Some green shoots of capex-cycle recovery: IIFL Capital Services

22 Aug 2022 , 05:41 AM

The outlook on capex-cycle has marginally improved in recent months. Net debt to EBITDA for top 500 companies is at its lowest level in recent years, and capacity utilization in the economy is also now above the long-term average. Higher interest rates have weighed on corporate bond and CP issuances, but bank credit and securitization volumes, are on an uptick.

CRISIL and ICRA – Healthy outlook for non-rating businesses

CRISIL’s organic research revenue is up by 55% over 2 years, and the outlook is sanguine despite exposure to global banks that are facing significant headwinds, considering: 1) Higher engagement over the years. 2) Multi-year deals lending near-term revenue visibility. 3) Higher outsourcing when banks face pressure/volatility. Analysts at IIFL Capital Services see CRISIL’s headcount addition as a leading indicator for revenue growth. ICRA’s knowledge services segment (revenue up by 60% in 2 years) has benefited from higher engagement with Moody’s and new client wins. These businesses also benefit when INR depreciates versus the USD.

ICRA remains IIFL Capital Services’ top pick

While CRISIL and ICRA are likely to witness healthy financial performance, the recently announced share buyback should support CARE’s stock price, to some extent.

Analysts at IIFL Capital Services have maintained estimates for CRISIL and ICRA, and raised CARE’s EPS by ~3%. CRISIL could witness the highest EPS CAGR, but they believe 39x 1YF PE, largely prices this in. Analysts at IIFL Capital Services find the risk-reward to be most attractive for ICRA at 26x 1YF PE. CARE’s valuation is attractive, but a sustained re-rating is contingent upon consistent revenue delivery. They have increased target price (TP) for CRISIL/ICRA/CARE to Rs3,630/Rs4,670/Rs529, respectively.

Valuation matrix

	CMP (Rs)	TP (Rs)	Reco	PE (x)	FY22-24 CAGR (%)	RoE (%)
	FY23	FY24	EBITDA	EPS	FY22
CRISIL*	3,278	3,630	Add	43.1	37.5	19	22	32.2
CARE	502	529	Add	16.2	14.3	19	18^	12.1
ICRA	3,869	4,670	Buy	29.6	23.3	18	19	14.1

Source: Company, IIFL Research; *FY22 represents CY21 and so on, for CRISIL
^CARE’s FY22-24 EPS CAGR would be 14% if we remove the one-off hit in FY22