initiatingcoverage ratings 21jan2019

Jainam Share Consultant Pvt Ltd Sector : RATINGS

01-11-2018 1

Darshan Jain - Research Trainee ([email protected]); 0261-6725518

RatingsInitiating Coverage |

21 Jan 2019

Investors are advised to refer through important disclosures made at the last page of theResearch Report.Jainam Share Consultant research is available on www.jainam.in

http://www.motilaloswal.com/Institutional-Equities


01-11-2018 2

IndexA. Company Overview

1. About……………………………………………………….…………….…….32. Investment Rationale……………………………………….…………………43. Risk………………………………………………….………………………….5

B. Industry Overview

1. Global Outlook………….……………………………………………..………………………………….62. Indian Outlook………….………………………………………………………………………..…….…..7

C. Business of the Company

1. Subsidiary & Associate…………………………………………………….….132. Milestone………….…..…………………………….………………………...143. Top Shareholders…………………………………..…………………………154. Management………………………………………………………………….16

D. Financial Outlook

1. Balance Sheet……………………………….……………….………………..172. Profit & Loss…………………………………….………….………………….183. Cash Flow Statement…………………………………………………………194. Ratio………………………………………..….………………………………19

E. Analysis

1. Peer Analysis………………………………………………………………….202. Valuation………………………………………………………………………22

F. Conclusion

1. Recommendation…………………………………….………………………..252. Sources……………………………………………….………………………..263. Full Form & Glossary………………………………………………………….274. Report Gallery………………………………………………………………….285. Disclaimer……………………………………………………………………..29


01-11-2018 3

Company Overview

About

Exchange: BSE NSE Code:534804 Current Market Price: 1014.50 Date: 21-JAN-19

Latest Date 21-JAN-19

Latest Price (Rs) 1014.50

52 Week High (Rs) 1440.00

52 Week Low (Rs) 950.00

Face Value(Rs) 10.00

Book Value(Rs) 184.93

TTM Period 2018-09

Price/BV(x) 5.94

EV/TTM EBIDTA(x) 12.53

EV/TTM Sales(x) 8.90

Dividend Yield% 2.76

MCap/TTM Sales(x) 8.98

Market Cap (Rs in Cr. ) 2988.84

EV (Rs) 2959.67

Latest no. of shares (in Cr.) 2.95

CARE Ratings Ltd.Credit Analysis & Research Ltd (CARE) is secondlargest rating company in India which caters 30%of the rating market share. Rating businessaccounts for around 97% of the total revenue ofthe company as of now. CARE is the secondlargest rating company in India in terms of ratingturnover. CARE has achieved a steady growth inits ratings business having rating relationshipswith 15,098, increase in number of assignmentsto 10,027 and cumulatively rated INR 16.47 lakhCrore of debt. In the last few years, the companyhas begun expanding internationally and isproviding technical assistance service in Nepaland Mauritius. In addition, CARE entered intocollaboration with four credit rating agenciesfrom emerging markets like in Brazil, Portugal,Malaysia, and South Africa each to provide ratingsin those countries, set up ARC ratings in thosecountries. CARE also provides research servicesand it has been expanding its product portfolio toinclude newer services.This company is exploringopportunities to provide risk managementsolutions and acquired 75.1% stake in Kalypto, afirm providing risk management softwaresolutions in Nigeria. Commenced operations inadvisory services and launched CARE Kalyptoapplication in September 2013.


01-11-2018 4

Investment Rationale

Increase in number of instruments rated:Overall increase in Debt rated jumped by 25% toINR16480bn which involve around 10200 Instruments and 4079 new clients are added to theclient base this year which lead to more than 16000 clients and bank loan ratings showed agrowth of around 7.6% and 9.4% in long term debt rated and 175% growth in short term debtrated due to higher volume of commercial papers.

Saving on lease cost:Majority of the office spaces are owned by the company as this is themajor advantage to this company which adds to its profit margin as company does not needexternal funding and can use his cash flows which will reduce his lease expense.

Best EBIDTA margin in the industry – 63%: Care continues to focus on high marginsegment as the majority of the business is derived from the rating segment and this margin isway higher than the industry leader who enjoys just 25% EBIDTA margin and this EBIDTAmargin of care ratings is expected to remain constant due to rising focus on low margin SMEbusiness

Debt free balance sheet of the company: Being the company with totally debt free balancesheet shows that company have an investment edge over other companies and because at theend of the year there is no interest payment due this will directly increase the company PATmargin.

Lower operating cost:Company enjoys the EBIDTA margin of 63% which is almost consistentover the years. Operating income increased at a very lower rate of 0.48%. Qualified Personnelis one of the major expense on the books of company.

Asset light business:Business model of the care rating agency is asset light and as thefinancials shows that over the years the company have reduced their fixed assets and focusedon increasing their investment over the years. Investment portion and the cash surplusavailable is currently invested in government securities and mutual funds.

Reduction in employees:Although the number of instruments and bank loan rating has beenincreasing of the years but the number of employees have decrease in number from 627 to569 employees in 2017

Robust business model:Rating agencies are not legally liable for their opinion and canchange their ratings according to their convenience. If incase the Company default the ratingcompany will immediately reduce to default grade.

Consistent tax rate:Financials of the company clearly shows that company has beenconsistently paying his tax and is under the corporate tax bracket of 30% and there is no DTAor DTL in the balance sheet of the company.


01-11-2018 5

Risk

Default risk - Default by a client would hamper the credibility of the rating agency and affecttheir brand faith in the market. It is mandatory by SEBI to disclose the default rates as thiswould keep the rating agency under control of the watch guard.

Concentration risk -CARE’s business is concentrated on rating revenues which account for97% of consolidated revenues as compared to CRISIL and ICRA which are more diversified inrevenue profile. As a result macroeconomic concern would impact the growth of the company.However, the company has taken small steps towards diversification with the acquisition ofKalypto, a risk management company in Nigeria.

Expansion risk- Company is expanding its business outside India and had already enteredMaldives, Nepal, Brazil, Portugal, Malaysia and South Africa through various route like jointventure. As the company is entering into newer geographies and services may potentiallyimpact margins in the medium term. However management is comfortable sustainingoperating margins at 63% and plus.

Reputational risk – Revenue of this business is largely dependent on brand recognition. CAREhas separated the analytic function and business development function, and analystcompensation is not linked to business generated. CARE had moved to internal ratingcommittee where all ratings are assigned by internal rating companies.

Human risk – Business of the company is largely dependent on the human resource and it isconsidered as the major proportion of the company expense. The management should havean expertise in recruiting new credit analyst who is responsible for giving ratings.

Litigation risk – Company can come under legal supervision or litigation by the investors orlenders to the company. Suppose Rating Company have assigned a particular corporate debtin an investment grade category and the same company made default on their paymentobligations. Rating is just an opinion on the company debt issue and not any kind ofrecommendation.

Recovery risk- If in case the company is not able to recover its annual surveillance fees thiscan hamper the cash flows of the company as the surveillance fees is recorded over the 12months equally every year.

Technology risk – significant security breaches and breakdown in the computer system andnetwork infrastructure can lead to the leakage of data and other important information aboutthe clients. CARE has in place kept a comprehensive IT policy.

Information risk – Rating of the credit agency is totally dependent on the basis ofinformation provided by its clients and third parties. Inaccuracy of the information providedby them can lead to the risk of giving an inappropriate rating which may impact CAREreputation.


01-11-2018 6

Industry Overview

Global OutlookRatings in following segment may boost the revenue of the rating industry,if considered in India.

SUBSIDARY RATING: It helps to manage the subsidiary risk. Today’s regulatory landscape isUnpredictable. Multi-national companies with subsidiaries around the world need toconstantly monitor the changing regulatory environment in the event that it could affecttheir ability to manage effectively their cash across the group and fund corporatedevelopment activities.

SWAP RISK RATINGS: A Swap Risk Rating is forward-looking opinion about the likelihood ofloss associated with a specific swap transaction.A Swap Risk Rating takes into consideration the Ratings view on the terms of the SwapTransaction including, without limitation, the creditworthiness of one or more reference orunderlying obligations or obligors (the "portfolio") above a certain specified thresholdpercentage/amount, termination events, and potential recovery percentage or amount onthe Portfolio. All swap risk ratings take into consideration the creditworthiness of theportfolio.

MID-MARKET EVALUATION (MME): A Mid-Market Evaluation (MME) is forward-lookingopinion about the creditworthiness of a mid-market company relative to other mid-marketcompanies. It assesses a mid-market company's relative capacity and willingness to meet itsfinancial obligations as they come due.

LOAN,RECOVERY RATINGS: A Loan Rating is the issue-specific rating assigned to aborrower's syndicated loan. Loan Ratings are performed on syndicated loans comprised ofbank lenders and institutional investors. In the Loan Rating process, review Revolving Linesof Credit, First Lien Term Loans, Second Lien Term Loans and Mezzanine Debt. Loan Ratingsare widely used in the loan market for credit risk assessment, pricing and structuring ofsyndicated loans


01-11-2018 7

Indian Outlook

The fortune of the rating business is dependent of debt market and capital market of the country.RBI has a mandatory guideline to rate the debt issuance and other commercial papers. Genesis ofthe Credit Rating Industry in India, the first credit rating agency, Credit Rating and InformationServices of India Limited (“CRISIL”), was set up in 1987. Second largest rating agency, ICRA Limited(then known as, Investment Information and Credit Rating Agency of India Limited) (“ICRA”) wasestablished in 1991 and a third agency, CARE, was established in 1993. Duff and Phelps CreditRating India (P) Limited which started its operations in 1996 was renamed Fitch Ratings IndiaPrivate Limited (Fitch) in 2001 and renamed again to India Ratings and Research Private Limited in2012. Brickwork Ratings India Private Limited (Brickwork) began its rating business in 2008. SMERating Agency of India Limited (SMERA) also began its rating business in 2008. Performance of thetop line is directly proportional to performance of Indian debt market and economical condition.

As capital flows in international financial markets had shifted from the banking sector to capitalmarkets, credit rating had begun to make a market overseas. Credit ratings are in use of financialmarket of most developed economies and several emerging countries as well. With demand risingin foreign countries, the number of foreign based rating agencies had increased. Along with fourlargest U.S raters, one other U.S, one British, two Canadian and three Japanese firms are listedamong the world’s most influential rating agencies by the financial times in its publication creditrating-international.


01-11-2018 8

CARE RATINGS COMPANY PROFILE

Fees structure

Initial rating fees

Fixed Deposits - 0.10% of the outstanding amount of Fixed Deposits subject to a minimum ofRs.200,000Debentures- 0.10% of the issue amount subject to a minimum of Rs.200,000.Commercial Paper- 0.10% of the issue amount subject to a minimum of Rs.200,000.

Issuer Rating- 0.05% of all the outstanding debts as on last balance sheet date subject tominimum of Rs.300,000.

Annual Surveillance fees

FD/Debentures/CP - 0.03% of the amount outstanding under the rated instrument subject toa minimum of Rs.100,000.Issuer Rating - 0.05% of the amount outstanding under the rated instrument subject to aminimum of Rs.200,000.

RATINGS GRADING ANDRESEARCH

Corporate FinancialSector

PublicFinance

Infrastructure and MSME

-IPO

-Shipyard

-Educationalinstitution

-Maritime training

-Real estate project

-SME fundamentals

-Customized sectorresearch

-CARE industry riskmetrics

-Economic researchreports

-Debt ratings

-Bank-loanRatings

-Issuer Ratings

-corporateGovernanceRatings

-Banks

-Credit Quality

-Insurance

-NBFC’s

-Mutua funds

securitization

-State entities

-Urban localbodies

-Power

-Roads

-Ports

-IDF

-NSIC rating

-SME rating


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Credit Reports - Fees applicable will depend on the scope and coverage of each report andcan be obtained on specific request.

Revenue collection

Initial rating fees is collected in advance before the rating is assigned and CARE does notcarry the risk of non-payment by the clients. Rating revenue is Recognize on the basis of %of completion method. Surveillance fees are recorded over the term of 12 months from thedate of rating assigned. Company follows the conservative approach, Fees in respect ofcertain category of clients are Recognize only when there is a reasonable certainty ofultimate collection. Income from sale of research report and subscription to informationservices are recognize on an accrual basis. Certain regulatory controls have been Establishto control the Debtors policy and ensure that reviews and surveillance are conducted in atimely manner.

Rating services includes credit ratings for corporate, banks, bank loans, small and mediumenterprises (SME), credit analysis services, grading services and global analytical services.

Research – Research segments includes global research and analytical services, industryreports, customized research assignments, subscription to data services, independentequity research (IER)

Advisory and training –CRISIL provides advisory services and a comprehensive range of riskmanagement tools, analytics and solutions to financial institutions, banks and Corporate inIndia.


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Focused business model – Care focus on large and medium sized enterprise and isexpecting a growth in the SME segment provide us positivity about the long termfundamental prospects of the company and as the data suggest that care has beenconsistently gaining market share over the last five years.

Rating procedure


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The broad evaluation criteria would be as under: Business fundamentals – Forecasting the long term fundamentals of the company and taking

into account the probabilities of change in fundamentals

Financial fundamentals- Access the future cash generating capacity of the company and itsability to meet debt Obligations, even in adverse conditions

Management capability – Check the key managerial persons and their credibility andreputation in the market.

Due diligence – Check ownership pattern, organizational structure and past financial analysison audited accounts

Channel pattern evaluation – SWOT analysis of channel partners and take feedback frombankers, customers and site visit to gather ground-level information.

Product study – Visit client manufacturing unit and study about its product and competitiveposition of the clients.

Validity of care credit ratings Short term rating letter have a validity period of 2months .Long term rating letter have a validity period of 6 months. Care ratings are valid forlife of the instruments unless it is withdrawn. The rating may be upgraded, downgraded orreaffirmed by the Rating Committee on periodic reviews, including annual surveillance.

Limitations of credit ratings They do not evaluate the reasonableness of the issue price,possibilities for capital gains or take into account the liquidity in the secondary market.Ratings also do not take into account the risk of prepayment by issuer. Ratings neither takeinto account investors’ risk appetite nor the suitability of a particular instrument to aparticular class of investors.

Effect of implementation of new norms The implementation of Basel II standards by theRBI resulted in large scale demand for credit ratings across sectors and geographies, whichwas previously limited to a small group of clients. We are the leading credit rating agency inIndia for IPO grading, having graded the largest number of IPO since the introduction of IPOgrading in India.

Tailwinds in this industry

Dual ratings for commercial papers will help CARE ratings to grow its revenue.

Basel III approach of liquidity guidelines will allow banks to invest up to 40% in bonds andCommercial papers as against 10%.

New NPA Under implementation of bankruptcy code has a specific role for rating agencies.

Bond market is going for structural changes in upcoming future in Indian economy.

Rating revenue in India is less then 1% of the entire credit market vs 5.6% in the US.

New instruments such as REIT, infrastructure bonds,hybrid for insurance sector will help thebond market development.


01-11-2018 12

Growth Drivers

Growth by regulatory bodies Some of the measures are undertaken in the Union Budget2018-19 for the development of corporate bond market. SEBI will also consider mandating,beginning with large Corporate, to meet about one-fourth of their financing needs from thebond market and to allow strong Regional Rural Banks to raise capital from the market toenable them increase their credit to rural economy. Finance minister reduce the thresholdrating criteria and urged them to move from ‘AA’ to ‘A’ for investment eligibility.

Growth in SME market Various states are exploring options to increase capital availabilityand improve policy support to SMEs. The West Bengal government has signed pacts with BSEand NSE to raise awareness among the State’s MSMEs to tap the capital market as analternative funding source.

Growth in real estate sector The real estate sector has shown some pick up after theimplementation of RERA as has registered an average growth of 10% in Q1-FY19. Aggregatebank deposit has grown at 7.6% yoy while the bank credit grew at 12.8% yoy in Apr-Jun’18.This data suggest that there is an uptick in the construction activity.

Growth in commercial papers In FY18, commercial paper showed a growth as Rs. 22.9 lakhcrore were raised, 32% higher than the issuances of Rs. 17.4 lakh crore in the previous year.Corporate are more incline towards borrowing by commercial papers although the growth ofthe corporate bond market was subdued but there has been a growth in commercial papers.

Benefits of Credit rating agency

Credit rating agency gives a brief about the issuer’s credibility which will help investors inmaking his investment decision. Higher the rating more the credibility of the issuer.

Rating agencies keep a regular track on the companies which they have rated in the past andpost regular updates on his ratings so that investors can decide whether to stay invested inthe instrument or sell it.

Higher the credit rating better the reliability of the issuer and it also gives assurance to theinvestors about the safety of the instrument and less risk of bankruptcy.

These rating agencies assigns rating symbol to the instruments which can be easilyunderstood. Instruments rated AAA ensures the highest safety, whereas instruments rated Dare in the category of default.

Credit rating agencies provides an investor with different choice of instruments and thechoice totally depend on the risk appetite of the investor and on the basis of rating allottedto different instruments.

These rating agencies appoint professionals the conduct credit analysis on these companiesand rate them which save investors time and effort in analyzing the financial strength of thecompany and can base his investment decision on the basis of research done by creditanalyst.


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Subsidiary & Associate

CARE Risk Solutions Pvt. Ltd. ( Formerly known as CARE Kalypto ).

Risk Technologies and Advisory Service Private Limited)-100%

CARE Advisory Research and Training Limited - 78% Holding

CARE Ratings (Africa) Private Limited – 100% Holding

CARE Ratings Nepal Limited – 51% Holding

CARE Advisory Research and Training Limited (CART)

Advisory division - CART now offer Valuation, Business plan preparation, financial improvementplan, bid process management, LIE services among other services.

Research division - During the year, CART undertook 9 industry research assignments for clientsto assist them in filing Draft Red Herring Prospectus.

Training division - During the year the company conducted 13 days of executive classroomtraining on various topics which included customized training for a bank and an NBFC.

Care ratings (Africa) private ltd.

CRAF provides ratings for various instruments such as bonds, debentures, commercial paper,bank deposits, structured finance and other debt instruments besides the bank facilitiesincluding term loans, working capital limits, non-funded exposures etc.

CRAF has expanded its operations and assigned ratings to instruments in both the bond andbank facilities domain aggregating to around MUR 20.0 billion (MUR 9.0 billion in FY17).

Care ratings Nepal ltd (CRNL)

CRNL is providing credit ratings and related services in the geography of Nepal. The ratingservices of CRNL majorly include IPO grading, issuer rating and rating of debt instruments.


01-11-2018 14

New projects

Launched grading of Industrial Training Institutes constituted under Directorate Generalof Employment and Training (DGE&T).

Launched India’s first securitization transaction backed by mortgage guarantee and also inassigning rating to consumer durable organization.

Also started rating partial guarantee bonds/co-guarantee structured bonds as well asprojects based on hybrid annuity model in road projects.

Launched CARE Rating Tracker (CART), a platform which gives informationpertaining to 40,000 rated companies across more than 120 industries.

CARE ratings in consultation with the ministry of Finance and other stakeholderslaunched a new credit rating system, Expected Loss ratings (EL Ratings) for infrastructureprojects.


01-11-2018 15

Milestone

1997 to 2000

2005 to 20082003 ONWARDS

2001 to 2004

2009 to 2012

2013 ONWARDSSource : CARE RATINGS LTD-WEBSITE


01-11-2018 16

Top Shareholders

Shareholders % Holding

Life Insurance Corporation of India 9.8%

CRISIL LIMITED 8.9%

Stichind Depositary Emerging Markets Equity Pool 3.8%

FRANKLIN TEMPLETON INVESTMENT FUNDS 2.6%

FRANKLIN TEMPLETONMUTUAL FUND 5.2%

THE PABRAI INVESTMENT FUND IV, LP 2.2%

DSP BLACKROCK MIDCAP FUND 2.6%

L AND T Mutual Fund Trustee ltd-L AND T TAX advantage ltd 3.3%

GOVERNMENT PENSION FUND GLOABAL LTD 2.9%

INDIA CAPITAL FUND LIMITED 2.5%


01-11-2018 17

Management

Name Designation About

Mr. S. B. MainakChairman,IndependentDirector

Mr. Suryakant Balkrishna Mainak, CA hasbeen Independent Director of Gloster Ltd.since April 17, 2018.

Mr. Mainak has served as IndependentDirector at Capacit’e Infraprojects Limitedsince March 2018 and also serves as itsChairman.

He served as the Managing Director at LifeInsurance Corporation of India since July 10,2013 until March 28, 2016.

Mr. Mainak served as the Chief of Investment- Central Office and Head of Investments atLife Insurance Corporation of India

Mr. A. K. Bansal IndependentDirector

He worked as Executive Director of IndianOverseas Bank between 2010-13.

Shri A. K. Bansal is a Post Graduate inAgriculture from the renowned G B PantAgriculture University

He joined Union Bank of India as AgriculturalField Officer at the age of 23 years in the year1976

Dr. Ashima Goyal Chief FinancialOfficer

She is a B.A. (Honours) Economics from DelhiUniversity and M.A. and M. Phil. from DelhiSchool of Economics, Delhi University, andPh.D. from Bombay University.

She has rich experience in the field of openeconomy macroeconomics, internationalfinance, institutional and developmenteconomics, in which she is widely published.

Mr.RajeshMokashi

ManagingDirector & CEO

He holds a Bachelor's degree in MechanicalEngineering from VJTI, Mumbai and a Masterof Management Studies degree fromUniversity of Bombay. He is a qualifiedChartered Financial Analyst and has alsocleared Level III of the CFA Programconducted by the CFA Institute, USA

He has more than 27 years of experience infinance, commerce and credit risk sectors. Hehas been associated with OTIS ElevatorsCompany (India) Limited, DSP FinancialConsultants Limited and Kotak MahindraFinance Limited in the past


01-11-2018 18

Financial Information

Balance Sheet(Fig in cr)

Particulars March-16 March-17 March-18Assets

Non-current assets

Property, plant and equipment 55.35 52.65 51.09

Intangible Asset 0.25 0.35 1.16

Goodwill on Consolidation 7.95 7.95 7.95

Capital work in Progress 0.00 0.07 0.00

Financial assets 236.16 83.44 257.37

Other Assets 0.30 0.20 0.12

Current Assets

Financial Assets 226.38 436.38 338.70

Other Assets 9.25 3.97 2.22

Total Assets 535.64 585.01 658.61

Equity & Liabilities

Equity 469.68 520.03 596.83

Minority Interest 0.00 0.49 2.12

Non current liabilities

Provisions 5.65 4.00 4.73

Deferred tax Liabilities 10.40 11.43 5.32

Borrowings 0.00 0.00 0.00

Current Liabilities

Financial Liabilities 10.63 9.74 11.49

Other Current Liabilities 34.49 37.39 30.58

Provisions 4.79 1.93 4.27

Current Tax Liabilities 0.00 0.00 3.27

Total Equity & Liabilities 535.64 585.01 658.61


01-11-2018 19

Profit and Loss

Particular March-16 March-17 March-18INCOME

Revenue From Operations 279.36 287.43 332.68

Other Income 8.68 33.67 25.46

Expenses

Employee benefits expense 75.63 72.60 88.90

Other expense 29.85 32.23 10.30Depreciation and amortisationexpense 4.17 3.39 3.14

Profit before exceptional items and tax 178.39 212.48 233.07

Exceptional items - - -

Profit before tax 178.39 212.48 233.07

Tax expense 58.79 64.86 70.73

Net profit 119.60 147.61 162.33

Cash Flow Statement

Report Date (in Cr.) Mar-16 Mar-17 Mar-18

Cash from Operating Activity 106.37 118.99 138.33

Cash from Investing Activity -40.86 -21.99 -24.58

Cash from Financing Activity -66.23 -95.80 -98.65

Net Cash Flow -0.72 1.19 15.10


01-11-2018 20

Ratio

Performance Ratios 2016 2017 2018

ROA 14.85 15.74 14.95

ROE 31.49 31.85 29.30

ROCE 46.48 45.76 41.74

Valuation Ratios 2016 2017 2018

P/E (x) 22.92 33.06 21.96

EPS (x) 40.68 50.13 55.13

P/BV (x) 6.73 9.39 6.06

EV/EBITDA (x) 14.94 22.54 14.98

Du Point Analysis


01-11-2018 21

Peer Analysis

Topic CRISIL ICRA CARE

MAJORSHAREHOLDER’S

S&P owns 67.1% ofthe majorshareholdings jn thefirm

Moody’s owns 50.1%of the majorshareholdings jn thefirm

Majorly hold bymutual funds andother FII’s

REVENUESEGMENTATION

62% of the CRISILrevenue comes fromits rating businessand 30%from itsresearch busines

70% of the ICRArevenue comes fromits rating businessand 20% from its infoservices

97% of the CARErevenue comes fromits rating business

INSTRUMENTS RATEDNo of instrumentsrated is 15000 in smesegment by CRISIL

Total no ofinstruments rated ismore than 4000

Total no ofinstruments rated is10,273 in the SMEsegment

NEW PRODUCTS

Launched a newproduct calledQuantix to drivegrowth in researchbusiness

ICRA had launched acredit rating schemefor SME segment inindia

Announces thelaunch of certificatecourses in creditmanagement

EMPLOYMENT COST Employee Cost OfCRISIL is around 51%

Employee Cost OfICRA is around 47%

Employee Cost OfCARE is around 41%


01-11-2018 22

Particulars CRISIL ICRA CARE

Current price 1664.5 3186.75 1014.50

52 week high /low 2020.85 / 1259.00 4019.00 / 3002.00 1440.00 / 950.00

Book value 150.14 678.69 196.65

Stock P/E 34.78 29.11 19.48

Dividend yield 1.67 0.97 5.41

ROCE 41.16 24.85 41.78

ROE 28.93 15.95 29.02

QUICK RATIO 1.39 2.79 1.40

CURRENT RATIO 1.39 2.79 1.40

PEG ratio 5.60 2.16 2.14

Market cap 11999.04 3075.00 2997.19

Price to cash flow 41.18 49.98 21.00

Price to book 10.91 4.69 5.33

EV/EBITDA 21.89 16.83 13.05

face value 1 10 10


01-11-2018 23

ValuationsManagement is expecting a growth rate in the range of 7% -10% during FY19

Scenario 1 assumptions: Assuming the company grows at a rate of 7% for next 3 years . Current P/E of 19.34 is assumed to estimate the M.cap.

PART 1 is based on 5 years and 3 years PAT margin.

PART 2 is based on 5 years and 3 years EBIDTA margin

SCENARIO 1(PART 2) FY 21

5yrs avg EBITDA margin(%)


sales 408 408

EBITDA margin 62.58% 63%

EBITDA 255 257

Ev/EBITDA 12.14 12.14

M.cap (cr) 3100 3120

No. Of shares 2.9459 2.9459

Reasonable price 1052 1059

SCENARIO 1 (PART 1) FY 21

5yrs avg PAT margin (%) 3yrs avg PAT margin (%)

sales 408 408

PAT margin 50.14% 47.74%

PAT 204.5 194.77

P/E ratio(x) 19.34 19.34

M.cap (cr) 3955 3767

No. Of shares 2.95 2.95



01-11-2018 24

Scenario 2 assumptions:Assuming that a company grows at a rate of 10% for the next 3 years.

PART 1 is based on 5 years and 3 years PAT margin

SCENARIO 2 (PART 1) FY 21

5yrs avg PAT margin (%) 3yrs avg PAT margin (%)

sales 443 443

PAT margin 50.14% 47.74%

PAT 222.12 211.48

P/E ratio (x) 19.34 19.34

M.cap (cr) 4296 4090



PART 2 is based on 5 years and 3 years EBIDTA margin

SCENARIO 2(PART 2) FY 21



sales 443.00 443.00

EBITDA margin 0.63 0.63

EBITDA 277.22 279.00

Ev/EBITDA 12.14 12.14

M.cap (cr) 3365.45 3387.06


Reasonable price 1142.42 1149.75


01-11-2018 25

DISCOUNTED CASHFLOW VALUATIONFollowing valuation is derived by assuming the growth of 10% for the next 5years and 8% growthfrom 6-10 years and 2% after 10 years in the business.

Initial Cash Flow 136.14

Years 1-5 6-10FCF Growth Rate 0.10 0.08Discount Rate 0.12Terminal Growth Rate 0.02

Shares Outstanding(Crore) 2.95Net Debt Level -281.95

PRESENT VALUE CALCULATIONSYEAR FCF GROWTH PRESENT VALUE1.00 149.76 10% 133.712.00 164.73 10% 131.333.00 181.21 10% 128.984.00 199.33 10% 126.685.00 219.26 10% 124.416.00 236.80 8% 119.977.00 255.75 8% 115.698.00 276.21 8% 111.569.00 298.30 8% 107.5710.00 322.17 8% 103.73

FINAL CALCULATIONSTerminal Year 329PV of Year 1-10 CashFlows 1,204

Terminal Value 1,058Total PV of Cash Flows 2,262Number of Shares 3DCF VALUE/SHARE (Rs) 862


01-11-2018 26

Conclusion

RecommendationCredit Analysis & Research Ltd (CARE) is second largest rating company in India which caters 30%of the rating market share. Rating business accounts for around 97% of the total revenue of thecompany.

Rating industry in India has seen growth in past few years but still there are product gaps in certainsegments as compared to rating industry globally. There is room to introduce some ratinginstruments like Subsidary rating, swap risk rating, mid market evaluation, which are currentlyrated in major economies worldwide.

CARE ratings is definitely a company which have a high growth potential and is consistentlygrowing at a good rate as compared to its industry peers. Company is also expanding his globalreach by acquiring or investing in the globally recognize rating firms.

Care continues to focus on high margin segment as the majority of the business is derived fromthe rating segment and this margin is way higher than the industry leader who enjoys just 25%EBIDTA margin and this EBIDTA margin of care ratings is expected to remain constant due to risingfocus on low margin SME business

The OPM of the company is consistent around 63% over the years and ROE of the company is alsoaround 30% in the past recent years. Management is quite focused towards one business segmentand also willing to expand their client base.CARE is available at lower valuations as compare to itsindustry peers.

We recommend our Investors to “BUY" the stock with potential upside of 36% with Horizon of 2.5years.


01-11-2018 27

Sources

Annual Report (CARE RATINGS Ltd.)

Investor Presentation

Ace Analyser

BSE Ltd. - Website

S&P RATINGS - Website

CARE RATINGS - Website

Research Analyst Details:

Name Designation Email IdTejas Jariwala Research Head [email protected] Zaveri Sr. Research Analyst [email protected] Patel Sr. Research Analyst [email protected] Agarwal Assistant Research Analyst [email protected] Pareek Assistant Research Analyst [email protected] Patel Assistant Research Analyst [email protected] Modi Assistant Research Analyst [email protected] Nalbandh Sr. Research Executive [email protected] Patel Jr. Research Executive [email protected] Bakshi Jr. Research Executive [email protected]


01-11-2018 28

Full Form & Glossary

Abbreviation Full FormBV Book ValueCAGR Compound Annual Growth RateCAPEX Capital ExpenditureCOGS Cost of Goods SoldDPS Dividend Per ShareEBIT Earnings before interest and taxesEBITDA Earnings before interest, tax, depreciation and amortizationEPS Earning Per ShareEV Enterprise ValueFY Financial YearGP Gross ProfitHY Half YearMCap Market capitalizationNAV Net Asset ValueNII Net Interest IncomeNOI Net Operating IncomeNOPAT Net Operating Profit after TaxNPV Net Present ValueOCF Operating Cash FlowOI Operating IncomeP&L Profit & LossP/E Price/Earnings RatioPAT Profit After TaxPATM Profit After Tax MarginPBT Profit Before TaxQOQ Quarter on QuarterRE Retained EarningROA Return on AssetsROCE Return on Capital EmployedROE Return on EquityROI Return on InvestmentROIC Return on Invested CapitalRONA Return on Net AssetTTM Trailing Twelve MonthWC Weighted Average Cost of CapitalYOY Year over Year

Jainam Share Consultant Pvt Ltd Sector : Consumer Durable

01-11-2018 29

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Jainam Share Consultant Pvt Ltd Sector : Consumer Durable

01-11-2018 30

DisclaimerResearch Analyst Details

Name: Darshan Jain Email Id: [email protected] Ph: +91 0261-6725518

Analyst ownership of the stock: No

Details of Associates: Not Applicable

Analyst Certification: The Analyst certify (ies) that the views expressed herein accurately reflect his (their)personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is orwill be directly or indirectly related to the specific recommendation(s) or views contained in this research report.

Disclaimer: www.jainam.in is the domain owned by Jainam Share Consultants Pvt. Ltd.

SEBI (Research Analyst) Regulations 2014, Registration No. INH000006448

The views expressed are based solely on information available publicly and believed to be true. Investors are advisedto independently evaluate the market conditions/risks involved before making any investment decision.

This report is for the personal information of the authorized recipient and does not construe to be any investment,legal or taxation advice to you. This report should not be reproduced to any other person in any form. This documentis provided for assistance only and is not intended to be and must not alone be taken as the basis for an investmentdecision. Jainam Share Consultants Pvt. Ltd. or any of its affiliates or employees shall not be in any way responsible forany loss or damage that may arise to any person from any inadvertent error in the information contained in thisreport. Neither Jainam Share Consultants Pvt. Ltd., nor its employees, agents nor representatives shall be liable forany damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits thatmay arise from or in connection with the use of the information. Jainam Share Consultants Pvt. Ltd. or any of itsaffiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matterpertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particularpurpose, and non-infringement.

The recipients of this report should rely on their own investigations. Jainam Share Consultants Pvt. Ltd. and/or itsaffiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in thisreport. Jainam Share Consultants Pvt. Ltd. has incorporated adequate disclosures in this document. This should,however, not be treated as endorsement of the views expressed in the report. We submit that no material disciplinaryaction has been taken on Jainam Share Consultants Pvt. Ltd. by any regulatory authority impacting Equity ResearchAnalysis.

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initiatingcoverage ratings 21jan2019

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