CARE To Invest

Credit Analysis and Research (CARE Ratings), the only rating company in India with no foreign promoters, is tapping the primary market to raise funds. At a price band of Rs 700-750, it plans to raise around Rs 504-540 crore by issuing 0.72 crore shares at a face value of Rs 10 each. No fresh equity is being issued and this is purely an offer for sale by the current promoters. The issue is being made to give its promoters who will dilute 25.22% of their holding in the company through the stake sale the benefit of listing.

The Company

Incorporated in 1993, Credit Analysis and Research Limited (CARE) is a credit rating, research and advisory company primarily promoted by Indian financial institutions mainly including Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) among others. The company rates debt instruments that are issued in the Indian markets. Though it rates IPOs as well, most of its revenues (a little over 90 per cent) are generated by rating debt instruments.

CARE has completed over 7564 rating assignments since its inception in 1993. At the end of FY12, it remains the second largest rating company in India in terms of rating turnover. In terms of the number of issues rated, it has far outpaced its key competitors Crisil and ICRA. From FY08-12, the number of ratings done by the company has gone up at a CAGR of 40%, albeit on a lower base. Going forward, with the company diversifying in new geographies like Maldives, Nepal, Mauritius etc., we believe it will be able to maintain its growth momentum.

The Financials

The fundamental strength of the company is well reflected in its financials. Its topline and bottomline has exhibited a CAGR of 41% and 44% respectively between FY08-12. This is far superior to its key competitors like Crisil and ICRA, both of whom have been growing below 30% in both the matrices during the same period.

Even if we look at other financial matrices like EBITDA and PAT margins, ICRA is performing better than its peers. The company’s EBITDA margin for the year ending FY12 are a whopping 75% and the PAT margin is equally striking at 53%. The same figures for ICRA stand at 42 % and 35% respectively.

Valuation and Recommendation

At the lower and upper price band (Rs 700-750) the company will be offering its issue at a PE of 17.28x and 18.52x for its FY12 EPS of Rs 40.50. If we annualize the six month EPS, the issue is available at 21.5x at higher price band. However, if we look at other rating agencies like Crisil and ICRA, their stocks are trading at way above valuations of 38x and 28x respectively.

Looking at the huge investment that has been lined up in the 12th five-year plan there is a good chance that a whole lot of money will be raised through issue of debt. This calls for a larger role and consequently better business for rating agencies. The clarity on the future growth front and the strong fundamentals already in place make CARE an issue to subscribe in. The case for an investment in the issue is further amplified by the attractive valuation at which offer is being made vis-à-vis its peers.