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New-York based credit rating agency Moody's plans to double its stake in ICRA to 55 per cent (from 28.51 per cent) has come as a shot in the arm for the company and its shareholders.
While analysts remain bullish on ICRA given the positive outlook for the sector, the strong financials, high return ratios and high cash-flow generation and are advising to stay put, there is also a downside risk given the conditional offer.
Moody’s plans to buy up to 2.65 million shares at Rs 2,000 a share, at a 25.5 per cent premium to ICRA’s closing price of Rs 1,594 on Friday. This values the deal at Rs 530 crore (Rs 5.30 billion), and Icra at Rs 2,000 crore.(Rs 20 billion)
The open offer, however, is conditional on minimum acceptance of 2.15 million shares, equal to 21.5 per cent of Icra’s equity and will enable Moody’s to up its stake to 50.01 per cent. “If the number of shares tendered is less than 2.15 million, the buyer shall not accept any shares tendered,” Icra said.
This suggests the stock could get hammered in case the offer does not sail through and the shares tendered are rejected by Moody’s. Analysts say such a situation could wipe the recent gains in the stock, which jumped 20 per cent to make a 52-week high of Rs 1,913 on Monday in reaction to the offer announcement.
For now, institutional investors (53.6 per cent in ICRA) who hold the key to successful completion of the offer are not fully sure whether to tender their shares. An official of GIC (which holds 5.2 per cent in Icra) said they had not yet decided about tendering of shares. According to him, insurance companies are not very optimistic about the offer as it does not look very attractive in the present format.
"However, the views may change, once the detailed offer is presented to us," he said. LIC also holds a little about seven per cent.
Some analysts, though, are confident and peg the acceptance ratio at above 70 per cent. "We believe the acceptance ratio in the open offer would be between 70 per cent and 86 per cent, depending on the behaviour of other public and corporate shareholders. If the largest shareholder, Birla Mutual Fund, tenders any shares, the acceptance ratio may even be lower," says a note by Emkay Global.
The Moody’s advantage
Through this offer, Moody's is looking to tap a higher market share in India. The Indian debt market is underdeveloped compared to the developed economies. With the Reserve Bank clearing the way for products in this segment and capex cycle likely to pick up after elections (leading to higher debt issuances), analysts expect the market to grow significantly.
ICRA is the third-largest player in the Indian ratings business, with a share of 21 per cent. CRISIL and CARE hold 36 per cent and 28 per cent shares, respectively. With this move, ICRA could see share gains. It would also lead to higher outsourcing revenue from Moody's to ICRA, say analysts.
"ICRA would also have cash a share of Rs 370 in FY15, which may be used for buybacks and dividends," adds the note.
"ICRA provides offshore rating services to Moody’s, which contributes 15 per cent to the former’s rating revenue versus 36 per cent contribution (S&P business) for CRISIL. At the announced open offer price of Rs 2,000, the stock will trade at 24.5 times FY15 estimated earnings per share (EPS) compared to CRISIL’s current valuations of 27.9 times CY14 and 24.2 times CY15 estimated EPS. We have a buy recommendation,” says Shradha Sheth of Edelweiss Securities.
