ICRA’s Q3FY13 op. revenue at Rs652mn slightly below exp led
by lower than exp rev from BPA tech. With net loss of Rs10mn
in BPA, conso PAT was significantly lower at Rs125mn
n Rating revenue growth remain lower at 6%yoy as expected, as
poor credit offtake and sluggish bond market activity continue
to impact business
n Slower revenue growth with sharp deterioration in subsidiary’s
profitability taking toll on margins. Blended EBIDTA margin fell
to 25.5% from 39% in Q3FY13
n At CMP the stock trades at 27.1x/22.6x FY13E/14E EPS of
Rs52.9 and Rs63.5. Maintain HOLD with price target
maintained at Rs1300
Cost pressures in BPA impacted earnings growth
ICRA’s Q3FY13 operating revenues at Rs652mn, 20.3%yoy was slightly below
expectation, led by lower than expected revenue from its subsidiary, BPA technologies
(Rs81mn, -10%qoq). Revenue adjusted for BPA technologies which was acquired in
May 2012 would have been about Rs571mn, growth of just 5.3%yoy. Moreover with loss
of about Rs10mn in BPA technologies, consolidated net profit (adjusted for esop exp of
Rs10.2mn) came in significantly lower at Rs125mn, decline of 30%yoy. With consistently
higher opex in subsidiaries, consolidated EBIDTA margin came down further to 25.5%
from 39% in Q3FY12. As ICRA shifted almost its entire investment book to Fixed
Maturity Plans/short term debt funds of 12-18 months maturity in earlier quarters, other
income was also lower at Rs13mn
Lower bond activity & credit growth continue to impact rating revenues
Muted credit growth at ~15%yoy and lower activity in the bond market continue to impact
ratings revenue growth as the same came in at just 6%yoy. Though, credit growth could
improve a bit in next quarter due to seasonality and possible cut in interest rates,
improvement in debt market activity could take little longer.
Lower profitability in subsidiaries continue to add to the margin pressure
While margins in the standalone operation (rating business) have come down from 46% in
Q3FY11 to 40% in Q3FY13, the decline has been even severe in case of subsidiaries with
margins coming down from 9% to just 1% over the same period. As a result the
consolidated EBIDTA margins have fallen sharply from 34% in Q3FY12 to 24% in Q3FY13.
Rise in opex in subsidiaries could partially be attributed to BPA technologies, which has
reported net loss of Rs2mn for M9FY13, as against ~21% net margin for ex BPA business
BPA technologies disappoints for another quarter
While the revenue from BPA technologies declined by 10%qoq to Rs81.4mn as against
90.5mn for Q2FY13, the major disappointment came on the bottomline front, as the
company reported net loss of Rs12.1mn as against profit of 6.3mn in last quarter. ICRA
reported revenue of USD10mn for FY12, which at 45/USD comes at Rs450mn. With rupee
depreciating to now 53-54/ USD the quarterly run rate should have been about Rs130-
140mn, as against the Rs80-90mn for the last two quarter. As the acquisition deal was
based on performance, we believe the deal value could also come down from earlier
decided USD8mn for the residual stake of 50%, if the performance continues to remain on
similar lines.
Earnings remain under pressure
Despite 20%yoy growth in revenues, higher cost pressure in subsidiaries resulted in
30%yoy decline in PAT (adjusted for ESOP expenses of Rs10.2mn) to Rs125mn. We
expect earnings growth to remain flat for FY13 and 15%for FY14 with EPS of Rs52.9 and
Rs63.5 respectively
Valuation and view
While the growth in the rating business continue to remain on the lower side due to muted
credit growth and poor debt market activity, rising cost pressure in the subsidiaries have
further added to the margin pressure with same coming down from 39% in Q3FY12 to
25.5% in Q3FY13. Though reversal of interest rate cycle bodes well for bank loan rating
business and debt market, we believe it will take some time before we see any meaningful
turnaround in the investment activity and subsequent impact on demand for ratings. At
CMP the stock trades at 27.1x/22.6x FY13E/14E EPS of Rs52.9 and Rs63.5. Maintain
HOLD with price target at Rs1300.
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