March 21, 2007

ICRA Limited - Go Ahead

Issue Details

  • No. of Shares : 25.811 Lakhs Shares
  • Price Band : Rs.275 to Rs.330
  • Issue Dates: March 20th to March 23th
  • Issue Size : Rs. 71 crores to Rs.85 crores
  • Market Capitalisation : 274 crores to 329 crores
  • Sellers : IFCI,SBI and UTI
  • Post Issue dilution : 74.19%
  • Book Running Lead Managers: SBI Capital Markets and Kotak Mahindra Capital Markets
The company will have a preferential allotment of 2.889 lakh shares to Moodys and 9.06 Lakh shares as ESOPs to its employees.

Objectives of the IPO

  • IFCI, their principal promoter is selling its stake in the company and exiting through this IPO completely.
  • SBI is reducing its stake to below 10% as per regulations and SU UTI is also selling its complete stake in the company.
  • Brand building through the listing as the company is not making any fresh issue for raising money in this offer.
  • ESOPs to its existing employees and thus an exit route for them in case they would divest their holding.

Company Analysis

The company was established in 1991 for providing credit rating with a tie-up with most of the major financial institutions in India. It has a tie-up with
Moody's, a subsidiary of Dun and Bradstreet, who also advice on the Technical part too.

ICRA subsidiaries provide consulting, technology support, outsourcing facilities and information based
services. The services mentioned is largely done with its subsidiaries: IMaCS, ICTEAS and ICRA online.

The company does other types of innovative ratings too like corporate goverance, project finance, mutual funds etc.

Some observations of the business model:
  • The rating business derives more than 50% of the total income for the company and this is a strong segment as the company has a good brand name to generate business
  • It has a solutions business segment that is deriving revenues of more than 15-20%. However, the target segment is still looks a bit hazy for a Credit Research Agency (CRA)
  • Its CAD services is still a puzzle to me and the website drives too small income in the current stage.
  • The information services segment is currently too small in its revenue mix. However, the company must understand that this is one of core work of a CRA. Its ability to derive strong brand name will depend on the reports that it comes out regularly. It must also understand the segments where there is income to be made. I am not too clear in a maritime institution rating, segments where the growth seems to be limited.
  • There royalty payments are also on the lower side to Moody's, something I actually feared in this IPO. There are hardly any significant payments to Moody's apart from the dividend payment to them.

Industry Analysis
This is a regulated industry with only 4 players. Crisil, ICRA, CARE and Fitch being the largest.

  • This is a regulated industry and hence there are huge entry barriers. However, this industry also requires huge investment in knowledge and hence investment in industry research is a constant requirement. CRISIL has been a leader in this segment with its well respected industry reports.
  • Most of these agencies in India have a foreign partner who can bring in the much needed expertise to build a strong reputation in India.

  • The industry revenue model is different as the average realization looks to exceed 365 days
  • Attrition levels at more than 22% for a company like ICRA. It is surprising for such a company with such high levels of attrition. The only plausible reason could be the pay being just not competitive to its competitors.
  • The industry has not been witnessing any major growth in the number of debt issuance over a 3 year basis. The cAGR on a 2 year basis is just above 7% though the average issuance has grown by 23%.

  • The Industry is extremely dependent on a strong debt market. Given the nature of bank's role in Indian Debt Market, issuance of securities is far lower in number leading to an inefficient market. However, with growing funds available in the longer term in the form of Insurance and Pension funds we could see an improved market in the near future.
  • The government is playing an active role in ensuring that the debt market is improved. It has, over the period, issued guidelines on compulsory rating and has gone a step further with the necessity of dual rating.
  • Barring Korea and Malayasia (>50% of GDP) which have debt markets controlling credit, India is still at an abysimal 5% of GDP.
  • Bank plays an important role in mobilizing the savings of the country. Hence, it role in controlling the growth of Credit Rating Agencies(CRA) is significant. With the introduction of Basel Norms, we could see an increase in the role of CRA.


  • The company generates over 85% of its total revenues from 3 business units. Rating services:55%, Consulting:17-20%, IT Based Services: 14-15% and the rest is from research and outsourcing. The company has a good revenue mix in ratings revenues. An average of 30% comes from corporate and infrastructure ratings, 50% from financial companies and the rest from structured finance and project financing.
  • The biggest cost is in personnel cost at about 40-44% of the total revenues followed by administrative expenses at 10%.
  • Quality of Debtors is still a question as the company has close to 25% of debtors who have do not pay for more than 6 months.
  • There are tax suits against the company. Service Tax of around Rs. 22 Lakhs and IT of 2.44 Lakhs
  • The company has significant investments in Mutual Funds, Debentures etc as this currently contributes close to 7.5% of the total revenues for the company.
  • Book Value for the company: Rs 118
  • Annualised (Expected) EPS: Rs.17.5 (Given a discount of Rs. 0.25 ) and Diluted EPS (Annualised and Expected) :Rs. 15.6
  • RoE: This has been consistent at approximately 13% barring one year at 9%.
  • The Net Profit Margin for the company has been increasing and is currently above 35%, indicating a strong pricing model.The companys' ability to use its reserves is very impressive given its ability to increase profits over the cost of maintaining in the form of reserves over the years (Barring 2005 which saw a decline in profit growth due to an abnormal increase in personnel due to revision of salary and administrative expense).
  • The capital infusion of the company is unlike the other IPOs that I have seen in the recent past. The fresh infusion for the company has been done at reasonable prices. There was an infusion of equity in 1997 and 1999. The prices has been at Rs.60. The price growth is similar to the business growth at 21% on the issue in 1999 and 16% in 1997
  • The company is a regular dividend paying company. The dividend rate exceeds 20% for the past four years. The company is able to make full utilisation of its reserves barring one year in 2003 when the incremental profit generated was less than the RoE for the previous year.
  • The cash from operations generated has been not been that strong over the years. The CAGR over the past five years in Cash from Operations is 12% and this could be a result of the revenue mix for the company.
  • As the subsidiary companies are less than a couple of years, no individual valuation of these companies has been done (consolidated statements have been taken into valuation)

IPO Details

The comparison is done only with CRISIL, as it is the only competitor listed in this segment.
  • The P/E is in the range of 21.33 to 23.41 with a Dividend Payout approximately 20% when compared to CRISIL P/E at 40 and Dividend Payout at 40%.
  • The P/BV is in the range of 3.4 to 3.73 with a RoE approximately 17% when compared to CRISIL P/E at 9.15 and RoE at 19.5%.
  • The P/Sales is in the range of 5.7 to 6.22 with a Net Profit Margin approximately 37% when compared to CRISIL P/Sales at 11.21 and Net Profit Margin at 21.12%.

Summary and Points to Ponder

Here is a credit rating company and they have recently started a new initiative of rating Equity IPOs. As a company that is providing that service, would one
not expect to rate their own company given that the concept is new and not too many companies are willing to rate their IPOs in the first place? I would have liked to see this company actually do a credit rating of their IPO and state if the offer price was good or not! Though they could have not done it by themselves, they could have atleast asked the other credit rating agencies to do this.

The IRR for Moodys in its investment at ICRA is at 27%. Looks good for an investment across 7 years.

The report on the industry is extremely poor,vague and largely irrelevant to the nature of business that the company is involved in. Consider IT/ITES as a segment in which the company has some exposure to. The prospectus touches the entire industry and the growth as a whole rather than looking at the area in which the company is concentrating its revenues or the growth of that segment in the total IT/ITES arena.

One of the critical requirements of the company that its boasts is its personnel. Surprisingly, this is also mentioned as a biggest risk that it is facing given the attrition levels of more than 22%.

When I saw the directors salary, it was pretty unimpressive and thought the directors were equally in a bad
footing with this company. The main directors were getting an annual salary approximately 13-18 Lakhs.However, if one goes to the total take home, it is a whopping Rs.50 Lakhs. The perks (exceeding 30% of the total take home) for being in this company too attractive for the top management to leave this company.

It is a norm from most companies to have a mid year dividend declared to its existing shareholders so that the new shareholders do not enjoy the benefit of the company's existing profits. Surprisingly, this company has not done nothing of that sort. Also, given that the principal promoter, IFCI, was leaving them, thought it would be good to have a dividend declared, a nice parting gift :)

Given all this, I still like the company as it trades at a discount to CRISIL on almost all counts. However, CRISIL has a different business model (with its recent acquisition of Irevna and Crisil Newswire-I think it is still not sold, though not sure). If the company is able to establish a strong business model and generate a good brand through its consultancy/research reports, able to reduce its attrition, this company looks good to me.

Despite this, I would give a go-ahead to invest in the company though one may not see significant institutional investment as the size of the IPO is too small for them to make an investment!

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