By their own yardstick, stocks of credit rating agencies are fast losing their AAA lustre. In the past year, they have fallen between 25% and 30%. Compared to the 2% rise in the Nifty 50 index during this period, the performance sure comes across as tardy.
The reasons are not far to seek. A string of events has impacted bond issuances over the past few years, affecting the business growth of credit rating agencies. Analysts attribute the slowdown to the paucity in capital expenditure, which has not revived the corporate bond market.
To top it all, the crisis triggered by defaults at Infrastructure Leasing and Financial Services Ltd (IL&FS) has dragged down the buoyant market for commercial- paper issuances. Non-banking financial companies have been large issuers of commercial paper in the debt market. The crisis also increased regulatory scrutiny, which has raised investor concerns about new rules that may impact growth and/or profitability.
“The IL&FS crisis is a bigger problem for credit rating agencies and is aggravating the slack in the bond market. The private capex revival story, which everybody anticipated as coming, has been elusive. The bank credit system has not really picked up," said Ritika Dua, associate vice president at Elara Securities (India) Pvt. Ltd.
In fact, the revenue growth trend for all credit rating agencies together fell in the December quarter. Revenue growth was just 3.8% last quarter on a cumulative basis, compared to 5.9% growth a year ago.
“The overall industry’s rating revenue has been seeing growth pressure. In FY18, rating revenues of top three rating agencies in India increased ~5% YoY vs. 7% YoY traction seen in FY17. The slower revenue growth was on account of weak credit growth of the banking system (especially in corporate loans) and on account of lowering of the subsidy benefit to SMEs for acquiring credit ratings. Further, owing to weak investment activity and capex in the economy over the last few years, the bond market has also been muted for rating agencies," said ICICI Direct in a note on CARE Ratings Ltd to clients.
This past year, interest rates, too, have been high. This also impacted bond issuances. “There are fewer buyers for short-tenure paper, and virtually no buyers for longer-tenure paper," avers Dua.
The ICICI Direct report added: “Despite various measures taken by government and the regulator with respect to reviving and deepening the bond market, we believe it would take time for benefits to accrue. Thus, we expect revenue for the rating industry to continue to be muted in the near term."
Further, stock valuations are discomforting. The one-year-forward price-earnings multiple of Crisil Ltd, Icra Ltd and CARE Ratings are 28.6, 23.7 and 21.7, respectively, as per Bloomberg consensus estimates. That’s quite stiff for businesses seeing growth of just 4-7% next year, according to analysts. That means the equity markets may continue to keep credit rating businesses on a rating watch, or even a downgrade.