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CNX Nifty CARE

One year Price Chart

Credit Analysis and Research Ltd. (CARE) was founded in 1993 and is the

second largest rating agency (in terms of rating income) in the country. The

company offers a wide range of rating and grading services across a diverse

range of instruments and industries. Apart from providing rating services to

financial sector, infrastructure sector, corporates, public finance and

MSMEs, CARE is also engaged in rating IPOs, educational institutions,

shipyards, etc. The company has recently initiated its valuation services and

started offering valuation of equity, debt instruments and market linked

debentures. Being headquartered in Mumbai (Maharashtra), CARE has

geographical presence in Republic of Maldives, Brazil, Malaysia, Portugal

and South Africa.

Investment Rationale

Revenue is expected to grow at a CAGR of ~13% over FY15-17E

Despite the challenging economic environment, CARE added 1,529 customers

in Q4FY15, successfully widening the customer base to 9,828 clients in FY15.

An uptick of 1.4% YoY in total number of instruments rated at 7,973, during

the year, reflects the company’s efforts towards increasing its coverage of

clients given that both the debt and credit markets were stagnant.

Considering expectations of further revival in economic growth in near-term,

we expect CARE to witness robust growth, going forward. We estimate the

revenue to grow at a CAGR of ~13% over FY15-FY17E.

Focus on SME segment to drive growth in the long-term

CARE’s focus towards the SME segments may not yield desirable results in the

near-term, but given the low penetration and underlying opportunities

associated with that, CARE may see a healthy growth from the SME segment.

With only 1 lakh SMEs being rated out of a total of ~15 lakhs functional units,

the company sees a great potential from this segment. Given its focus on low-

margin SME segment, CARE might see a little dip in margins in the near-term,

but healthy growth from other business segments may provide certain

cushion to the overall margin.

EBITDA margin is expected to remain stable

Driven by relatively lower operating expenses (employee cost and other

expenses) and higher contribution from the high-margin bank loan rating

(BLR) segment (which contributed ~59% to total revenue), CARE posted a

growth of 61.2% in EBITDA margin in FY15. Going forward, we expect the

margin to remain in the same range (~61% in FY16E and FY17E), owing to a

rising focus on the low margin SME business and mainly due to the expected

rise in staff costs.

Rating BUY

CMP (`) 1,500

Target (`) 1,803.0

Potential Upside ~20%

Duration Long Term

Face Value (`) 10.0

52 week H/L (`) 1,805.7/810.0

Adj. all time High (`) 1,805.7

Decline from 52WH (%) 16.9

Rise from 52WL (%) 85.2

Beta 0.6

Mkt. Cap (`crore) 4,391.0

EV (`crore) 4,376.2

Promoters - - -

FII 31.2 29.0 2.2

DII 45.5 47.7 (2.2)

Others 23.3 23.3 -

Shareholding Pattern

Mar15 Dec14 Diff.

Market Data

Y/E FY14 FY15 FY16E FY17E

Revenue (`cr) 235.6 260.5 295.2 330.6

EBITDA (`cr) 147.7 159.6 180.4 200.0

Net Profit (`cr) 129.4 137.8 155.2 170.9

EPS (`) 44.9 47.1 53.0 58.4

P/E (x) 33.4 31.9 28.3 25.7

P/BV (x) 8.9 12.2 9.8 8.0

EV/EBITDA (x) 29.5 27.4 23.9 21.2

ROCE (%) 36.5 54.0 49.4 44.9

ROE (%) 26.7 38.4 34.8 31.1

Fiscal Year Ended

May 15, 2015

BSE Code: 534804 NSE Code: CARERATING Reuters Code: CREI.NS Bloomberg Code: CARE:IN CRG:IN

Volume No. 1 Issue No. 17 Credit Analysis and Research Ltd.

CARE – India’s second largest credit rating agency

Incorporated in 1993, CARE has established itself as the second-largest credit rating agency in

India in terms of rating income. The institutional ownership profile of CARE is reflected by IDBI

Bank, Canara Bank and State Bank of India being the major stake holders. CARE offers a wide

range of rating and grading services across a diverse range of instruments and industries.

While providing ratings in the financial sector, infrastructure sector, corporates, public finance

and MSME spaces; CARE carries out grading of IPOs, assesses the financial strength of shipyards,

grades various courses of educational institutions and provides grading services to energy

service companies (ESCO), Renewable energy service companies (RESCO), Real estate projects

and Maritime training institutes under its umbrella of grading services. Moreover, CARE is

engaged in providing equity grading for listed entities. The company has recently initiated its

valuation services and started offering valuation of equity, debt instruments and market linked

debentures.

Headquartered in Mumbai (Maharashtra) along with other operational offices in Ahmedabad,

Bengaluru, Chandigarh, Chennai, Hyderabad, Jaipur, Kolkata, New Delhi, Pune; CARE has

extended its footprints internationally in Republic of Maldives and has recently partnered with

four other domestic credit rating agencies in Brazil, Malaysia, Portugal and South Africa to form

an international credit rating agency called ARC Ratings.

While the performance in FY15 remained healthy with a growth of 10.6% YoY in consolidated

net sales and 6.5% YoY increase in profitability; we remain optimistic for further growth in FY16

and in the following years, given the expectations for a gradual recovery in the economy in the

on-going fiscal. The government clearing pending projects would provide a boost to the

investment climate leading to a pick-up in debt issuances. Higher growth in bank credit would

provide support for bank loan rating, strengthening prospects for revenue growth in CARE.

CARE, the second largest

credit rating provider in India,

was established in 1993.

The institutional ownership

profile of CARE is reflected by

IDBI Bank, Canara Bank and

State Bank of India being the

major stake holders.

CARE has recently partnered

with four other domestic

credit rating agencies in

Brazil, Malaysia, Portugal

and South Africa to form an

international credit rating

agency called ARC Ratings.

CARE’s product profile

CARE

Ratings

Grading & Research

Corporate

Debt Loan

Bank Loan

Issuer Corporate governance

Financial sector

Banks

NBFC

Housing Finance

Insurance

Mutual Funds

Securitization programmes

Public Finance

Sub-sovereign entities

MSME

NSIC–SSI ratings

SME ratings

Infrastructure

Power

Roads

Ports

IDF

Grading

IPO

Shipyard

Educational Institutions

Maritime training

Construction cos.

Real estate projects

SME fundamentals

Renewable energy projects/cos.

Research

Covering 49 sectors Customised research

CARE industry risk metrics

Economic research reports

Valuation of market linked debentures (MLD)

Q4FY15 performance remain mixed

Total revenue grew 2.9% YoY; net profit declined 15.0% YoY in Q4FY15

Value of debt rated

2.4

1

2.3

9

2.1

2

1.9

8

4.4

7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

75

.7

42

.7 7

4.3

62

.4

77

.8

51

.3

20

.1 5

1.5

38

.4

52

.0

41

.3

26

.6 52

.4

26

.2

35

.1

67.7

47.1

69.4

61.6 66.8

54.6

62.3 70.6

42.0 45.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15

Total revenue EBITDA Net profit EBITDA margin (%) Net profit margin (%)

`cr

ore

%

2,4

21

1,0

85

1,6

55

2,0

34

3,1

99

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

1,1

14

3,9

00

5,2

63

7,7

54

9,8

28

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

FY11 FY12 FY13 FY14 FY15

Number of instruments rated

Number of active clients

`la

kh c

rore

No

. of

un

its

No

. of

clie

nts

CARE witnessed mixed set of numbers in Q4FY15. While total standalone revenue grew 2.9%

YoY to `77.8 crore, sequentially the growth stayed robust with 24.7%. The growth in revenue

was mainly on account of substantial rise in volume of debt rated instruments. CARE rated a

total of 3,199 instruments in Q4FY15 with total value of debt rated recording a significant

increase of 85% to `4.47 lakh crore compared to `2.41 lakh crore in the year-ago period. The

growth in revenue was also attributed to an addition of 1,529 new clients during the quarter

under review.

The growth in revenue was

mainly on account of a

substantial rise in volume of

debt rated instruments.

Employee expenses and other

expenses (as a percentage of

total revenue) grew by 55bps

and 39bps YoY to 24.8% and

8.4%, respectively.

Impacted by higher operating expenses and a muted growth in revenue, CARE reported a 1.5%

YoY growth in EBITDA at `52.0 crore in Q4FY15. Employee expenses and other expenses (as a

percentage of total revenue) grew by 55bps and 39bps YoY to 24.8% and 8.4%, respectively.

EBITDA margin, as a result, contracted 94bps YoY to 66.8% in Q4FY15 as against 67.7% in the

corresponding period a year ago. Moving ahead, the company reported a 15.0% YoY decline in

net profit to `35.1 crore in Q4FY15 further impacted by 59.4% YoY decline in other income and

a rise in depreciation cost by 29.6% YoY, respectively.

Margins may possibly remain stable in FY16E-17E; focus on high-margin

businesses is expected to offset lower margins from SMEs

CARE recorded strong performance on margins front in FY15 with EBITDA margin at 61.2%,

driven by limited competition and strong pricing power, which enabled the company to earn

healthy margins. As per our estimates, EBITDA margin is likely to remain in the same range at

~61% in FY16E and FY17E driven by relatively lower employee cost and other expenses, high

proportion of high-margin bank loans & bonds and savings on lease costs (as the company

largely owns the offices).

During FY15, CARE derived a large portion of revenue from BLR segment. Concentrated efforts

by CARE to capture fresh businesses yielded positive results with a growth of 23.8% YoY in total

debt rated by the company at `10.97 lakh crore compared to `8.86 lakh crore in FY14. Of this,

the value of BLR stood at `6.45 lakh crore as against `5.57 lakh crore in FY14, marking an uptick

by 15.8% YoY. For other segments like SMEs, the increase in volume remained quite small as it

is relatively a newer segments and a lot of growth is yet to be seen within this segment. On the

back of substantial growth in high margin BLR, will help to offset expectation of lower margins

from the SME segment. We believe, CARE’s focus on large and medium sized entities would

enable better generation of margins.

At the forefront in capturing BLR opportunity…

CARE saw a sharp rise in market share in the BLR segment (contributed ~59% to total revenue

in FY15), from 21% in FY08 to 25.4% in FY09, which took the company to second position in

terms of rating revenue market share. Furthermore, BASEL II guidelines, which require banks to

provide capital on the credit exposure as per credit ratings assigned by the rating agencies like

CARE, opened up a large opportunity for the company. On the back of its low cost of

operations, CARE’s decision to tap this segment aggressively yielded fruitful results. Owing to

support from its parentage of large banks ownership, the company was able to capture large

volumes. The ability to handle lower ticket size instruments profitably was one of the major

reasons, which enabled CARE to maintain its stronghold in the BLR segment. Despite the

challenging environment, CARE rated 5,054 banking instruments in FY15, reflecting blossoming

growth prospects of the company. Given the expectations of further pick-up in credit growth,

we believe rating coverage for bank loans would see a further pick-up moving ahead.

Focus on SME to unleash great opportunities in the long-run

Going forward, CARE is planning to strengthen its SME network as it sees large revenue

opportunity in the SME rating space in long run. In India, there are around 15 lakh functional

SMEs of which merely one lakh units are being rated. Given the low level of penetration

(~0.3%), there is a large scope for rating agencies like CARE in the SME space.

Being an important segment of the economy, SME dominates in terms of its share in industrial

output, exports and employment. Since these companies face a lot of challenges owing to their

relatively lower size and limited formal information on their workings and financials, credit

rating is an extremely useful tool for them as it bridges the information asymmetry between

the lender and the unit. CARE understood this information gap and took advantage of it by

conveying carefully the creditworthiness of these units.

Presently, CARE is well focused to cover a large part of the SME universe in India, given the

underlying opportunities associated with that. Led by its thrust on low margin SME business,

CARE may see a little dip in margins in FY16, but since its large corporates are doing quite well,

the company would be able to maintain margins in the same range as they were in FY15.

As per our estimates, EBITDA

margin is likely to remain in the

same range at ~61% in FY16E

and FY17E driven by relatively

lower employee cost, high

proportion of high-margin bank

loans & bonds and savings on

lease costs (as the company

largely owns the offices).

BASEL II guidelines, which

require banks to provide capital

on the credit exposure as per

credit ratings assigned by the

rating agencies like CARE,

opened up a large opportunity

for the company.

Going forward, CARE is planning

to strengthen its SME network as

it sees large revenue opportunity

in the SME rating space in long

run.

For private circulation only

Foray into different geographies & products yet to contribute

meaningfully

CARE, which derives most of its revenues from the domestic market, is well focused towards

diversifying its presence geographically. While the company has expanded its ratings business

into the Republic of Maldives, indirect recognition by the Hong Kong Monetary Authority as an

external credit assessment institution, also augurs well for the company. Making further

strides on the international maps, CARE has launched ARC Rating in January 2014 in London

(UK) and is in the process of setting up a subsidiary in Mauritius, the investment platform

linking Asia and Africa. We believe that CARE’s experience and knowledge in India favourably

positions it to continue to explore opportunities in foreign markets, either directly, through

joint ventures and partnerships, or by acquisition.

Meanwhile, CARE also focused towards ratings newer products and has rated India’s first securitization transaction backed by mortgage guarantee in FY14. This transaction is a landmark development that will enhance the growth prospects for the securitization market for housing loan receivables in India by helping to effectively manage credit risk associated with housing loans.

We believe that CARE’s

experience and knowledge in

India favourably positions it to

continue to explore

opportunities in foreign markets.

CARE’s continued focus on high

margin segment, focus on large

and medium sized entities and

expectations for growth in the

SME segment makes us positive

about the long-term prospects of

the company.

CARE has been gaining market share

50.8 49.6 48.6 50.7 53.2 51.4

23.8 22.1 22.1 21.7 20.1 20.4

25.4 28.3 29.2 27.7 26.7 28.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY09 FY10 FY11 FY12 FY13 FY14

CARE ICRA CRISIL (Rating business)

Well positioned among the peer set

The rating industry, primarily characterized by oligopoly, mainly has three major listed

rating agencies, namely, CRISIL, CARE and ICRA.

While CARE derives almost entire of its revenues from core rating services, CRISIL’s

revenue is skewed more towards research. ICRA has started diversifying, but the ratings

segment still drives the majority of its income.

CARE has outpaced industry by clocking rating revenue CAGR of ~28% in the past six years

vs. ~21% in case of CRISIL and 18% in case of ICRA.

CARE is well placed among its peers as despite competition from the market leader CRISIL. The company has managed to earn superior EBITDA margin of ~61% and a PAT margin of 50%+, which defines its strong position in the rating industry. CARE’s continuous focus on high margins segments (i.e. BLR), also on large & medium sized entities and expectations of growth in SME segment makes us positive about the long-term prospects of the company.

%

Profit & Loss Account (Consolidated)

Y/E (`cr) FY14A FY15A FY16E FY17E

Share capital 29.0 29.0 29.0 29.0

Reserve &

surplus 456.4 330.1 417.4 520.4

Net Worth 485.4 359.1 446.4 549.4

Minority interest 0.9 - - -

Provisions 47.9 44.5 49.4 55.0

Deferred tax

liabilities 3.9 2.9 2.9 2.9

Other current

liabilities 43.0 39.0 42.9 47.2

Total equity &

liabilities 581.1 445.5 541.7 654.6

Fixed assets 51.6 56.7 59.7 64.3

Goodwill 7.2 8.0 8.0 8.0

Investments 458.8 334.7 368.2 405.0

Loans &

advances 14.8 13.7 14.5 15.4

Other current

assets 48.7 32.4 91.3 162.0

Total Assets 581.1 445.5 541.7 654.6

Y/E (`cr) FY14A FY15A FY16E FY17E

Total revenue 235.6 260.5 295.2 330.6

Expenses 87.9 101.0 114.8 130.6

EBITDA 147.7 159.6 180.4 200.0

Other income 35.8 43.7 50.2 57.8

Depreciation 2.9 5.1 5.6 6.2

EBIT 180.6 198.2 225.0 251.7

Interest - 1.3 1.3 1.3

Profit before tax 180.6 196.9 223.7 250.4

Tax 50.9 59.0 68.5 79.5

Profit after tax 129.7 137.8 155.2 170.9

Minority interest 0.2 - - -

Net profit 129.4 137.8 155.2 170.9

Y/E FY14A FY15A FY16E FY17E

EBITDA Margin (%) 62.7 61.2 61.1 60.5

EBIT Margin (%) 76.6 76.1 76.2 76.1

NPM (%) 54.9 52.9 52.6 51.7

ROCE (%) 36.5 54.0 49.4 44.9

ROE (%) 26.7 38.4 34.8 31.1

EPS (`) 44.9 47.1 53.0 58.4

P/E (x) 33.4 31.9 28.3 25.7

BVPS(`) 168.6 122.7 152.5 187.7

P/BVPS (x) 8.9 12.2 9.8 8.0

EV/Net Sales (x) 18.5 16.8 14.6 12.9

EV/EBITDA (x) 29.5 27.4 23.9 21.2

Key Ratios (Consolidated)

Balance Sheet (Consolidated)

Valuation and view

CARE, with over 20 years of experience in rating debt

instruments, enjoys a strong market position with respect to

ratings of most types of debt instruments, bank loans and

facilities. With expectations of ~13.3% and ~12.6% growth in

revenue and profitability, respectively, in FY16E, we believe

the company is likely to witness healthy growth across its

segments. While, expectation for further revival in the

economy, in the near-term, raises prospects of the higher-

margin BLR segment. Further, the company’s focus on SME

segment, where it sees a lot of opportunities in the long-term,

also makes CARE’s prospects brighter.

Considering the above aspects, we remain bullish on the stock.

We rate the stock as ‘BUY’ at a current CMP of `1,500.0,

attractively placed at P/E of ~28x and ~26.0x, for FY16E and

FY17E, respectively to arrive at a target price of `1,803.0, with

a potential upside of ~20% for the coming 12 months.

For private circulation only

Disclaimer : This document has been prepared by Funds India and Dion Global Solution Ltd. (the company) and is being

distributed in India by Funds India. The information in the document has been compiled by the research department. Due

care has been taken in preparing the above document. However, this document is not, and should not be construed, as an

offer to sell or solicitation to buy any securities. Any act of buying, selling or otherwise dealing in any securities referred to

in this document shall be at investor’s sole risk and responsibility. This document may not be reproduced, distributed or

published, in whole or in part, without prior permission from the Company.

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