ICRA-Robust results; raising to ACCUMULATE: Emkay

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ICRA

Robust results; raising to ACCUMULATE

ACCUMULATE

CMP: Rs1,420                                        Target Price: Rs1,550

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n     ICRA’s Q2FY11 results above expectations with operating revenue at Rs484mn and Adj. net profit at Rs141mn

n     The revenue growth was driven by healthy growth in rating, consulting and professional services segment

n     Operating margins expanded by 524bps yoy to 41.2% as the operating leverage played out partially with controlled costs

n     We expect the 23% CAGR in core earnings over FY10-13E. Upgrade to ACCUMULATE with TP of Rs1,550, valuing at 16x FY13E EPS (now introduced) plus cash of Rs365/share

Revenues growth ahead of expectations

ICRA’s revenues for the quarter grew by 33.2% oy to Rs484mn ahead of our

expectations (Rs464mn). The growth mainly came from rating segment which reported

growth of 35.6% yoy followed by consulting and professional services. The growth in

rating segment was driven by increase in debt ratings and bank loan ratings.

Higher revenues and expansion in margins boost operating profit

The operating profit at Rs200mn was better than our expectations driven by higher than

expected revenues and better margins. The operating margins expanded by 524bps yoy to

41.2% led by margin expansion across segments, as the operating leverage played out

partially with controlled costs. The rating segment witness significant 418bps yoy expansion

in margins to 64.4%, back to historical levels.

Rating business will continue to drive growth going forward

We expect the momentum in the revenue growth to sustain in coming quarters driven by

rating business over FY11/FY12. Continued traction in Bank loan rating, increased debt

issuances, implementation of the base rate will drive rating revenues going forward.

Moreover the launch of rating services in Indonesia in the last quarter will provide further

impetus to the rating business.

Lower tax rate helps further

The reported net profit grew by 34.9%yoy to Rs144mn. However, adjusted for reversal in

diminution in value of investment, the net profit grew by even higher 49.4%yoy to Rs141mn.

The lower tax rate during the same quarter helped the performance further as the effective

tax rate in Q2FY11 was at 32.6% compared with 37.9% in Q2FY10.

Valuation and view

At the current market price, the stock is quoting at 24.9x/19.7x/16.1x FY11E/FY12E/FY13E

earnings. We have upgraded our earnings estimate for FY12E by ~5.3% to take into

account stronger traction in revenues and controlled costs. We are also introducing our

FY13E estimates with EPS of Rs89.2. We upgrade the stock to ACCUMULATE with a

revised TP of Rs1,550, valuing the stock at 16x FY13E (earlier 16x FY12E) plus cash per

share of Rs365.