CARE - Subscribe to IPO - Sbicap Securities

Credit Analysis and Research Ltd.

Company Overview

Credit Analysis and Research Ltd. (CARE) is a leading, full service credit rating company in India. It offers a wide range of rating and grading services across a diverse range of debt instruments and related obligations covering a wide range of sectors, such as manufacturing, services, banks and infrastructure. It also provides general and customized industry research reports. Its clients includes banks and other financial institutions, private sector companies, central public sector undertakings, sub-sovereign entities, small and medium enterprises and micro-finance institutions, among others.

Key Highlights

- CARE is the second largest rating company in India in terms of rating turnover for the year ended March 31, 2012.

- Since incorporation in April 1993, CARE has completed 19,058 rating assignments and has rated Rs. 44,036.03 billion of debt as of September 30, 2012. It has rating relationships with 4,644 clients as of September 30, 2012.

- It is the leading credit rating agency in India for IPO grading, having graded the largest number of IPOs since the introduction of IPO grading in India.

- In November 2011, the Company acquired a 75.1% equity interest in Kalypto, a firm providing risk management software solutions. Pursuant to this acquisition, Kalypto has become a subsidiary of the Company.

- CARE provides technical assistance to HR Ratings De Mexico S.A. DE C.V. in Mexico, and in order to explore opportunities in Latin America, it provides technical assistance to Summa Ratings S.A., Ecuador with respect to providing credit ratings

- CARE is also recognized by the Capital Markets Development Authority, Republic of Maldives to carry out ratings of debt instruments and bank loans and facilities in respect of Maldivian companies through its office in Republic of Maldives.

- The Company has also been granted indirect recognition by the Hong Kong Monetary Authority as an external credit assessment institution for the purpose of the regulatory capital framework in Hong Kong.

- It's top shareholders includes domestic bank and financial institutions like IDBI Bank, Canara Bank, SBI Bank, IL&FS, Federal Bank etc.

Key Concerns

- The Company's business is impacted by changes in the volume of debt instruments issued and bank loans and facilities provided in the Indian debt market. Any reduction in such volumes due to economic downturn or regulatory restrictions may adversely affect the business, results of operations and financial performance.

- Any increase in interest rates and credit spreads may negatively impact the issuance of debt instruments or demand for bank loans or facilities for which the company provides rating services.

- Over 80% of the Company's revneue is primarily on account of rating services. If it is not successfully able to diversify its business, its financial condition and results of operations may be adversely affected.

- If the banks whose clients avail credit rating services under the Basel II framework migrate to the internal rating based approach for credit risk (IRB Approach), it could have an adverse effect on the rating business, which may in turn have an adverse effect on the Company's business.

- A portion of the ratings business is driven by regulatory requirements or requires accreditation, recognition or approval from government authorities. Demand for ratings may decrease if there is a change in regulations which negatively impacts the volume of debt instruments issued or the demand for bank loans or facilities in the domestic markets. A decrease in demand for ratings would affect the Company's business.

Valuations & Recommendation:

CARE Ltd. is currently valued at 20.1x and 21.5x of its post issue annualized H1FY13 earnings at lower and upper price band respectively whereas it is valued at 4.7x and 5.0x on P/BV multiple. While comparing the company to its closest peers, the company appears to be fairly valued on most of the valuation parameters.

CARE's strong market position in rating debt instruments and bank facilities, brand presence, healthy financial position coupled with prominient client base makes the issue worth investing. However, the risk of slowdown in the credit market remains a major concern.

We recommend Investors to Subscribe the issue.

Source : Equity Bulls

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