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Credit Analysis and Research Ltd (CARE)

Company Background

Credit Analysis and Research Ltd (CARE) is the second largest rating company in India in terms of rating turnover and have over 19 years of experience in rating debt instrument and related obligations. The company offers a wide range of rating and grading services across a diverse range of instruments and industries, and also provides general and customized industry research reports. Since incorporation in April 1993, it has completed 19,058 rating assignments and has rated INR44,036.03 billion of debt coupled with rating relationships with 4,644 clients as of September 30, 2012. CARE's list of clients includes banks and other financial institutions, private sector companies, central public sector undertakings, sub-sovereign entities, small and medium enterprises ("SMEs") and micro-finance institutions, among others. CARE, being a credit rating company in India, is exempted by SEBI from obtaining the IPO grading for its Initial Public Offer. None of the rating companies including CRISIL, FITCH or ICRA graded CARE IPO.

Investment Highlights

Experienced Board of Directors and Management Team: The company's board of directors and management team are experienced in the Banking and Financial services industry, Commerce and credit risk assessment. Several of general managers have been with the company for over ten years. The knowledge and experience of management team and Board of directors are able to response to market opportunities as well as adapt to changes in the regulatory environment.

Strong Business Growth: CARE has completed 19,058 rating assignments and has rated INR44,036.03 billion of debt as of September 30, 2012 from April 1993. Volume of debt rated by the company increased from INR4,325.84 billion as of March 31, 2008 to INR9,268.61 billion as of March 31, 2012, at a CAGR of 21.0% during such period. Moreover, management sound optimistic towards the expansion of company's debt instrument and bank loan and facility rating business, though the acquisition of new clients and the retention of existing clients by providing high quality services.

Robust Growth in Profitability: Company's Total Income and Profitability has been growing rapidly. Total Income increased from ~INR54.9 crores in FY08 to ~INR217.2 crores in FY12, grown at a CAGR of 41.0% over same period. Whereas, Profit After Tax (PAT) has been grown at a CAGR of 44.3% to ~INR115.7 crores over the period of FY08-12. For the six month ended September 30, 2012, PAT stood at ~INR50 crores. Moreover, management optimistic stance towards business expansion and growing business profitability has boosted our confidence.

Strong Rating Credibility and Brand: Company's ratings business is supported by a strong team of skilled analysts and support staff. Its analysts are predominantly post-graduate professionals, such as MBAs and other finance professionals, which has made the company's brand. Moreover, ratings assigned by the company show that a higher category of rating demonstrates a relatively lower likelihood of default and a higher degree of stability. We believe, CARE's high rating accuracy will help it to develop new client base and also in retention of the existing clients.

Objects of the Issue

The objects of the fresh issues are:

- To carry out the sale of 7,199,700 Equity Shares by Selling the Shareholders stake.
- To achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Key Risks

- 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.

- Demand for debt rating services is primarily linked to the issuance of debt instruments and the provision of bank loans and facilities in the Indian debt market. Any reduction in such volumes may adversely affect company's business, results of operations and financial performance.

- If the banks decide to rate their loan on internal rating based approach for credit risk (the "IRB Approach"), it could have an adverse effect on company's rating business.

- The company has made investment in bonds, debentures and other securities, Changes in interest rates and volatility in the financial markets may adversely affect company's income from such investments (which accounted for 12.2% of consolidated total income as on six months ended September 30, 2012) and the market value of its securities portfolio.

Valuation and Outlook

CARE is the third rating agency in the country to go public after CRISIL and ICRA. At the upper price band of INR750 and lower price band of INR700, the issue of "Credit Analysis and Research Ltd" is quoted at 21.4x on the upper side of the price band and 20x on the lower price band on its annualized FY13 EPS of INR35. The rating business is trading at 33-35x in the market. We believe that company's superior growth in profitability, high return ratios, strong business credibility and brand and likely diversification will boost the valuation multiples. We recommend investor Subscribe to the issue.

Source : Equity Bulls

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