ICRA - Strong Outsourced Growth; IT Bounces Back; Result Update Q3FY15 ::Edelweiss

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ICRA - Ratings, Outsourced Sustain Growth; IT Drags; Result Update Q2FY15 :: Edelweiss, PDF link

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Credit Rating - Sector Initiation - "A credit-able proposition" :: Centrum

“A credit-able proposition”



We initiate coverage on Credit Rating Agencies (CRA) with a positive
bias – CARE (Buy) and CRISIL (Hold). Elevated interest rates, policy
lapses and moderation in GDP growth impacted the investment cycle
during FY11-14 and in turn the ratings business. With stable
government, prospects have emerged of policy reforms across core
sectors of growth which will push corporate capex plans. This, in
addition to initiatives on reviving the corporate bond market will
result in a surge in the rating business and lead to improved
profitability for CRAs. CRISIL and CARE stand to gain given their
leadership positions and superior returns profile.

$ Green shoots emerging; but it will be a gradual process: The period
between FY11-14 was characterised by weak investment activities
following policy lapses, sticky interest rates and moderation in GDP
growth. This, in addition to excess leveraging by the corporates and
higher levels of delinquencies (NPAs) led to moderation in funds
raised by corporates to 15.2% CAGR vs 21.4% CAGR in the preceding
period (FY08-11). Green shoots have emerged following early signs of
progress in reforms across core growth sectors. With a stable
government and the need to accelerate growth, leading corporates,
lenders and associations expect gradual recovery beginning H2FY15.

$ Efforts to revive corporate bond market; SME, the next business
opportunity:  The Indian corporate bond market remains
under-penetrated (~3% of GDP), partially due to the financial
structures and regulatory intervention in the past. Efforts have been
made towards reviving the corporate bond market by encouraging
participation of various investors. With huge capex pipeline and
constrains on bank funding, the growth in corporate bond market though
gradual, will improve steadily. SME is the backbone of large
industries (contributing 45% to manufacturing) and with immense
benefits of rating, is the next business opportunity for rating
agencies.

$ Asset light model; credibility of utmost importance: CRAs deal with
the capital requirement of corporates and reflect the health of
investment activities in the economy. These agencies operate on asset
light models that generate healthy EBIDTA margins and superior return
ratios. Judicious utilisation of cash is vital from the shareholders’
perspective and hence these agencies have resorted to payback or taken
up in-organic growth. Default study / stability reports play a vital
role in assessing the health of corporates and quality of ratings by
the agencies, but it can affect their credibility if they fail to
recognise early signs of stress. Though CRISIL and ICRA have done
well, CARE’s performance was equally good. (exhibit 36-39).

$ Outlook and recommendation: CRISIL commands premium to its peers
given its strong parentage, well diversified revenue mix and superior
return ratio profile. Valuations at 31.1x CY15E EPS is on the higher
band and limits upside. Initiate with HOLD (TP of Rs1,340). CARE
trades at 34% / 48% discount to ICRA and CRISIL respectively. While
the discount to CRISIL is justified given the superior profile of the
latter, we believe the valuation gap to ICRA is on the higher side and
should narrow as CARE scores well on all ratios when compared to ICRA.
Initiate with Buy and target price at Rs1,150.



Thanks & Regards

--

ICRA Margins continue to remain under pressure:: Emkay

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

Know about index funds and ETFs :: Business Line

Index funds are ideal for those who are willing to invest in equities but don’t prefer to take much risk.

Investors put their money in mutual funds with the expectation that the scheme will deliver better returns than the benchmark index and their category peers as well.

Investors bear the fund management charges primarily to get alpha returns. But in reality, there will be funds that underperform the benchmark index despite active fund management.

Index funds are primarily equity funds that invest in a particular benchmark index.

The fund manager just follows the index and invests in all the constituent shares in the same proportion as is there in the index.

Theoretically, such a fund should reflect the return of the index. That means there is no possibility of loss owing to a wrong call taken by the fund manager. Moreover, the expense ratio of such funds is lower than most actively managed funds.

Union Budget, 2012-13: Credible roadmap for fiscal consolidation awaited :: ICRA

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The Union Budget for 2012-13 is to be presented on March 16, 2012 in the midst of deteriorating Government finances as well as a challenging domestic macroeconomic environment. While economic growth, investment spending and business confidence have weakened during 2011-12, interest rates remain high and concerns regarding inflationary pressures are yet to be eliminated. Recently, the Reserve Bank of India (RBI) indicated that it may be constrained from lowering the policy rate to respond to the slowing economic growth in the absence of credible fiscal consolidation. This has heightened the expectations from the Union Budget for 2012-13 to provide a realistic roadmap for fiscal correction, through a combination of augmenting tax revenues and restricting the growth of revenue expenditure (particularly subsidies). At the same time, it is expected that the Budget may increase outlays and announce policy measures to boost infrastructure spending, which would ease supply constraints and raise the potential growth rate of the Indian economy.
The Budget for 2011-12 set an ambitious target to rein in the fiscal deficit to 4.6% of GDP in 2011-12 from 4.8% of GDP in 2010-11 (according to Provisional Accounts), despite the expected decline in non-tax revenues following the one-time inflow of funds from the telecom auctions held in 2010-11. However, the fiscal situation of Government of India (GoI) has displayed considerable signs of stress in the current fiscal year, on account of factors such as a slower than anticipated economic growth, unfavourable equity market conditions and a widening of fuel subsidies.

DOT DECISIONS ON SPECTRUM MANAGEMENT AND LICENSING FRAMEWORK: IMPACT ASSESSMENT ::ICRA

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Overview The Ministry of Communications & Information Technology, Government of India, has just come out with the decisions made by the Department of Telecommunications (DoT) on the issues of spectrum management and telecom licensing framework, largely accepting the recommendations of the Telecom Regulatory Authority of India (TRAI) on the same. TRAI will now give recommendation on some key areas like spectrum re-farming and pricing. The key decisions of DoT, as announced by the Ministry of Communications & Information Technology on February 15, 2012, are presented in the following bullet lists. Licensing
1. All future licences will be unified licences (ULs) and allocation of spectrum will be delinked from the licence. Spectrum, if required, will have to be obtained separately.
2. Validity of existing unified access service (UAS) licences may be extended for another 10 years at one time.
3. On extension, the UAS licensee will be required to pay a fixed fee: Rs. 2 crore for the Metro and category A Circles; Rs. 1 crore for category B circles; and Rs. 0.5 crore for category C circles.
4. The prescribed limit on spectrum will be 8MHz and 5MHz for GSM and CDMA technologies respectively, for all service areas other than Delhi and Mumbai, where the limits will be 10MHz and 6.25 MHz, respectively. However, the licensee can acquire additional spectrum beyond the prescribed limits in the open market, should there be an auction of spectrum, subject to the limits prescribed for the merger of licences.
5. The spectrum shall be paid for by separately. While extending the licence, the licensee shall be assigned spectrum only up to the prescribed limit, or the amount of spectrum assigned to it before the extension, whichever is less. Spectrum assigned to the licensee in excess of the prescribed limit shall be withdrawn.
6. Decisions on all matters relating to spectrum pricing will be taken separately.
Licence Fee
1. Uniform licence fee will be levied across all service areas, and this will be progressively made equal to 8% of the adjusted gross revenue (AGR) in two annual steps starting 2012-13.
2. Decision to bring passive infrastructure service providers under the licensing regime is deferred.

India Goes Easy On Gold Buying In Oct-Dec As Rupee Slides ::ICRA

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D epreciating rupee and high gold prices have jointly forced to India to cede its long-held position as the world’s No. 1 con-sumer of the precious metal to China in October-December.
India and China together account for more than half of total global demand for gold, with demand from India typically surpassing that of China’s. But the fourth quarter of 2011 registered a change in the trend.
According to World Gold Council data, total demand for gold in India was 173 tonnes in October-December, down 42% from a year ago. Demand in China, on the other, increased marginally from a year ago to 190.6 tonnes.
While both countries registered high inflation, particularly in the first half of 2011, weakening of the rupee against the US dollar dampened demand for gold in India.
In October-December, while gold prices rose 23.5% in dollar terms from a year ago, in rupee terms, gold prices shot up a whop-ping 39%.
Rupee depreciated 8.4% versus the dollar during the quarter, while the Chinese yuan that appreciated 0.2% in the same period.
On December 16, rupee weakened to its all-time low of `54.30 versus the dollar.
Impact of rupee depreciation is also reflected in the fact that while international gold prices (in dollar terms) fell 0.8% in October-December on a sequential basis, Indian prices were up 8.8% dur-ing the same period.
In the quarter that went by India’s jewellery demand nosedived 44% from a year ago to 103 tonnes and investment demand plunged 38% to 70 tonnes.
It was mainly depreciation of rupee in the second half of the year that resulted in India’s gold demand during July-December weak-ening 33% from the first half.

ICRA: Short term pain, long term gain: SPA

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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. We therefore initiate coverage with BUY recommendation.

ICRA - Sluggish debt market issuances led to fall in revenues::Emkay

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ICRA

Sluggish debt market issuances led to fall in revenues

REDUCE

CMP: Rs 1,008                                       Target Price: Rs 900

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n     ICRA’s Q1FY12 operating income/ Adj. net profit at Rs387/85mn significantly below expectations, led by decline in rating revenues

n     The rating rev declined by 12% yoy led by sluggish debt market issuances. Significant low volumes on high margin bond rating business reflected in 760bps drop in OPMs

n     Cutting our earnings by 30/26% each for FY12E/FY13E assuming lower margins. Downgrade rating  from ACCUMULATE to REDUCE with TP of Rs900

n     What can change our view?: Improvement in investment scenario and debt issuances as the rating business has very high operating leverage

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

Macquarie:: ICRA Meeting with the CEO – Takeaways regarding banks’ asset quality

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ICRA
Meeting with the CEO – Takeaways
regarding banks’ asset quality
Event
􀂃 We met with Mr. Naresh Takkar, CEO of ICRA (Rs1,202, Not rated), which is
India’s second-largest credit rating agency, to get a brief update on the asset
quality of banks. We present our takeaways below.

ICRA: Good Growth! PPFAS

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ICRA: Good Growth!
Performance Highlights:
Consolidated top line of the rating and consulting major ICRALtd increased 33% Y-Y to ` 484Mn for the quarter ended
September 2010 as compared to ` 363.5Mn for the quarter ended September 2009. On a sequential basis too, the
company's revenues scaled up by 18% as compared to the June 2010 reported numbers.

Research Views -Emkay; 10 November, 2010

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n        Research Views

Thermax acquires Danstoker – A European biomass boiler maker for Euro 30 mn

Thermax acquired Denmark based Danstoker A/S along with its subsidiary Omnical Kessel, Germany for Euro 29.5 mn. Danstoker (along with Omnical) is a manufacturer of biomass, oil & gas based boilers and heat recovery systems and products for a wide range of industries. Danstoker has manufacturing facilities in Denmark and Germany with marketing presence in UK, France and Russia. Its core products range from 200 to 100,000 kg of steam / hour and design pressures upto 86 bar. Danstoker is a profitable company with revenues of Euro 40 mn pa and employs 237 employees.

We believe that the acquisition will enhance Thermax’s packaged boiler product portfolio under the Cooling & Heating Business Unit. However, in absence of key earnings information of Danstoker, we are unable to determine the impact on the Thermax’s earnings – await clarity in the same to factor it in our earning estimates. At CMP the stock is trading at 27.5X FY11E and 22.1X FY12E consolidated earnings of Rs31.8 and Rs39.5 per share respectively. We have a BUY recommendation on Thermax.

GIPCL Q2FY11E Result Estimates (Results on 10th November)

We expect Q2FY11E to be strong on the back of very low base in Q2FY10 due to plant maintenance in the Q2FY10 quarter. We expect revenues to grow 7% yoy to Rs2.1bn. Expect 392bps YoY improvement low base) in EBITDA margins to lead to EBITDA growth of 27% yoy. APAT is expected to grow by 100% YoY to Rs249mn. Reported PAT to be higher due to Rs88mn income tax refund received last quarter. Key things to watch - (1) PLF of the plants, (2) update on new plant commercialization and (3) update on further expansion of 600MW.

n        Research Update Included

Aurobindo Pharma Q2FY11 Result Update; Above estimates; Raise target price; BUY; Target: Rs1,581

n    Aurobindo’s Q2FY11 performance was above estimates with a) Revenues at Rs10.4bn (est. Rs9.9bn), b) EBITDA at Rs2.5bn (est. Rs2.1bn), and c) APAT at Rs1.4bn (est. Rs1.1bn)

n    Strong revenue growth was driven by 38% growth in formulation business, higher dossier income (Rs699mn vs. Rs400mn) and ramp-up in SEZ facility (full impact in Q3FY11)

n    APAT (excl forex gain of Rs546mn net of tax), was up 35% to Rs1.4bn

n    On account of strong performance, raise target price to Rs1,581 (earlier Rs1,242); Maintain Buy

PGCIL FPO Note; Core ROE of 22.5% offered at 1.5x; No brainer; subscribe; Price Band: Rs 85-90

n    FY10 actual core ROE of 21.3% - (1)18.9% from regulated business, (2) 1.1% from STOA, (3) 1.3% from consultancy and (4) -1.7% reduced by deferred tax accounting

n    Core ROE to increase by 1% to about 22.5% in next two years led by Short Term Open Access volumes; Potential of further 1% ROE upside if assume likely numbers on volumes

n    FPO at 1.5xFY13E Book, cheap on absolute basis with core ROE of 22.5% and relative basis – NTPC core ROE at 24% (including 3% from UI) and P/BV at 2.1x

n    Operating cash flow yield of 16% in FY12E; November 11 target of Rs128/Share; Sure Shot returns; Subscribe  

Eicher Motor Q3CY10 Result Update; Margins to remain under pressure in short term; Not Rated

n    EBIDTA margin disappoints at 7.2% (est. of 9.2%) due to lower topline (Rs 11.0bn vs est. Rs11.6bn) & higher staff cost. Lower other income impacts APAT ( Rs 387mn vs est. 675mn)

n    Price increased by 2% to 4%in CVs to pass on the emission cost and some of the other cost pressures. Margins under pressure in the short term due to focus on HCVs

n    Valued the stock on SOTP basis with TP of Rs 1,326 (current business – Rs 1,173, NPV of engine business – Rs 153).

n    Was a preferred play in the CV space since last two quarters. Find valuations unattractive, post the strong outperformance

ICRA Q2FY11 Result Update; Robust results; raising to ACCUMULATE; Target: Rs1,550

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

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