ICRA – the next multibagger in making in India, November 2009
Under some circumstances, betting on the number two player in the industry is more fruitful than betting on the leader. Investor Information and Credit Rating Agency (ICRA) is a classical example for this.
India has largely undeveloped market of debt products. NSIC (National Small Industries Corporation) has formulated a Performance & Credit Rating Scheme for Micro & Small Enterprises which will provide a major kicker.
NSIC in consultation with Credit Rating Agencies and Indian Banks’ Association has formulated a Performance & Credit Rating Scheme for Micro & Small Enterprises. The National Small Industries Corporation (NSIC) has been appointed as a nodal agency by the Ministry of Micro, Small & Medium Enterprises to implement the scheme. NSIC empanelled the leading credit rating agencies like CARE, CRISIL, Dun & Bradstreet, FITCH, ICRA, ONICRA and SME Rating Agency of India Ltd (SMERA) to conduct the rating of interested Micro & Small Enterprises under the scheme. While the criteria of finalization is left up to the individual rating agencies, the symbols and the definitions for indicating the risk score has been evolved on uniform basis for implementation by all rating agencies. The scheme was launched on April 7, 2005 by the Finance Minister and Minister of MSME .
Selection of the Rating Agency
In the Scheme the micro & small enterprises are at liberty to select any of the rating agencies empanelled with NSIC. These Enterprises are required to mention the name of the rating agency selected by them in their request for obtaining the rating.
The Rating Agencies have different fee structure for the rating services provided to various clients including Micro & Small Enterprises. The fee structure for Micro & Small Enterprises has been devised separately under this Scheme.
The Rating Fee to be charged will vary in accordance with the evaluation criteria adopted by various Rating Agencies and their acceptability also varies with the users.
These Agencies are required to intimate their rating fee to NSIC at the time of empanelment, making it known to both the parties. The fees may, however, be reviewed by Rating Agencies from time to time keeping in mind the competition and the number/size of clientele. A ceiling has been prescribed by the Government to subsidize the fee.
The MSEs pay rating fee along with their respective applications. The payment can be made by pay order/demand draft drawn in favor of the Rating Agency selected by the Micro & Small Enterprises.
In the case of a request for rating being treated as closed by the Rating Agency due to non-receipt of the complete information, fifty per cent of the fees received from the Enterprise is refundable. However, if the MSE backs out from the rating process after the Rating Agency has carried out its inspection, no amount is refundable.
Sharing Of Fees
The Rating fee to be paid is based on the turnover of the Micro & Small Enterprise, which has been categorized into three slabs. The slabs of the turnover and the share of the Ministry in the fee charged by the Rating Agency is:-
Fee to be reimbursed by Ministry of MSME
Up to Rs.50 lacs
75% of the fee charged by the rating agency subject to a ceiling of Rs.25, 000/-
Above Rs.50 lacs to
Rs. 200 lacs
75% of the fee charged by the rating agency subject to a ceiling of Rs.30, 000/-
Above Rs.200 lacs
75% of the fee charged by the rating agency subject to a ceiling of Rs.40, 000/-
The balance amount towards the fee is borne by the Micro & Small Enterprises.
The portion of the fee to be subsidized by the Ministry is released through NSIC after submission of the Rating Report to NSIC by the Rating Agency.
While the criteria for evaluation is set by the Rating Agency, the symbols and their definition for indicating the risk score in the rating awarded has been evolved for uniform implementation by all the Rating Agencies. These symbols depict both the performance evaluation as well as the credit worthiness of the unit.
The Rating is to be prefixed by the word NSIC and its valid for a year from the date of issue of the rating report.
Sharing of Rating of Small Enterprises
The Rating Agencies share the Rating awarded to Small Enterprises with NSIC.
Process of Application
The Small Enterprises are required to submit their applications for rating in duplicate and they can be submitted to any of the offices/branches of NSIC or directly to the Rating Agency selected by the Small Enterprise.
On receipt of application, NSIC forwards the second copy of the request along with the information and documents to the Rating Agency along with their comments, if any. Alternatively, if the application is submitted to the Rating Agency, one copy of the application is sent to NSIC for their reference and comments.
Promotion Of The Scheme
NSIC is creating awareness about the Scheme, among the Small Enterprises by conducting various open house/exclusive sessions. Various Industry Associations and Rating Agencies are also being involved in these programs. The Scheme is also being propagated through seminars and campaigns conducted by NSIC. Efforts are being made to popularize the Scheme, so that maximum number of units can avail its benefits.
NSIC has tied up with banks such as Oriental Bank of Commerce, UCO Bank, United Bank of India, Central Bank of India, Bank of Maharashtra, YES Bank, UTI Bank, Karur Vysya, Union Bank of India and HSBC Ltd. and others. It has been agreed upon by the banks that the bank will promote the units applying for credit support under this arrangement and it will also re-calibrate the interest rates and security norms while considering the sanction of their proposals.
The Scheme is getting good response from the Micro & Small Enterprises. Till September 30, 2009, a total of 16,000 units have applied for the rating and various rating agencies have already awarded the rating to 15,000 units.
ICRA is primarily in the business of rating financial instruments for various entities. The competitive structure of the industry in which it operates is highly oligopolistic. The demand for rating services are increasing more than ever and the entire sector is demonstrating robust growth. The business itself runs on low debt and strong operating margins in excess of 50%, which makes the cash flow even stronger.
ICRA is going to gain tremendously from the systemic structure and the recent norms issued by RBI and the Government regarding borrowing requirements of various entities through banking system. Even the larger businesses wanting to raise debt from open market now prefer availing services of more than one rating agency. This is to make the borrowing programme attractive by tapping the investors’ comfort as the debt offer is rated by two or more independent agencies. Till now ICRA has benefitted and should continue to benefit as the practice of availing the services of two rating agencies becomes wide spread.
Besides credit ratings, ICRA is also engaged in advisory, outsourcing and information and IT services, but rating services contributes almost 64% of the revenues and 92% of the operating profit. ICRA’s consolidated revenues grew at 34 per cent CAGR in the last three years (FY 2007- FY2009) while net profit grew by 43 per cent in the same period.
The key source of growth in the future would be the RBI mandate for compulsory ratings for bank loans exposure. As per the Industry estimates, about 55 per cent in volume of the current loan exposures of banks and about 30 per cent by value is not rated. As per the stipulation, the ratings process must be over by end of 2008-09 for all commercial bank loans of above Rs 10 crore. Else bank will have to set aside more capital for such un-rated loans (through higher risk weights). This will encourage banks to get the ratings done on the existing loans as to release more lendable resources. Correctly spotting this as an opportunity, ICRA has signed MoUs with many banks for providing rating services to source more revenues. Other than this one time opportunity, fresh loans to be given by banks also require rating, ensuring a steady demand for ICRA’s rating services. The banks on their own will come to debt market to raise Tier – II capital in order to meet their capital adequacy norms, again requiring ICRA’s services. In the September 2008 report on currency and finance released by RBI, it is estimated that the banking sector would require additional capital of Rs 5,68,744 crore over the next five years to maintain capital adequacy of 12 per cent.
Apart from banks, the debt offerings from India’s corporate will be the key medium to long-term revenue driver for rating agencies such as ICRA. With the difficult state of affairs in the global credit market, many Indian companies have turned to domestic debt, which will play a major role in India Inc’s capital raising plans over the next five years. The sublime interest rate scenario will also fuel the corporate bond market. In addition to corporate bonds, state and local level entities (municipal bonds and state level bonds) are also expected to tap the market for funding requirements. Though in an early stage of development, the securitisation market also offers huge potential.
However, poor show on the non-rating business front is likely to bring down the overall operating margins in future. The benefit of acquisitions of Axiom Technology and Sapphire International by ICRA’s IT services division is yet to be seen.
At the CMP of Rs 780 per share, ICRA is available at the multiple of 15 FY10 expected earnings of 50Rs per share.
Any fall in its current market price, will make the fresh position on it attractive. Investors’ looking for steady and decent returns from medium term perspective should become interested in this counter.