Here are my notes from the concall
- What went wrong in the past? A large part of business was lost due to stress in NBFCs, some of them went under and didn’t need any further ratings impacting surveillance income. Also, the NBFCs were highly levered at time and have subsequently reduced leverage needing lower outstanding loans which reduced rating volumes
- Are there one-off in revenues? There is some spill over of revenues from Q1 to Q2 (specifically the surveillance business some of which couldn’t be finished in Q1 because of delayed availability of financial statements; also said the same in Nirmal Bang interview); Q2 performance has come from initial + surveillance businesses, there is no one-time effect there. Comparing H1FY21 ratings revenue with H1FY20 is better (5% reduction)
- Short & medium term issuances along with bank loan ratings have gone down while longer time issuances have gone up
- Seems that they want to slowly exit the SME credit rating business because the revenues cannot pay for the cost incurred in that business line
- Future growth: Want to grow in the capital markets segment (including structured debt segment such as REITs, INVITs). Currently they are developing internal capabilities to serve these markets, specifically the REIT and INVIT markets. Want to bring it to the same level as the BLR segment
- Held a number of industry webinars on impact of COVID on different industries (including industry experts this time around)
- Will require a few more quarters to prepare an outlook on different business lines (Risk solution and advisory (to SME) businesses)
- Looking to further modify the corporate culture by building a mindset of analytical rigor with a single minded focus on rebuilding the company’s reputation by the quality of work (will be happy to lose business but not reputation)
- Improving internal talent within the organization to add knowledge driven analytics to clients (have added new products in structured finance)
- 10 lakh stock options (will be granted in H2FY21). These expenses will hit P&L statement in H2FY21
- Increase in employee cost will not be very high gestation (like 3 years). Instead most of the investments will show impact in a few quarters and should be more EPS accretive in a 1 year kind of timeframe
- Capital allocation: Dividend comes from cash generated from business while buyback requires a comprehensive thought process of overall capital allocation. Haven’t yet thought of giving buybacks with cash generated from business
- Industry outlook: With more rating agencies and the size of pie (overall borrowings) not increasing significantly has led to more competition; Pricing for fee based businesses such as ratings is very challenging in India
- Bond market outlook: Development of bond markets through a secondary capital market has failed from the last 3 decades. It requires mature investors who understand the impact of MTM and do not chicken out at the first sign of stress, especially because the bond market is so shallow. India has tried to develop debt capital markets using bank loans and this has not worked. No clue when it will actually work
- Revenue accounting is more lumpy because it depends on the business done in last quarter. Will not change the revenue accounting policy now (to percentage based accounting)
One thing that I want to know is how much of the current rating business is from the BLR line to PSU banks and what is the impact of a shift to Internal Risk based ratings from banks?
Disclosure: Invested (Position size here)