RUPA & COMPANY LTD : ALL ABOUT COMFORT !!!

Scrip Code: 533552 / RUPA

CMP:  Rs. 229.10; Market Cap: Rs. 1,821.90 Cr; 52 Week High/Low: Rs. 253.75 / Rs. 192.70;

Total Shares: 7,95,24,560 shares; Promoters : 5,95,86,390 shares –74.93 %; Total Public holding : 1,99,38,170 shares – 25.07 %; Book Value: Rs. 34.30; Face Value: Rs. 1.00; EPS: Rs. 8.34; Dividend: 250 % ; P/E: 27.47 times; Ind. P/E: 12.03; EV/EBITDA: 14.40.

Total Debt: 180.77 Cr; Enterprise Value: Rs. 1,998.08 Cr.

RUPA & COMAPNY LTD: Rupa was incorporated in 1985 by the Agarwala brothers. In 1995, they took over the business of Binod Hosiery, a partnership firm incorporated in 1979. They have emerged, over the years, as the largest hosiery manufacturer in India. The company produces and markets knitted garments such as innerwear, casuals wear and also footwear. The company came with an IPO at Rs. 10 in the year 1995 and was initialy listed on Culcutta Stock Exchange & Jaipur Stock Exchange. And it got itself listed in BSE in 2010 & at Rs. 200 on NSE in 2011. The company launched Thermocot, the first branded winter wear in India. The company is also pioneered in printing of the brand name in front of the vest. This made the logo as a design element which made the product to be flaunted. RUPA is one of the earliest brands which introduced celebrity endorsement. This created huge impact and recall value. Rupa & Company Ltd has a comprehensive portfolio of product offerings in the knitted innerwear, casual wear and thermal wear segment for men, women and kids. The company offers its products principally under the Rupa, Frontline, Jon, Air, Macroman, Macroman M' Series, Euro, Kidline, Bumchums, and Thermocot brand names. Rupa & Company Limited sells its products primarily through own retail outlets, as well as through independent retailers in India and the Middle East. The company also exports its products. The Company manages more than 6000 stock keeping units (SKUs), each of them for a particular brand, segment colour and size. The Company has its two wholly owned subsidiaries- M/s Euro Fashion Inners International Private Limited which sells premium men’s innerwear products under the brand “EURO” and Imoogi Fashions Private Limited which has recently launched apparel for kids of 0-12 years of age under the brand “IMOOGI”. Rupa also operates a Wind mill for power generation. The company is locally compared with Lovable Lingerie Ltd, Page Industries Ltd, V2 Retail Ltd , Trent Ltd, Brandhouse Retail, CESC Ltd, Future Retail, Arvind Ltd, Kewal Kiran Clothing Ltd, S Kumars Nationwide Ltd, Koutons Retail Lyd, Maxwell Industries Ltd and Globally with I.T Limited of Hong Kong, Dickson Concepts (International) Limited also from Hong Kong, Industria DE Diseno of Spain, Inditex SA of Spain, Gunze Ltd of Tokyo, Levi Strauss & Co of US, Gucci Group NV of Netherlands, Tommy Hifiger BV of Netherlands, Marc Jacobs International LLC of USA Calvin Klein Inc of USA and Donna Karan International Inc. form USA.

Investment Rationale:

Rupa & Company Limited is one of the leading textile companies, operating across the country and abroad. It is into manufacturing, processing, designing and selling hosiery and fashion wear products for men, women, and kids. It provides knitted garments, including innerwear, casual wear, and footwear. Rupa & Company Limited sells its products primarily through own retail outlets, as well as through independent retailers in India and the Middle East. The company also exports its products. Rupa, a branded innerwear player & has created and nurtured over 100 brands and manages a portfolio of 6000 stock keeping units (SKUs) comprising different range for men, women and kids. The company has a product offerings catering to different sections of society covering various price points. Over the years, the company has invested in brand building and moved up the value chain from a commodity centric marketing strategy to a brand led market positioning. The company is looking to capture a higher share of the in the premium innerwear segment by introducing premium category products, which would enable it to have better margins, going ahead. The share of super-premium products in the overall mix has gone up from 4 % in FY09 to 9% in FY13. Rupa has a pan–India presence with a large distribution network consisting of three central warehouses, 19 exclusive business outlets, 20 branches, 859 sales & marketing professionals, 950 dealers and 1,10,000 retailers. The company has already set up extensive touch points with customers, which would enable it to achieve consistent growth. Rupa is looking at having a higher proportion of the customer’s wallet by introducing newer products. The company has recently launched jeans under the Euro brand and leggings under the brand “Femmora”. The company is also looking at leveraging its brand equity by entering the kids’ innerwear segment. The Indian textile industry is set for strong growth, buoyed by both rising domestic consumption as well as export demand. Abundant availability of raw materials such as cotton, wool, silk and jute and skilled workforce has made India a sourcing hub. The most significant change in the Indian textile industry has been the advent of man-made fibres (MMF). India has successfully placed its innovative range of MMF textiles in almost all the countries across the globe. Manmade fibre production recorded an increase of 2 per cent during the year 2012-13. India is the one of the world's largest producers of textiles and garments. The potential size of the Indian textile and apparel industry is expected to reach US$ 22,100 Cr by 2021, according to the reports by Technopak's Textile and Apparel Compendium. Textile industry has made a major contribution to the national economy in terms of direct and indirect employment generation and net foreign exchange earnings. This sector contributes about 14 % to industrial production, 4 % to the Gross Domestic Product, and 17 % to the country's export earnings. It also provides direct employment to over 3.5 Cr people. The textiles sector is the second largest provider of employment after agriculture in India. Thus, the growth and all round development of this industry has a direct bearing on the improvement of the economy of the nation. The hike in FDI limit in multi-brand retail will bring in more players, thereby providing more options to consumers and this will be in all very good for Textile Industry. It will also bring in greater investments along the entire value chain – from agricultural production to final manufactured goods. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with several international players like Marks & Spencer, Guess and Next shop having entered the Indian market. The organised apparel segment is expected to grow at a compound annual growth rate (CAGR) of more than 13 % over a 10-year period. Rupa will be surely a beneficial as it competitive advantage lies in its owned Brands which have grown over the years with a vast popular product line & with decades-long experience in successfully launching, nurturing and managing several winning brands in a pre-dominantly unorganized industry Rupa surely has its upper hand.

Outlook and Valuation:

Rupa & Company is India’s largest hosiery brand, covering the entire range of knitted garments from innerwear to casual wear & also operates a Wind mill for power generation. Due to decades-long experience in successfully launching, nurturing and managing several winning brands in a pre-dominantly unorganized industry, RUPA & Co is acclaimed by the Limca Book of Records as the largest hosiery and innerwear manufacturing and marketing company in India, for a 8 consecutive years. Rupa sells more than 12 million pieces of inner wear every month. Rupa’s competitive advantage lies in its owned Brands which have grown over the years, a product line range named $ as a brand across all categories, a formidable reputation of “Great Quality at Great Price points”, and a fact that it accepts the Buyer’s specification. Also RUPA is the first Indian company to launch bacteria-resistant briefs under its exclusive brand Euro. Rupa & Company Limited own three state-of-the-art manufacturing facilities at Delhi, Tirupur and Domjur with an overall capacity to produce 7,00,000 pieces a day. It has one of the largest distribution networks through 1 lakh retail outlets across 600 locations with a dedicated support of more than 950 dealers and distributors. Rupa had seen an accelerated revenue growth over FY07-10 with a CAGR of 21 %. Even in FY11-13, Rupa abled to maintain its double digit growth at CAGR of 13 %. Over FY09-13, the company was able to increase the share of super-premium segment from 4 % in FY09 to 9 % in FY13. Geographically, the north region contributes the highest with 48 % contribution to FY13 revenues while east contributes 26 %. Rupa is strategically focusing on increasing its share of the super-premium category. The super-premium category has grown at a CAGR of 41 % over FY09-13 while the other category has grown at a CAGR of 17 % over the same period. Among products, men’s and thermal category have grown at a CAGR of 20 % and 22 %, respectively, over FY09-13. Among other categories, women’s has grown at a CAGR of 15 % while kids (on a low base) have grown at a CAGR of 44 %. Among brands, Jon, Frontline and Macroman contributed 33 %, 26 % and 10 %, respectively. Rupa reported 9 % YoY revenue growth in FY14. Over the years, Rupa has progressed from a commodity centric marketing to brand led market positioning enabling it to register a drastic transformation in EBITDA margin. Rupa’s EBITDA margin improved from 8.2 % in FY07 to 15.2 % in FY13, which has been its peak EBITDA margin. However, in FY14, the EBITDA margin declined 80 bps YoY to 14.4%. EBITDA margin is expected to improve over the next two years driven by higher share of super-premium category and introduction of new high margin products. Driven by improvement in EBITDA margin, it is expected that its EBIDTA to grow at 10 % over FY14-16E and PAT to grow at a CAGR of 14 % over the period. It is expected that the company surplus scenario is likely to continue for the next three years which will keep its growth story in the coming quarters also.  

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	829.00	904.00	973.00	1,053.00
NET PROFIT (₹ Cr)	65.00	66.00	75.00	82.00
EPS (₹)	8.10	8.30	9.40	10.20
PE (x)	28.10	27.60	24.30	22.40
P/BV (x)	7.50	6.40	5.40	4.60
EV/EBITDA (x)	16.20	15.50	14.10	12.70
ROE (%)	26.60	23.10	22.10	20.50
ROCE (%)	25.80	24.40	24.00	24.10

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-------------------------------------------------------------------------------------------Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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LUMAX AUTO TECHNOLOGIES LTD: SHIFTING ITS GEARS !!!

Scrip Code: 532796 / LUMAXTECH

CMP:  Rs. 288.40; Market Cap: Rs. 392.32 Cr; 52 Week High/Low: Rs. 322.75 / Rs. 90.90.

Total Shares: 1,35,57,327 shares; Promoters : 75,89,146 shares – 55.67 %; Total Public holding : 59,68,181 shares – 44.02 %; Book Value: Rs. 75.83; Face Value: Rs. 10.00; EPS: Rs. 24.84; Dividend: 15.00 %; P/E: 11.61 times; Ind. P/E: 14.94; EV/EBITDA: 5.83.

Total Debt: Rs. 38.79 Cr; Enterprise Value: Rs. 417.95 Cr.

LUMAX AUTO TECHNOLOGIES LIMITED: Lumax Auto Technologies Limited was founded in 1981 and is based in Pune, India. The company was formerly known as Dhanesh Auto Electricals Limited and changed its name to Lumax Auto Technologies Limited in 2006. It manufactures and sells automotive parts for two wheeler and three wheeler industry in India. Lumax Auto Technologies Ltd came with an IPO in December 2006 offering 30.12 lakh equity shares of Rs. 10 each for Rs. 75 per share raising Rs. 22.60 Cr. The object of offer for sale was to part finance the project’s cost of Rs. 50.2 crore and for other general corporate purposes. The company primarily offers two wheeler chassis; exhaust systems and mufflers, and silencers; petrol tanks; sheet metal and tubular welded products, such as handle bar assemblies, side stands, main stands, footrest assemblies, fork assemblies, and number plates; gear shift levers; parking brakes; adjustor motors; and PCBs, as well as auto lightings. It is also involved in the trading of automotive parts. Lumax Auto Technologies Ltd has 6 manufacturing facilities in India, which are strategically located in the automotive industrial belt in Maharashtra. It has also has a setup in Himachal Pradesh. Lumax Auto’s other manufacturing units are located at Bhosai, Chinchawad, Chakan, Pantnagar in Uttaranchal and Waluj in Maharashtra. Company’s subsidiaries include Lumax DK Auto Industries Limited. LDK, The Gear Shifter division (including research and development facilities) of LDK has been demerged from the LDK and transferred to LMAT w.e.f. October 01, 2013. Recently the company has sold some stake of LMAT to Mannoh Industrial Co, Ltd, Japan. In order to strengthen its foothold in the seat frame business, the Company has entered into a Joint Venture Agreement with Gill-Austem LLC as new JV Company - Lumax Gill-Austem Auto Technologies Private Limited (LGAT) was incorporated during the year. Another JV, Lumax Cornagiia Auto Tech (LCAT) is supplying Air Intake System (AIS) to leading automobile manufactures in India viz. TATA, FIAT, VOLKSWAGEN, SKODA & General Motors. Lumax Auto Technologies Limited is locally compared with Amtek Auto Ltd, Balkrishna Industries, Bharat Forge LTd, Munjal Auto Ind Ltd, Suprajit Engineering Ltd, Motherson Sumi Systems, Swaraj Engines Ltd, Richo Auto and globally compared with Bosch Ltd of USA, Cub Elecparts Inc of Taiwan, Depo Auto Parts Industrial Co. Ltd of Taiwan, Toyota Industries Corporation of Japan, ARB Corp Ltd of Australia, Stanley Elecctric Co of Japan, Sumitomo Electric Ind Ltd from Japan, Sangsin Brake Co. ltd of South Korea, Denso Co of Japan, Metair Investments Ltd Johannesburg, AD Plastik d.d of Africa, DaNang Rubber JSC of Middle East, Phuoc Hoa Rubber JSC , Saph,  Hyundai Wai Corp of Korea, Hi-lex Corp of Japan.

Investment Rationale:

Lumax Auto Technologies Ltd is a part of the DK Jain Group of companies which has carved its strong position in automotive parts and is the market leader in Design, Testing and Manufacturing of Parking Brakes & Gear Shift with a strong presence in both passenger cars as well as in the commercial vehicle segments. In order to fully exploit the opportunity in exports market and to give speed to its Gear Shift lever business, Lumax Auto Technologies incorporated its 100 % wholly owned subsidiary, Lumax Mannoh Allied Technologies Limited (LMAT) on July 22, 2013. Lumax is the leader in automotive lighting systems and has a technical and financial collaboration with Stanley Electric Co (Stanley) of Japan. Lumax, primarily, was in the business of automotive lighting systems which now accounts only 30 % of its standalone revenues and 19 % of consolidated revenues. The company is market leader in Designing, Testing and Manufacturing of Parking Brakes & Gear Shift levers in India since past 10 years with an overall domestic market share of more than 60 % with a strong presence in both passenger cars & commercial vehicle segments. Also the company is a major supplier of chasis, exhaust systems and petrol tanks for two wheelers. Further, Lumax Auto has now diversified into non-automotive segments such as infrastructural lighting. The company has ten modern manufacturing plants in India. Lumax Auto has large and reputed customers which include Bajaj Auto, Honda Motorcycle & Scooters India (HMSI), Piaggio, Lumax Industries, Maruti Suzuki, Tata Motors, Eicher Motors, Force Motors, and Fiat etc. in the commuter segment. Company’s five plants are located in Pune, two plants in Aurangabad, in Maharashtra, one in Manesar Gurgaon, in Haryana, one plant in Ambala in Himachal Pradesh and one in Narsapura, Karnataka. All these facilities are strategically located in the automotive industrial belt. The manufacturing facility at Narsapur, Hubli, Karnataka has commenced supplying plastic moulded parts to Honda Motorcycle & Scooters India (HMSI) last year which helped them to post flat growth in FY14 despite weak automotive sales during the year. With HMSI growing rapidly and capturing significant market share the growth of Lumax is likely to remain intact in the coming years. Lumax has various tie-ups like for its exhaust systems the company has a tie‐up with Cornaglia group of Italy which is a major supplier to Fiat. For its parking brakes and gear shift levers business, LATL through its subsidiary Lumax DK Auto Industries has formed a JV with M/s Mannoh Industrial Co Ltd, Japan to manufacture complete gear shift lever systems for Manual, AMT & CVT transmissions in India. These tie‐ups ensure best of the technologies for LATL’s products. The domestic automobile industry has increased at a CAGR of 10.6 % from 2003-2008. The vast domestic market is attracting more number of foreign automobile manufacturers such as Ford, General Motors, Honda and Toyota as they look for alternative markets to counter the sluggish growth in US market and to counter the overcapacity in other global markets. Global manufacturers such as Suzuki and Hyundai have adopted India as their global production base for small cars. The Indian auto component industry has been growing at a CAGR 16 % p.a. for past seven years and is expected to have 3 % share in global market by 2015-16. Exports of auto components grew at the rate of 30 % during the last five years. As per estimates provided by Automobile Components Manufacturers Association of India (ACMA), auto component exports are expected to reach US$ 20-22 billion by 2015-16. The entry of foreign vehicle manufacturers in India & with the growing cost pressures in the global automotive market gives India a huge exports potential. India has low penetration of car per 1000 person; India has 7-8 cars per 1000 person and India will have a growing middle class from 5 Cr to 55 Cr by 2025 and so the prospects of the Auto Industry in India looks good and eventually with better infrastructure development which are planned out to be around $50,000 Cr in the next 5-6 years will also be the key growth drivers for the auto component industry in India.

Outlook and Valuation:

Lumax Auto Technologies (LATL) is a supplier of key components to the two wheeler and the passenger car industries. It has created its strong position in automotive parts like Sheet Metal parts, Fabricated Assemblies, Tubular Parts for two wheeler and three wheeler industry. Its key customers include Bajaj Auto, Piaggio, Honda Motorcycles and Scooters, Maruti Suzuki, Toyota and Tata Motors. Strong tie-ups with these OEMs will entail large business opportunities in the next few years. For Lumax Auto Technologies its Head lamp contributes 15 % to its standalone revenues; Tail Lamp contributes 3.69 % to its standalone revenues; Frame Chassis contributes 9.95 % to its standalone revenues; Adjustor Motor contributes 6.15 % to its standalone revenues; Gear Shift Assembly/Parking Brake/Nob contributes 32.65 % to its standalone revenues; Air Intake Systems (AIS) contributes 3.32 % to its standalone revenue. The company had shown poor growth in FY14 due to slowdown in Automotive Industry.  But it is expected that there could be a strong revival in automotive industry on the back of overall macro-economic recovery, cut in fuel prices and peak out in interest rates. The auto industry showed decent performance in YTD FY15 and expect it will continue in coming years on the back of revival in economy. Lumax Auto Technologies can have a top line increase by 13 % in FY15e and 15 % in FY16e on the back of strong volume growth driven by new launches and favourable economic conditions. With strong volume growth expectations in automotive industry the next couple of years, it can have a robust margin expansion. On performance side its Total sales for the H1FY15 rose by 13.18 % to Rs. 420 Cr from Rs. 370 Cr in H1FY14. During H1FY15, the consolidated net profit jumped to Rs. 32 Cr against Rs. 14.5 Cr in the corresponding quarter of previous year, an increase of 121 %. EBITDA for the H1FY15 was Rs. 34.54 Cr as against Rs. 27.8 Cr in H1FY14, growth of 24.24 %. EPS of the company stood at Rs. 23.49 a share during the period, registering at 120.8 % increase over previous year period. However, during H1FY15, there was an exceptional item of Rs. 21.36 Cr in Q1FY15 as profit on sale of shares in Lumax Mannoh Allied Technologies Limited (LMAT) to Mannoh Industrial Co, Ltd, Japan in terms of Joint Venture and Share Purchase and Shareholders' agreement. With comfortable D/E of 0.2x and robust RoCE of 17 %+, the stock has to catch up in terms of valuations of its auto ancillary peers which have seen strong rally in the recent past. 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)	766.30	762.80	861.90	991.20
NET PROFIT (₹ Cr)	41.11	30.20	34.80	48.00
EPS (₹)	30.10	22.20	25.50	35.20
PE (x)	9.30	12.60	10.90	7.90
P/BV (x)	1.80	1.70	1.50	1.30
EV/EBITDA (x)	4.00	4.20	5.90	4.30
ROE (%)	19.40	13.40	13.80	16.40
ROCE (%)	23.90	16.80	17.40	20.80

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-------------------------------------------------------------------------------------------Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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CREDIT ANALYSIS AND RESEARCH LTD : HAS A GOOD POTENTIAL !!!

Scrip Code: 534804 / CARERATING

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:

Credit Analysis and Research Ltd (CARE) is a leading credit rating company in India offering rating and grading services. It also provides research services and risk management solutions through its subsidiaries. CARE is the second largest rating company in India and it enjoys a strong parentage of marquee banks and large financial institutions 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. Its experience and knowledge has enabled it to rate a wide range of instruments and has created a strong customer base of 7,754 clients as on March 2014. CARE has rated debt instruments of entities in various sectors like manufacturing, services, banks and infrastructure. It also has provided debt and issuer ratings to corporates, banks, financial institutions, public sector undertakings, state government undertakings, sub-sovereign entities, NBFCs, SMEs and microfinance institutions. In FY14 CARE reported completed assignments of 7,865 nos as compared to 7439 no.s last year. CARE has also launched ARC Ratings in London on 16th January 2014 while it has commenced operations in Advisory Services through its subsidiary company CARE Kalypto Risk and Advisory Services Private Limited. Credit rating business is a niche segment in the financial services arena. In the post-reforms era, with increased activity in the Indian Financial sector both existing and new companies are opting for finance from the capital market. Presently, the India can claim to be one of the world's most vibrant capital markets. In spite of the challenges that are still there, the future of this sector's looks good. The market size of banking assets in India have reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 2025. According to the data provided by SEBI, during FY 14, Foreign Institutional Investors (FIIs) invested a net amount of about Rs. 80,000 Cr (US$ 13.31 billion) in Indian equity market. Association of Mutual Funds in India (AMFI) has reported that the mutual fund industry's assets under management (AUM) have gone past the Rs. 10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian mutual fund industry rose to Rs. 10.11 trillion (US$ 168.19 billion) in May from Rs. 9.45 trillion (US$ 157.21 billion) in April. A strong capex cycle in Indian economy, lower penetration of corporate bond market and regulatory push due to implementation of Basel II norms are likely to help credit rating agencies ahead. Also Credit Agencies are likely to benefit from increased penetration by pension funds and insurance companies and multiple initiatives taken by the Government of India to develop the bond market. In India, Rating is a more recent phenomenon, but the changing global perspectives on the subject do impact the financial system. India was perhaps the first amongst developing countries to set up a credit rating agency in 1988. The function of credit rating was to institutionalized when RBI made it mandatory for the issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating compulsory for certain categories of debentures and debt instruments. In June 1994, RBI made it mandatory for Non- Banking Financial Companies (NBFCs) to be rated. Also earlier there was severe under-cutting in the BLR (Bank Loan Rating), which impacted the margins of credit rating business, however, over the past six months, SEBI has came out with its guidelines under which a credit rating agency (CRA) has to disclose its minimum rating fees on a new BLR assignment. Around 50 % to 60 % is surveillance income and 70 % to 80 % of the business comes from existing clients with the balance coming from new clients. Therefore, this provides a hedge against a downturn even if CARE does not get any new client. However, old clients are still enjoying discounted fees in the BLR segment. Consequently, the full impact of SEBI guidelines on minimum rating fees is also not visible. CARE is trying to gradually increase its fees going forward, which is expected to improve the margins of the BLR segment and partially negate the effect of lower margins in SME rating business. CARE has also started increasing its presence in the SME segment. For this, CARE has expanded its reach to 60-70 locations, the results of which will be visible in the coming years. This should surely benefit CARE.

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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