Rating agency, ICRA is well placed to give double-digit returns in stock markets going forward with credit growth and outsourced business emerging as a major booster for the company. HDFC Securities has placed a buy stance on ICRA and expects the stock to reach a fair value of ₹4,195 apiece over the next two quarters.
On Friday, ICRA stock witnessed selling pressure and was trading at ₹3766.20 apiece on BSE down by Rs55 or 1.44% at around 2.22 pm. The stock has touched an intraday high and low of Rs3853.75 apiece and Rs3754.30 apiece respectively.
HDFC Securities believes "investors can buy the stock in the band of ₹3720-3750 and add on dips to ₹3350-3380 band (22.5x FY24E EPS) for a fair value of ₹4195 (28x FY24E EPS) over the next 2 quarters."
On the previous day, ICRA stock stood at Rs3821.20 apiece. Taking into consideration HDFC Securities' fair value target and Thursday's price level, then ICRA is set to make nearly 10% over the next 2 quarters.
Meanwhile, from the current price level, ICRA stock has the potential to rise by more than 11% going forward. So far this year, ICRA stock has skyrocketed by nearly 11%.
Giving rationale to its outlook on ICRA, HDFC Securities in its note stated that ICRA is well placed to benefit from the revival in credit growth.
"We expect ICRA’s revenue/EBITDA/PAT to grow at 13/21/21% CAGR over FY21-FY24, led by demand revival in credit growth and a strong uptick in outsourced business. ICRA has healthy cash and cash equivalents (FY24) on books equivalent to 19.5% of its CMP," HDFC Securities note added.
As per the stockbroker, the COVID-19 pandemic had disrupted businesses and the rating volumes which resulted in lower revenue from rating services for rating agencies. However, the credit growth has begun to pick up and the requirement for credit rating would also grow along with the economy. Over the longer term, the credit market outlook remains optimistic as support from government and regulatory authorities could enable depth in the markets which are positive for rating business.
Further, the broker highlighted that the increasing preference of sound borrowers towards bank loan alternatives has opened an additional source of revenues. The outsourced and information services business segment of ICRA is doing well and the margins have been improving. The long-term outlook for the rating business remains positive, given the large funding requirements which would have to be raised through a combination of bank loans and bonds. ICRA is aiming to gain wallet share in focused large and mid-sized clients by being the preferred rating agency from investor’s
perspective.
In Q3FY22, ICRA's consolidated operating income rose by 11.9% yoy to ₹86.6 crore on account of traction in fresh business. In the quarter, the company's employee expenses dipped on account of attrition while other operating expenses increased (due to higher bad debts & provisions) resulting in an EBITDA increase of 43% yoy to ₹34.6 crore. EBITDA margins expanded 865bps to 40%. PAT increased by 27.8% YoY to ₹30.9 crore and PAT margin expanded 440bps to 35.7%.
Moreover, in Q3FY22, ICRA's ratings, research, and other services segment, including foreign subsidiaries, has grown by 3.7% on y-o-y basis. Outsourced and information services segment grew by 30.8% due to an increase in business from existing and new clients, whereas Consulting services de-grew by 5% due to challenges in the external environment and de-focus on certain unprofitable segments of its business.
Noteworthy, during Q3 of FY22, bond issuances saw growth over the corresponding quarter of the previous year supported by issues from Banks and NBFCs. The bank credit to large industry however continued to be tepid as a pickup in economic activity got weighed down by supply-side disruptions.
