Kotak Institutional Equities initiates coverage on credit rating agencies with 'sell' on CRISIL; here's why
CRISIL with a ‘sell’ call and ICRA with a ‘reduce’ call and sees 21 percent and 8 percent downside, respectively. "While we are positive on ratings, we are cautious about the non-ratings businesses of both CRISIL (85 percent/70 percent of revenues/EBIT) and ICRA (45 percent/55 percent of revenues/EBIT), which have global market linkage. Reasonable valuations and more confidence in the profitable growth of non-ratings businesses could make us revisit our stance," it said.
Kotak explained that the credit rating agencies (CRAs) are well-placed to benefit from the broad-based credit expansion in the next 3-5 years, resulting from (1) increased supply of credit from all sources (banks, NBFCs, credit funds, etc.); (2) deleveraged corporate balance sheets that are well-placed for the next investment cycle; and (3) potential growth optionalities (ESG ratings, corporate bond market and secondary loan market). It forecasts a 13-15 percent ratings revenue CAGR in the next 3-4 years. Rating revenues have shown a strong correlation with credit growth in the past two decades, which augurs well given the high operating margins as well as stronger guardrails of regulation and reputation after the IL&FS saga, it added.
CRISIL has jumped 43 percent in the last 1 year and 38 percent in 2023 YTD, giving positive returns in 8 of the 10 months completed this year. It declined in only 2 months - September, down 1.17 percent and March, down 5 percent. Meanwhile, it surged the most in April, up 12 percent.
The stock hit its record high of ₹4,284.30 last month on October 20, 2023. Currently, trading at ₹4,212.45, it has rallied over 54 percent from its 52-week low of ₹2,725, hit on December 23, 2022. ICRA, on the other hand, has advanced 31
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