ 2023 spending outlook holds key

CRISIL’s Research segment has sported 20%+ revenue growth in the past six quarters. ~40-45% of segment revenue is linked to discretionary spending by global banks, though multi-year deals may insulate it to some extent in the event of a downturn. Another ~40-45% is linked to outsourcing, risk modelling, etc., which may be resilient in tough times.

ICRA Knowledge Services: IIFL Capital Services builds in some moderation after the recent stellar run

This segment, catering mostly to Moody’s, has seen ~30% revenue growth in the past six quarters, with EBIT margin rising to an all-time high of ~54%. Management expects margin to sustain; analysts at IIFL Capital Services assume some moderation, with pricing negotiated every two years.

Valuation matrix

	CMP (Rs)	Target price (Rs)	Reco	MCap (US$mn)
CRISIL*	2,950	3,375	Add	2,600
CARE	531	619	Add	190
ICRA	4,138	4,797	Buy	485

Source: Company, IIFL Research; *FY22 represents CY21 and so on, for CRISIL