Buy ICRA; target of Rs 1038: SPA Research

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Buy ICRA; target of Rs 1038: SPA Research

SPA Research is bullish on ICRA and has recommended buy rating on the stock with a target of Rs 1038 in its January 10, 2012 research report.

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SPA Research is bullish on ICRA and has recommended buy rating on the stock with a target of Rs 1038 in its January 10, 2012 research report.

"ICRA Ltd. (ICRA), an associate company of international rating agency Moody's Investors Service, is the second largest credit rating agency in India. Due to ongoing economic concerns, there has been slowdown in credit off-take in the form of bank loans and debt market activities which has impacted the revenue and profitability of the company. We therefore expect consolidated revenue CAGR of 6% for next two years for the company. Despite short term headwinds, we are very positive on the huge long term opportunity for the credit rating sector on the back of development in debt market which is at nascent stage in India. We believe that all the short term negatives (i.e. lower rating revenue growth and pressure on profitability) are already discounted in the stock price and there is a good upside potential from here."

"Since the implementation of Basel II norms in FY2008, rating revenue from Bank Loan Rating (BLR) segment of ICRA now contributes ~45% (INR 580mn in FY11) of its overall rating revenues from NIL. This was on the back of 2 year CAGR of 23.47% majorly on account of increased coverage of existing bank loans and remaining from fresh issuances of loans. According to the industry sources, 65% of the outstanding bank loans have already been rated. We, therefore, don't see any major upside in revenue growth from further coverage of outstanding bank loans. We expect ICRA's Bank Loan Rating (BLR) segment revenue to grow marginally at INR 595mn in FY13 on the back of lower growth contribution from expanding coverage of outstanding loans. Also, increased coverage of small size loans has been putting pressure on the overall profitability. Despite short term headwinds, we are positive about the long term potential on the back of expected revival in economic growth momentum in next 1-2 years that would stimulate expansion in bank lending to the corporate sector and correspondingly add to BLR segment revenues."

"ICRA is an associate company of Moody's Investors Service (28.51% stake in ICRA) which is amongst the largest international credit rating agencies in the world. ICRA has established strong market presence on back of high value technological, strategic and methodological support provided by Moody's. Company is the second largest player in Indian credit rating industry in terms of market share. The alliance also provides ICRA with access to Moody's global research base and in turn benefitting ICRA's inhouse research capabilities. ICRA's other businesses (~33% of consolidated revenue in FY11) include consulting services, outsourced & information services, and professional & IT services. With increased scale of businesses by addition of newer clients and increased revenue from existing clients, we expect the combined other businesses to achieve a turnover of INR 766mn in FY13 at 2 year CAGR of 9.65%."

"Despite short term headwinds, we are very positive on the huge long term opportunities for the credit rating sector on the back of development in debt market which is at nascent stage in India. ICRA, being the second largest player in the industry is positioned strongly on back of years of rating experience across various industries along with high brand recognition, good service quality and strong industry network. We believe that all the short term negatives are already discounted in the stock price which is currently trading at 15.51x FY12E adj. EPS against average 5 year historical multiple of 22.43. We have valued the stock using discounting cash flow (DCF) and relative EPS multiple method and arrived at an average 15 months target price of INR 1,038. We initiate coverage with BUY recommendation," says SPA Research report.  

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To read the full report click on the attachment