ICRA has three wholly owned subsidiaries: ICRA Management Consultancy Services (IMaCS), ICRA Techno Analytics Ltd (ICTEAS), and ICRA Online Ltd (ICRA Online). IMaCS provides management consulting services to clients based in India and abroad. ICTEAS provides business solutions and computer-aided engineering services.

The objectives of the offer are to achieve the benefits of the listing on stock exchanges and to provide exit route for existing shareholders: IFCI, Administrator of the Specified Undertaking of the Unit Trust of India, and State Bank of India (SBI). Thus, the company will not receive any proceeds from the offer. However, with the exit of other promoters, Moody’s will be in full control. This will not only help ICRA garner business from SBI (which was not possible earlier due to regulations), but also help it enjoy the full benefits of Moody’s association.

Strengths

• ICRA is the No. 2 credit rating agency in the country with 399 outstanding public issues under its belt. It enjoys a strong market position, brand recognition and creditability.

• Moody’s Group, one of the global credit rating majors, holds a 29% equity stake. This will help ICRA to leverage the US company’s expertise in newer products. Also, ICRA provides certain outsourcing services to Moody’s Investors Service.

• Due to diversification of its revenue stream, the share of the rating fee income in the consolidated revenue has scaled down from as high as 85% in FY 2002 to 58% in FY 2006. This will insulate it from the risk of change in volume of debt securities issued in the domestic market, interest rate volatility and economic slowdown.

Weaknesses

• Personnel cost as a proportion to sales is on the higher side compared with the listed market leader. Higher expense is also partly on account of higher attrition rate of 23%.
• ICRA has arranged for short-term loan facility of Rs 50 crore from banks to fund the ESOS Welfare Trust (ESOSWT) for subscription to the preferential allotment made to it under the employee stock option plan (ESOP). Under the arrangement between the company and ESOSWT, the latter will repay the loan as and when funds become available through the exercise of options by employees. This will involve higher interest burden as well as ESOP amortisation charge.

Valuation

Annualised EPS for the nine months ended December 2006 on the post-issue equity works to Rs 15.9. On the price band of Rs 275-Rs 330, PE is 17.3-20.8. The only listed comparable player is Crisil, currently traded around Rs 2100, giving PE of 23 times FY 2006 consolidated EPS. Crisil deserves higher PE as it is: over four times larger than ICRA, growing at a faster rate than ICRA, perceived to be more aggressive, and has made much more headway in non-rating and international business. Besides, S&P controls a 56.5% stake in Crisil compared with 29% by Moody’s in ICRA.