Rating Agencies: Near-term blip in rating and non-rating

16 Nov 2023 , 11:44 AM

Considering weak industrial bank credit growth, relatively high bond yields and wait-and-watch stance adopted by private corporates in the run-up to elections, analysts at IIFL Capital Services see modest rating revenue growth in the next 2-3 quarters. Global macro challenges are likely to weigh on non-rating businesses of both CRISIL and ICRA in the near-term. 

Analysts at IIFL Capital Services have largely maintained estimates for all three companies as lower costs offset the revenue cut. They have downgraded CRISIL from ADD to REDUCE considering punchy valuations (44x 1YF PE). Pegging CRISIL’s non-rating business at 30x 1YF PE, the implied multiple for the rating segment comes to ~70x, which analysts at IIFL Capital Services believe is high for 10-12% revenue growth business. ICRA remains their top pick. Their December 2024 Target Prices for CRISIL/ICRA/CARE stands at Rs. 4,177, Rs. 6,410 and Rs. 938, respectively.

Rating revenue growth may take a short-term breather

Rating revenue growth in Q2 moderated to 8-12% for listed rating agencies versus mid-teens growth in recent quarters amid high yields and tight liquidity conditions. Corporates could adopt a wait-and-watch stance in the run-up to the elections, which may temper growth in the near-term. Inclusion of Indian bonds in the JP Morgan Emerging Market Index and recent SEBI rules on ESG rating are medium-term positives.

CRISIL Research: Near-term speed bump due to slowdown in discretionary spending by global banks

CRISIL’s RAS revenue growth of 7% YoY in Q3CY23 was the lowest in many quarters; constant currency growth would have been even lower. 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. CRISIL’s cost control amid demand weakness is timely.

ICRA: Knowledge services may see a gradual recovery after a sharp slowdown in H1

ICRA’s Knowledge Services revenue growth (largely pertaining to Moody’s) slowed down sharply to 5% YoY in H1FY24 from 20%+ in preceding quarters. The company attributed this to weak global macro. Analysts at IIFL Capital Services are building in a gradual revenue recovery profile.