Stocks of Indian rating agencies are in news yet again. The stock of ICRA shot up by 17 per cent today, after Moody's revised the open offer price from Rs 2,000 to Rs 2,400. Moody’s currently holds a non-controlling 28.5 per cent stake. The offer is to increase the stake by another 26.5 per cent.
Last time around the stocks of rating agencies were in news was when CARE’s four principal shareholders holding 45 per cent stake in the company made public their intention to offload their holdings.
While CARE’s stake sale did not go as planned, it is clear that foreign rating agencies as well as PE investors are taking an active interest in rating agencies. Only last year, S&P, the parent of CRISIL had made an open offer to increase its stake in the company to 75 per cent, and took its stake up to 68 per cent.
In India, the fortunes of rating agencies depend on the underlying economy and the capital market conditions. Sluggish investment activity and fewer bond issuances have impacted the revenues of these companies in recent times.
If the economy were to recover from here, > rating agencies will stand to benefit both from the first round of fund-raising as well as refinancing activity. Both bank loan ratings and corporate bond ratings account for a significant portion of rated debt. The size of the debt market (as a per cent of GDP) in India is at a fraction of that in developed markets. This presents huge business opportunity for rating agencies to grow their mandates and thus their rating fee income. Recent moves by the government and regulators to deepen the bond market are expected to brighten prospects for the Indian rating agencies.
Three rating agencies — CRISIL, ICRA and CARE — command 82 per cent share of ratings revenue in India. Of these, CRISIL has always traded at a premium to ICRA and CARE, thanks to its diversified revenue streams and additional business from international partner-- S&P.
After the run up in the stock of ICRA on Wednesday, the stock is now trading at 30 times one year forward, at a slight premium to CRISIL which is trading at 27 times. ICRA has always traded at a discount of 18-20 per cent to CRISIL in the past. While a higher stake by Moody’s is expected to open more revenue opportunities, significant upsides may be limited.