ICRA shares surge upon Moody's majority stake acquisition

Shares of Mumbai-based ICRA surged over 17 per cent in intra-day trading today to touch a life-time high after promoters Moody's acquired a majority equity stake in the company.

Moody's now holds a little over 50-per cent stake in ICRA, from 28.5 per cent earlier.

The stock has been in hot action ever since its foreign partner Moody's announced its intention to raise its stake in February. A similar surge was seen recently when Moody's increased the open offer price from Rs2,000 to Rs2,400.

While both Crisil and ICRA have foreign ownership, the extent of stake in their Indian arms has influenced the revenue contribution from them.

S&P has a controlling stake of 67.7 per cent in Crisil. The work done for its parent S&P is about a third of its ratings revenues. On the other hand, ICRA's outsourced services which mainly comprises work from Moody's is only 9 per cent of revenues.

Globally, Moody's and S&P compete neck and neck, with an equal market share of 40 per cent each. A significant increase in Moody's stake in ICRA, can hence widen the scope of revenue opportunities from its foreign partner.

But whether this warrants a sharp rally of close to 67 per cent in the stock in the last six months needs to be seen in light of its performance in recent times.

ICRA has been lagging its peers in ratings growth in the last four years. Also ICRA's consulting services segment has remained sluggish, owing to over-capacity in the consulting space. While the company has attempted to diversify its business, consulting and IT-related services are not very profitable. And hence a pick up in ratings and outsourcing business will remain key drivers for earnings.

After the recent run, the stock of ICRA trades at 33 times one year forward, at par with CRISIL. Hence, ICRA's performance over the next year, will be critical to sustain such steep valuations.

But it has not been ICRA alone that has seen such investor interest. All ratings stocks have been on a merry ride in the last six months-- CARE and CRISIL gained more than 40 per cent. CARE started to rally after its four principal shareholders - holding 45 per cent stake - made public their intention to offload their holdings, in February. While the stake sale didn't materialise, the stock has re-rated significantly from 14 times to 22 times one-year forward earnings.

Indian rating agencies have been drawing interest from foreign rating agencies as well as PE investors, as they are an indirect bet on the growth in the nascent Indian corporate bond market. If the economy recovers, then rating agencies benefit both from the first round of fund-raising as well as refinancing activity.