CMP: Rs. 1,389.35; Market
Cap: Rs. 4,029.12 Cr; 52 Week High/Low: Rs. 1,590.00 / Rs. 666.00.
Total Shares: 2,89,99,122 shares;
Promoters : Not
Defined – 00.00 %; Total Public holding 5 % or more : 84,96,066
shares – 29.30 %; Total Public holding 1 % or more : 1,76,25,415 shares – 60.78
%; Public holding : 28,77,641 shares – 9.92 %; Book
Value: Rs. 167.01; Face Value: Rs. 10.00; EPS: Rs. 45.16; Dividend: 280.00 % ;
P/E: 30.76 times; Ind. P/E: 43.38;
EV/EBITDA: 19.31.
Total Debt: ZERO; Enterprise Value: Rs. 4,005.70 Cr.
CREDIT ANALYSIS AND
RESEARCH LTD: The Company was founded on 21st April, 1993 and is based in
Mumbai, India. Credit Analysis and Research
Limited is a credit rating agency, providing rating and grading services for
various sectors in India. The
company came with an IPO of 71,99,700 equity shares of Rs. 10 each at Rs. 750.00
to the general public in December, 2012. Its rating
services include corporate rating services, such as corporate debt, bank loan,
issuer, corporate governance, and recovery rating services; financial sector
rating services, which cover banks, mutual funds, capital protection oriented
schemes, insurance, NBFCs, securitization, and housing finance companies; and
public finance ratings that cover ratings of state government entities and
urban local bodies, as well as project finance, infrastructure sector, and
small and medium enterprises rating services. The company also offers grading
services for educational institutes, IPOs, construction companies, shipyard
companies, maritime training institutes, renewable energy service companies and
system integrators, micro finance institutions, and energy audit, as well as
real estate star rating services. CARE has entered into
collaboration with four credit rating agencies from emerging markets like in
Brazil, Portugal, Malaysia, and South Africa each to provide ratings in those
countries, set up ARC ratings in those countries. CARE also provides research
services and it has been expanding its product portfolio to include newer
services. The company is exploring opportunities to provide risk management
solutions and acquired 75.1 % stake in Kalypto, a firm providing risk
management software solutions in Nigeria in Nov 2011. Credit Analysis and Research Ltd is
locally compared with CRISIL INDIA LTD, ICRA and Globally with Asukanet Company
Ltd of Japan, Eprint Group Ltd of Hong Kong, ZWEI Co Ltd of Japan, McGraw Hill
Financial Inc of USA, Standards & Poors of USA, Moody's of UK.
Investment Rationale:
Outlook and Valuation:
CARE is the second largest rating company in
India in terms of rating turnover. CARE also enjoys a strong parentage of
marquee banks and large financial institutions of India like SBI, Canara Bank,
IDBI Bank and IL&FS. CARE has over 19 years of experience in this business
and has a significant rating coverage of Indian banks and financial
institutions and financial instruments. CARE is primarily engaged in rating
services which accounts for around 98 % of the total revenue of the company as
of FY13. CARE has achieved a steady growth in its ratings business having
rating relationships with 7,754 clients and with number of assignments of 7,865
and it has cumulatively rated around Rs. 7.7 lakh Crs of debt in FY14. In the
last few years, the company has begun expanding itself internationally and is
now providing technical assistance services to countries like Maldives, Hong Kong,
Nepal and Mauritius. Globally and in India
also Credit Rating business will continue to be an niche business making existing
players in India thrive on the upturn expected in the economy over the medium
term. This is because credit rating agencies all across the globe are a business
based on trust, long relationships and hence from the market point of view also
there is unlikely to be any excess supply of paper in this space. Also one important
and noteworthy aspect in the Indian Ratings space is that global rating players
have shown strong interest in the Indian ratings players with S&P holding 75
% in CRISL and Moodys holding 50.8 % in ICRA which has resulted in a sharp rise
in credit rating counters. After
CRISL and ICRA, CARE is now the second largest player in the rating space which
is now available going ahead. While any kind of strategic tie up cannot be
ruled out, it is quite clear that in future such a development cannot be ruled
out. Added to this CARE is atleast twice as large and more profitable to ICRA
and enjoys better financials and return ratios but still trades at 20x FY15E as
compared to 34x FY15E for ICRA. From performance side, CARE’s income from operations
increased 14 % yoy to Rs. 74.3 Cr in Q2FY15 despite sluggish growth in bank
credit. This higher income came mainly from surveillance cases. The sequential
strong growth was seen mainly due to cyclical nature of rating business. Total
operating expenditure increased to 28 % yoy to Rs. 22.70 Cr mainly due to 43 %
yoy increase in the staff cost which was Rs. 16.70 Cr. Higher staff cost was
due provision for ESOP cost and also increase in the staff count on account of
continued focus on building the business team especially in the SME space. CARE’s
EBITDA increased 8 % YoY to Rs. 51.5 Cr, and its EBITDA margin reduced to 69.4 %
from 72.9 % in Q2FY15. However, it was much ahead than EBITDA margins of its
listed peers ICRA which has EBITDA margin of 40.1 % in Q2FY15 and CRISIL with 33.3
% in Q2FY15. As CARE declared special dividend of Rs. 65.00 per share in the
last quarter, the company had to sell its some of the investments and booked the
gain on investments to P&L a/c. As a result, the company’s net profit increased
50 % YoY to Rs. 52.40 Cr and its Net Profit margin increased to 54.1 % from
49.6 % in Q2FY15. Modified credit ratio (MCR) has increased from 1.0 in Q1FY15
to 1.3 in Q2FY15 which is a good sign for the economy and it also suggests
improvement in credit environment during the recent quarters. It was 1.1 in
Q2FY14. MCR is the ratio of upgrades
against downgrades in ratings of the companies. An increase in MCR means stable
and improving financials of the rated companies. CARE continued with its
liberal dividend pay-out policy and the company had announced a special
dividend of 650 % in Q2FY15 with the purpose of sharing the cash surpluses with
the shareholders. Combining this with the interim dividend announced in Q1 of
60 %, the total dividend paid so far is 710 % or Rs. 71. In Feburary 2014, the stake holders of CARE namely IDBI holding 16.62 %, Canara Bank holding 11.95 % & SBI holding 5.19 % invited bids for selling their 33.76 % or approx 97,88,041 Cr shares of their holding in CARE. However the bids did not went through at that time due to valuation issues. It is now heard that CARE is likely to revive the stake sale of its investors again, now it should be noted here that if at all this stake went through, will also trigger an open offer for an additional 26 % shares facilitating the new investor to corner over 70 % in CARE. So if this stake sale goes successful then there would be a very good upside for the stock. CARE’s Q2FY15
performance was better and one can have a positive view on the huge long term
opportunities for the credit rating sector on the back of development in debt
market over next two to three years and CARE should be a good pick among the
listed credit rating agencies. CARE is the best placed for cyclical recovery in
corporate capex and bank credit growth. It is expected that with the company’s surplus scenario is likely to continue
for the next three years & will keep its growth story intact for the coming
quarters also. | KEY FINANCIALS | FY13 | FY14 | FY15E | FY16E |
|---|---|---|---|---|
| SALES (₹ Crs) | 198.80 | 229.50 | 265.80 | 319.00 |
| NET PROFIT (₹ Cr) | 113.00 | 128.70 | 148.20 | 179.10 |
| EPS (₹) | 40.80 | 44.00 | 51.00 | 62.00 |
| PE (x) | 18.90 | 30.70 | 26.60 | 22.00 |
| P/BV (x) | 5.10 | 8.10 | 12.10 | 9.80 |
| EV/EBITDA (x) | 15.80 | 26.70 | 22.80 | 18.60 |
| ROE (%) | 28.30 | 27.70 | 36.50 | 49.00 |
| ROCE (%) | 167.30 | 164.50 | 101.50 | 111.60 |
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