ICRA

ICRA’s rich valuations don’t look expensive considering the high growth trajectory and robust fundamentals
CREDIT ratings agency ICRA has grown by leaps and bounds in the last three years. Though much smaller than the market leader, Crisil, the company is a prominent player in the rating industry. Since it is in the services industry, which does not require huge investment in fixed assets, its return on capital employed (RoCE) at 31% for FY 2009 is quite high.

BUSINESS:

Apart from credit rating, which accounts for a major part of the company’s revenues, ICRA is also into consulting and outsourcing services. There is great scope for growth in the ratings business in India for several reasons. Corporate bond market is highly underdeveloped in India. There are entry barriers in the form of brand name and expertise. And finally, there are just four big players in the industry—Crisil, ICRA, CARE and Fitch (India). The recent regulations of the Reserve Bank of India (RBI), according to which any company borrowing more than Rs 10 crore from a bank has to be rated, has given a fillip to ICRA.

Already its rating business is growing fast. ICRA’s rating revenues grew by 28% in June ’09 quarter. Indian companies require huge investments in projects and need to raise funds from various classes of investors to meet their needs. This will increase their dependence on the bond market. Through its subsidiary, ICRA Management Consulting Services (IMAcS), the company has also entered into consulting, wherein it provides services to companies in various industries such as banks, automotive, health and retail. Though last year the consulting business was affected by slowdown, it is set for a revival this year after the improvement in sentiment and increase in investments.

The company also has a presence in outsourcing services as well. In brief, the company has presence in a whole gamut of rating, consulting and BPO related businesses, which are the growth drivers of future.

FINANCIALS:

The company can grow its profits without substantial investments in fixed assets. For instance, its revenue has grown at a compounded annual growth rate (CAGR) of 40% in last three financial years. In the similar time frame the balance sheet grew at a CAGR of 25%. This is typical of companies, which are not asset heavy, wherein more returns can be earned from little investment. For this reason, RoCE has improved from 16% in FY 2006 to 31% in FY 2009. Moreover, the company has always been debt free, which results in better cash flows.

VALUATIONS:

The stock is trading at a price-to-earnings (P/E) multiple of 19.5 times.

Though, the valuations don’t look cheap, but factoring a high RoCE, it would look modest. The company is growing at a very fast rate — its profit jumped 73% in June ’09 quarter. Definitely, the valuation doesn’t look expensive in the context of growth trajectory. Historically, the stock has traded at very high valuations. For instance, in June 2007, the stock was trading at 45 P/E and then in December ’07, it was trading at a P/E of 40. This shows that the stock still has scope to catch up at current valuation.

Emkay Global views on Bharti Airtel, Bharat Heavy Electricals, ICRA

Bharti Airtel - Target of Rs 1025

Emkay Global Financial Services has maintained its buy rating on Bharti Airtel with price target of Rs 1025 in its November 3, 2008 research report. "Its Q2FY09 results were slightly below our estimates primarily due to higher than expected fall in the mobile ARPU (Q2FY09 ARPU came was at Rs 331 v/s our estimate of Rs 341). The net sales for the quarter grew by 6.3% QoQ to Rs 90.2 billion v/s our estimate of Rs 91.4 billion. Post Q2FY09 results we have reduced our ARPU estimates by 3.2% each and once again increased the subscriber estimates by 3% and 3.6% for FY09E and FY10E respectively. We maintain buy rating with revised price target of Rs 1025 (from Rs1168 earlier) based on DCF value of core business at Rs 906 per share and value of tower business at Rs 119 per share," says Emkay Global Financial Services' research report.

Bharat Heavy Electricals - Target of Rs 1520

Emkay Global Financial Services has maintained its buy rating on Bharat Heavy Electricals (BHEL) with price target of Rs 1520 in its November 3, 2008 research report. "Its of 34.7% yoy to Rs 53.4 billion (against our estimates of Rs51.3 billion) driven by healthy order backlog of Rs 1040 billion. On account of sQ2FY2009 net profit at Rs 6.15 billion is above our expectations primarily because of better than expected topline growth. Net sales witnessed a strong growth lowdown in economic activity, high interest rest and lack of adequate funding for new projects we expect some slowdown in BHEL’s order inflow as well as order execution."

"Consequently we are downgrading our earnings estimates by 3% for FY2009 and 9% for FY2010. Also in order to factor the earnings downgrade and slowdown in order inflow we downgrade our price target for BHEL to Rs 1520, which is based on average of 16X BHEL’s FY2010 earnings, 12X its FY2010 EV/EBIDTA and DCF (WACC of 13.5%)," says Emkay Global Financial Services' research report.

ICRA -

Emkay Global Financial Services has maintained its buy rating on ICRA in its November 3, 2008 research report. "Its net profit of Rs 98 million for Q2FY09 was in line with our expectations driven by strong growth in revenues and improvement in operating leverage. The operating revenues have grown by 32% yoy to Rs 343 million driven by strong growth in the rating services and BPO business. We had valued the company at 15% premium to the Sensex multiple which it self has been derated to 10x. We are revising our price target on the stock to Rs 600, which values the company at 11.5x FY10E EPS (15% premium to the Sensex multiple). We maintain our Buy recommendation on the stock," says Emkay Global Financial Services' research report.

Emkay Global Views on CRISIL, ICRA, Sterlite Industries

Emkay Global Financial Services on CRISIL - Target of Rs 4150

Emkay Global Financial Services has recommended a buy rating on Credit Rating Information Services of India (CRISIL) with a target of Rs 4150 in its September 26, 2008 research report. "At CMP, the stock trades at 14.4x CY09E EPs. With strong earnings growth of 41% over CY07-09E and core RoE of 42%, we believe that CRISIL is an excellent investment opportunity. We have valued CRISIL at 18x CY09E EPS, giving a target price of Rs 4150, Buy," Emkay Global Financial Services' research report.

Emkay Global Financial Services on ICRA - Target of Rs 750

Emkay Global Financial Services has recommended a buy rating on ICRA with a target of Rs 750 in its September 26, 2008 research report. "At CMP, stock trades at 14.1x FY09E and 10.4x FY10 EPS. We expect its core RoE to improve to 27% in FY10 from 24% in Fy08. We therefore assign a target P/E multiple of 14.2x, over the company's FY10 EPS. Based on this multiple, we value ICRA stock at Rs 750, Buy," says Emkay Global Financial Services' research report.

Emkay Global Financial Services on Sterlite Industries - Target of Rs 637

Emkay Global Financial Services has maintained its buy rating on Sterlite Industries (India) with a target of Rs 637 in its September 26, 2008 research report. "Currently Sterlite is trading at EV/EBITDA of 2.4x our FY10 estimates, which includes assumptions of buyout of HZL and BALCO stake. At our target price, Sterlite will trade at EV/EBITDA of 3.2x FY10 estimates, a discount of almost 15% to the global base metal companies. We maintain BUY on the stock with revised target price of Rs 637 with an upside of 34% from the current level," says Emkay Global Financial Services' research report.