IPO Analysis- ICRA

NEW ISSUES
The Moody's effect
Sandeep Singh
Posted online: Tuesday , March 20, 2007
Its credit rating and information services businesses are poised to do well. The kicker: Moody's, one of the two global biggies, assuming sole charge.

The main, sometimes the only, objective of most companies to go public is to raise money to expand their business. By that count, Icra (Investment Information and Credit Rating Agency) is a rarity. The company is not issuing any new shares. Rather, three of its many promoters are selling their shares, in part (SBI and UTI) or in full (IFCI), in what is called an ‘offer for sale’. The entire Rs 80-odd crore IPO proceeds will go to them, Icra will get nothing.
So, what's the point of the issue? Ask company officials that, and they say something about how being listed gives a company visibility. What they don’t say is that the exit of IFCI and reduction of SBI’s stake to below 10 per cent will put Moody’s, co-promoter and the world’s second-largest credit rating agency, in the driver’s seat at Icra, opening up more possibilities for the business and by extension, for investors. The prospectus is silent on these ‘possibilities’, but those are within the realm of the possible and make for good reasons to invest in the Icra IPO.
Upside in business…
The first possibility is that of growth in business. Promoted by a clutch of banks and financial institutions, Icra commenced operations in 1991 as a credit rating agency, assigning ratings (like ‘AAA’ and ‘A’) to debt issues of companies. Over the years, business has grown. The company has also diversified into related businesses, notably consultancy, IT-based services and information outsourcing. As a result, the revenue share of rating services is down from 70 per cent in 2003-04 to 56 per cent in 2005-06.
That share will keep falling, but it will still remain the mainstay for Icra. Demand for rating services is linked to the state of the economy. If the economy is doing well, companies look to expand, for which, they raise money through debt and equity issues. The more debt issues they make, the more business they provide rating agencies like Icra, which earns a one-time fee (for the initial rating) and an annual surveillance fees (for monitoring the rating through the issue’s tenure). In the last three years, the volume of debt paper being rated has steadily increased.
Over the years, credit rating has been made mandatory for several kinds of debt paper. These include corporate debt with tenures of more than 18 months, commercial paper issued by companies, fixed deposits of non-banking finance companies and debt paper of more than one year issued by listed companies on a private placement basis. It’s in the interest of companies to get their debt paper rated, as several institutional investors only look at rated paper.
Rating agencies are venturing into rating new segments like stockbrokers, developers and governance practices of companies. If two pending regulatory proposals are cleared, it will open up two more business lines. The first is IPO grading, the need and utility of which is being contested by many. The second is rating of loans and advances of banks. At present, banks have to maintain a standard capital of 9 per cent on all their advances. But under an RBI proposal, once Indian banks shift to Basel-II norms, the capital they will be required to put aside will be based on a risk assessment of their loan portfolio. So, banks will have to get their loans and advances rated. Elsewhere, Icra is looking to increase its presence in three related businesses.
…and promoter
Business for rating agencies is good: companies are issuing debt to expand and regulators are being kind Although the prospectus and company officials are, strangely, silent on the opportunities in these segments or Icra’s plans, these should benefit from the Moody’s taking sole charge. In terms of business and shareholder value, Crisil, India’s largest credit rating agency, came into its own after Standard and Poor (S&P) took charge. Post-issue, Moody’s will have a 28.5 per cent stake in Icra. In all probability, the US company will look to increase it beyond 50 per cent, which could be a trigger for the share price.
Even if that doesn’t happen or takes long to pan out, there’s enough happening in Icra to merit investment. Growth won’t be explosive, but it should be steady. In the last three years, Icra’s revenues have grown at a compounded annual rate of 26 per cent, net profit at 13.9 per cent. Icra is cash-rich and, since it is in a people-driven service business, doesn’t need cash infusion to grow.
Salaries have been increasing, but Icra still managed a net margin of 26 per cent in 2005-06, which is better than Crisil. Its issue price of Rs 275-330 discounts its 2005-06 earnings 16.7-20 times, again better than Crisil (See table: Financial performance). If the economy stays on the fast track, if Icra can keep growing its new businesses and not lose much in margins, that’s a good price to buy this stock for the long term. As if Moody’s increases its hold and influence over the company, it should look even better.

Source : Express Money