ICRA - Disappointing numbers; Downgrade earnings: Emkay

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ICRA

Disappointing numbers; Downgrade earnings

ACCUMULATE

CMP: Rs 1,142                                       Target Price: Rs 1,370

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n     ICRA’s Q3FY11 results were below expectations led by slower growth in rating business coupled with higher employee expenditure

n     The rating business grew by a lower 9.7%yoy to Rs300mn led by sluggish debt market issuance and decline in structured finance volumes during the quarter

n     The adjusted operating margin declined by 390bps to 38.5% during the quarter led by substantial fall in margins in rating business

n     Downgrade earnings for FY11/12/13 by 4-8% to factor in slower growth in revenues. Maintain ACCUMULATE with TP of Rs1,370

Revenues growth below expectations

ICRA’s revenues for the quarter grew by 12.2% yoy to Rs472mn below our expectation

led by slower growth in rating business. The rating business grew by a lower 9.7%yoy to

Rs300mn led by sluggish debt market issuance and decline in structured finance

volumes during the quarter.

Pick up in rating revenues expected in coming quarters

The growth in the rating revenues was partly also due to bunching up of some revenues

to the fag end of Q2FY11. The revenue growth for M9FY11 in the rating business was

still at 24%. We believe that two things will still help ICRA to bounce back on revenue

growth – (1) the bank loan volumes have picked up over last quarter and (2) commercial

paper and bond issuances which were lower in Q3FY11 would pick up if the interest

rates stabilise in Q1FY12.

In our numbers we have taken a growth of ~20% in the rating business for FY11E

implying 11% yoy growth in rating revenues for Q4FY11.

Traction in other businesses continues

The traction in ICRA’s other businesses continued well as the revenues grew by 15.4% qoq

and 16.8% yoy.

Lower revenue growth and amortisation of ESOP hit operating profit

A slower revenue growth at 12.4% and amortisation of ESOP expenses have hit margins

harder and the EBIDTA margins were down by ~1350bps yoy.

ICRA has started amortising ESOP expenditure i.e Rs28mn/quarter from Q3FY11 onwards

and will continue to do so for next 11 quarters. ICRA has also paid Rs16-17mn of

consultancy charges during the quarter which are of one time nature. Adjusted for these

two, the EBIDTA margins would have declined by ~390bps yoy and 275bps qoq to 38.5%.

One off hits net profit hard as well

Driven by lower operating profit the net profit declined by 21.4% yoy to Rs113mn. However

adjusted for the amortisation expenses net profit would have declined by a lower 1.9% to

Rs141mn.

Valuation and view

We are downgrading our adjusted earnings for FY11/12/13 by 4-8% to take into account

slower than expected revenue growth. We retain our ACCUMULATE rating on the stock

with revised TP of Rs1,370. We have revised our TP by 12% in line with 8% downward

revision in earnings and lower cash per share