Credit Rating

ICRA Ltd: Anticipate opportunities in Rating business

ICRA is an associate company of Moody’s Investors Service, the Bond Credit Rating business of New York based Moody's Corporation.

(A) About The Company

  • ICRA is the second originating credit rating agency in India.
  • The Company was set up in 1991 by leading Financial/investment Institutions, Commercial Banks and Financial Services Companies.
  • Today, ICRA and its subsidiaries together form the ICRA Group of Companies and provide Rating, Grading and Research Services.
  • ICRA has also made its foray into the international market through subsidiaries in Indonesia, Nepal and Sri Lanka that offer Rating Services.

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(B) Executive Board Members

(i) Mr. Arun Duggal - (Non-Executive Chairman and Independent Director)

Mr. Arun Duggal is the Non-Executive Chairman and an Independent Director of ICRA Limited. He is also a Visiting Professor at the Indian Institute of Management, Ahmedabad. At there, he teaches a course on Venture Capital, Private Equity and Business Ethics. Mr. Duggal holds an MBA from the Indian Institute of Management, Ahmedabad.

Mr. Duggal is an experienced international Banker. He also advised companies and financial institutions on Financial Strategy, M&A and Capital Raising. Moreover, he had a 26 years career with Bank of America, mostly in the U.S., Hong Kong and Japan. His last assignment was as Chief Executive of Bank of America in India from 1998 to 2001. He is also an expert in international finance. From 1981-1990 he was head of Bank of America’s (oil & gas) practice handling relationships with companies like Exxon, Mobil, etc.

Moreover, Mr. Duggal is the Chairman of Indian Institute of Technology Delhi Endowment Fund. He is also on the Boards of ITC Limited, Jubilant Pharma Limited, Singapore and IIT Delhi Endowment Management Foundation.

(ii) Mr. N. Sivaraman (Managing Director & Group CEO of ICRA)

Mr. N. Sivaraman holds a Bachelor of Commerce from Madras University. He is also a Chartered Accountant from the Institute of Chartered Accountants of India. Mr. N. Sivaraman is a reputed business leader who spent 34 years with Larsen & Toubro Limited (L&T) Group. His last position was President and Whole-Time Director of L&T Finance Holdings, a subsidiary of L&T and a listed company.

Also, under his leadership, L&T Finance Holdings became the first subsidiary of L&T to be publicly listed. He strategized expansion of the business across lending, asset management and insurance, led inorganic growth initiatives as well, overseeing key acquisitions in asset management, housing and personal vehicle finance.

In his 34 years of association with L&T Group, Mr. N. Sivaraman also held many key roles in Finance & Accounts, Mergers & Acquisitions, Treasury, Project Finance, Corporate Finance and Investor Relations. Since his exit in 2016 from L&T Group, he has been working on establishing a platform for financing infrastructure projects using a combination of NBFC and managed funds.

At the same time, his firm – 5E Financial Services, has been advising entities seeking to invest debt funds in infrastructure projects. In December 2018, Mr. Sivaraman joined IL&FS Group, as Group Chief Operating Officer, responsible for asset monetization and creditor engagement, including restructuring of loans, where required. His assignment with IL&FS ended on July 31, 2020.

Mr. N. Sivaraman is also on the boards of Shiva Pharmachem Limited, Ascentios Advisors Private Limited, PGIM India Trustees Private Limited and ICRA Analytics Limited.

(C) Shareholding Pattern

ICRA Ltd stock research with detail of shareholding pattern
ICRA Limited Stock Research with the detail of Major Promoters' Holding.
ICRA Limited Stock Research with the detail of Major Public Holding.

(D) About services of ICRA Ltd

ICRA Limited mainly operates through its three Segments - Rating, Research and other Services, Consulting Services and Outsourced and Information Services.

(i) Rating, Research and Other Services

It involves Rating, grading and Industry Research services provided by the Company. ICRA rates:

  • rupee denominated debt instruments issued by manufacturing companies, commercial banks, non-banking finance companies, financial institutions, public sector undertakings and municipalities, among others.
  • It also offers Corporate Governance Rating, Stakeholder Value and Governance Rating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims Paying Ability of Insurance Companies, Project Finance Rating, and Line of Credit Rating. 
  • On the other hand, the Grading Services offered by ICRA employ pioneering concepts and methodologies and include grading of - Construction Entities, Real Estate Developers and Projects, Healthcare Entities, Maritime Training Institutes and Initial Public Offers (IPOs).

ICRA provides Research Services across the economy, industry and companies.

(ii) Consulting Services

Management Consulting offered by the Company includes Risk Management, Financial Advisory, Outsourcing and Policy Advisory.

(iii) Outsourced and Information Services

Lastly, the Information Services Segment focuses on providing authentic data and value-added products used by intermediaries, financial institutions, banks, asset managers, institutional and individual investors and others.

(E) Revenue Segmentation

As of 31.March.2021, Company's Segment-wise Revenue is as follows -

ICRA Limited Stock Research with the detail of Revenue Segmentation.

(i) Year On Year Segment-wise Revenue


Company's Ratings Segment has shown a volatile growth over the years. This segment grew at a CAGR of -1% over last 5 Fiscal Years. In the F.Y. 2021, Company's Rating Segment Revenue also de-grew to INR 187 Crore from INR 214 Crore in the previous year. This is mainly due to the decline in both the bank loan rating business and the non-bank loan ratings business as a result of low credit growth and competitive market.

This revenue decrease was largely driven by the reduction in structured finance ratings volumes, which were impacted by risk aversion from investors' arising concern on collections due to the COVID-19 pandemic.

Outsourcing & Information Services

On the other hand, ICRA's Outsourcing & Information Services Segment has shown a consistent and considerable Growth over the years. This Segment of the company has grown at a CAGR of 18% over last 5 Financial years.

In the year 2021, Revenue of this segment increased by 11%, to INR 96 Crore from INR 84 Core in 2020. This Growth became possible as no significant impact has been observed on Outsourced & information services of the company during the lockdown period, unlike other two segments.

Consulting Services

On the hand, Consulting Services Segment of ICRA has shown an irregular growth over the years and grew at a negative CAGR of -9% over last 5 years.

During Fiscal year 2021, Consulting business also impacted by localized lockdowns due to Covid and traction continues to remain subdued.

ICRA exited Professional & IT Services Segment in F.Y. 2018, which it entered by acquiring a company called BPA Tech, a California-based global business consulting and software services company, in the year 2013.

(F) Geographical Classification Of Revenue

ICRA's Geographical Classification of Revenue as on 31.March.2021 is as follows -

ICRA Limited Stock Research with the detail of Geographical Classification of Revenue.
ICRA Limited Stock Research with the detail of Year-on-Year Geographical Classification of Revenue.

Over the years, Company's Revenue from India as well as from outside India has shown an inconsistent growth. During the year 2021 ICRA's revenue in INDIA de-grew to INR 20,420 Crore from INR 24,164 Crore in the 2020. On the other hand, Revenue from Outside INDIA increased by 22% to INR 9,686 Crore in FY21 as against INR 7,945 Crore in the year 2020.

(G) Operating Profit

ICRA Limited Stock Research with the detail of Year-on-Year Segment profit

ICRA's Rating Segment's Results has shown a Volatile growth over last 6 Fiscal years.

On the other hand, Company's Outsourcing & Information Services Segment has shown a regular and significant growth in its profits over last 6 Fiscal years.

On the other hand ICRA's Consulting Business has shown a downward growth over last 5 Financial years. Also, in the year 2021, Consulting Segment bears a loss of INR 2 Crore.

(H) Industry Overview

  • The conditions in the credit market continued to remain challenging in F.Y. 2021, because of Covid-19 and Lockdown Situation lead to uncertainty the consequent increase in risk among lenders and investors.
  • After the lockdown got lifted, the economic activity picked up in the last two quarters of FY2021, showing a growth in Debt Mutual Fund AUMs and pick-up in securitization.
  • Bond markets continue to remain heavily skewed in favour of the PSUs and top-rated corporates and the expected growth in the Market is still awaited. As a result, a large section of the mid and small-sized corporates, non-banking finance companies (NBFCs) and micro finance institutions (MFIs) continue to face severe challenges in terms of accessing funds, though a revival of the securitization markets in H2 FY2021 provided some relief to NBFC, HFC and MFI lenders.
  • Also, RBI has already taken several measures to maintain surplus liquidity in the system has reduced the funding cost for banks, resulting a decline in borrowing costs for corporates and the NBFCs.

(I) Group Structure

As of 31.March 2021, ICRA had Five Subsidiaries, including One Step-down Subsidiary.

ICRA Limited Stock Research with the detail of Group Structure.

(i) ICRA Lanka Limited

ICRA Lanka Limited (ICRA Lanka) is a wholly owned subsidiary of ICRA. It also offers a wide range of rating services in the Sri Lankan market.

(ii) ICRA Nepal Limited

ICRA Nepal Limited (ICRA Nepal), also offers a wide range of rating services in the Nepalese market. ICRA Nepal rates Rupee-denominated long-, medium- and short-term debt instruments. Its services also include issuer rating, fund management quality rating and grading of equity offers and bank loan line of credit rating.

(iii) ICRA Analytics Limited

ICRA Analytics Ltd, formerly known as ICRA Online Ltd [ICRON], is also a wholly-owned subsidiary of ICRA platforms for Knowledge Services, Risk Management Market Data, Consulting and Grading.

ICRA Analytics also has a wholly-owned subsidiary, Pragati Development Consulting Services Limited.

(iv) PT. ICRA Indonesia

This Subsidiary of ICRA Limited is under Liquidation.

(J) Financial Parameters

ICRA Limited Stock Research with the detail of Financial Parameters.
  • ICRA is also a Debt-free Company, like its closest Peer CRISIL Limited.
  • Over the years, Operating Income of ICRA has shown an irregular growth and grew at a CAGR of 5% over last 10 Fiscal years.

On the other hand, major Rating Player, CRISIL's Operating Income has grown at a CAGR of 10% over last 9 Years.

  • Company's Net Profit also shown an inconsistent growth over last 10 years and grew at a CAGR of 6%.

On the other hand, PAT of major Rating Player, CRISIL,  grew at a CAGR of 6% over past 9 Fiscal years.

  • Company's ROCE have also shown a volatile growth over last 10 Financial years. On the other hand, PAT margin of ICRA has shown Downward growth trend over last 10 Fiscal years.
  • Company's PBIDT as well as PAT Margin shown an irregular growth over the years. In 2021, fall in ICRA's PBIDT and PAT Margins is mainly due to decline in revenue, and are only partially offset by the reduction in total expenses.
  • The Return Ratios of ICRA are falling. This is because of huge Cash & Cash Equivalents balance retained in Company's Books.

Year-on-Year Cash & Cash Equivalents balance retained by the Company is as follows -

ICRA Limited Stock Research with the detail of Year-on-Year Cash & Bank as % of total assets

(K) Management Discussion Highlights

  • The Board of the company has recommended a dividend of Rs.27 per equity share of face value of Rs.10 each, for the year ended March 31, 2021. It represents a payout of 49%.
  • As per the Management, long-term outlook for the ratings business remains positive, given the large funding requirements which would have to be raised through a combination of bank loans and bonds, though near-term challenges enumerated earlier exist.
  • Management also stated that ICRA continues to take initiatives to retain its strong thought leadership and market position. And company is also confident of meeting the challenges posed inevitably by the changing business requirements.
  • According to the Management, the challenges faced during H1 FY2021 may resurface in H1 FY2022. With the rise in Covid-19 cases in some states and re-imposition of localized restrictions, some sectors of the economy may once again experience temporary demand disruption, especially in the contact-intensive space. Additionally, there may be supply-side issues arising from disruptions in logistics.
  • Management is also expected that that the risk appetite of investors will be a function of the impact of the current regional lockdowns and other restrictions, on the corporates and the broader economy.

(L) Opportunities and Strengths

(i) Rise In NPA Levels

In the last few years, as NPA levels have grown considerably in the economy, a significant proportion is skewed towards corporates. Consequently, credit risk assessment, credit administration and monitoring has come increasingly into focus.

RBI has come out with a revised framework for resolution of stressed assets on February 12, 2018. This aims at strengthening the structure for prompt reporting of defaults, providing a resolution plan for defaulting accounts, also supported by independent credit evaluation by credit rating agencies and time bound referral to the National Company Law Tribunal (NCLT) for initiating bankruptcy proceedings.

For rating companies this is positive in the long-run, as these will involve restructuring and will require independent credit evaluation of the residual debt by credit rating agencies (CRAs). Moreover, this is likely to increase the volume of business for rating agencies in the coming years.

(ii) Growth In Corporate Bond Market

Over the last few years the company witnessed significant growth in the corporate bond market. Funds raised through corporate bonds increased from around INR 3.7 lakh crore in 2012-13 to INR 6.8 lakh crore in 2018-19 before slipping marginally to 6.7 lakh crore in FY20.

Also, the corporate bond market is expected to double over the next five years driven by infrastructure capex funding, regulatory push for incremental funding for non-corporates, stabilization of the process under the Insolvency and Bankruptcy Code, and improved demand from NBFCs and HFCs.

(iii) Increase in SME Ratings

The Government has been providing sops to the ailing MSME sector to improve their financial health. It also announced collateral-free loans up to INR 3 lakh crore backed by government guarantee, moratorium on principal repayment, setting up a Fund of Funds with Corpus of INR 10,000cr. This will provide the equity funding for MSMEs with growth potential and viability. Also, these measures are likely to increase the borrowing activity of MSME which would have to be rated.

(iv) Shift In The Preference Of Corporate Borrowers

Banks have become stricter in lending to corporates as the NPA levels have increased. Sound corporate borrowers who are in need of funds so that their projects don’t get stalled have found alternative sources for raising funds like commercial papers, company deposits, non-convertible debentures, etc.

This has opened up another source of revenue for the credit rating agencies as these instruments also need to be rated to reduce the cost of borrowing for the corporate. The Government has also changed the classification criteria for MSME so that they can grow in size and get benefits. This would also increase the number of firms under MSME category and bring in increasing rating volumes for companies like ICRA.

(M) Risk/concerns

(i) Internal Ratings Based Approach By Banks

If Banks whose clients avail Credit Rating Services under the Basel II framework migrate to the internal rating based approach for Credit risk (the IRB Approach), it could have an adverse effect on ICRA's Rating Business and also on its Revenue and Profit Margins.

(ii) Economic Slowdown

Credit Rating volumes are directly linked with the economic growth of a Country. In times of slowdown the overall volumes could take a hit reducing the scope of earnings for the company.

(iii) Regulatory Risks

Credit rating agencies (CRAs) have come under regulatory scrutiny in the wake of loan defaults by leading corporates. To enhance CRAs’ rating process and quality of disclosures, SEBI keeps prescribing higher disclosure of data by CRAs. This apart CRAs come under scrutiny of regulators and are also fined for lapses that may not be fully attributable to them.

ICRA had dismissed its MD and CEO Naresh Thakkar post anonymous complaint received from SEBI in relation to IL&FS issue. SEBI also has issues on credit rating companies carrying out non rating businesses to prevent them from assigning aggressive ratings.

(iv) Increasing Competition In Rating As Well As Non-Rating Sector

There are already three established players in this industry. Thus, as it is a boon it is also a threat, as in this form of market structure, companies normally tend to be price takers, and have to take the bite of severe competition. CRISIL is the market leader. Although, very small, but, there are more new entries - India Ratings, Brickworks etc.

On the other hand, In the non-ratings business i.e. Outsourced information and consulting, ICRA also faces competition from other rating agencies and also from global and local consultancy firms.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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