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Friday, December 7, 2012

Credit Analysis & Research (CARE) Ltd IPO Review


Care Ratings IPO Review

    
     (1)    Issue Highlights
  
Price Band
Rs. 700-750
Issue Period
7/12/12-11/12/12
Issue Size
71,99,700 shares
Face value
Rs. 10
Lot Size
20
Issue Type
100% Book Building
Listing
BSE,NSE
Registrar
Karvy Computershare
Maximum Retail Subscription
Rs. 1,95,500 (13 lots )
Industry
Credit Rating & Grading

      (2)    Issue Details

Issue type: Offer for Sale by stake holders



(3) Industry profile

Credit rating business was conceptualized and pioneered in the USA. In India, CRISIL (a subsidiary of S&P) was the first rating agency to be set up in 1987, followed by the ICRA –a subsidiary of Moody’s (1991) - and CARE (1993).
There are 6 credit rating agencies in India- Besides CARE, other players are CRISIL Ltd, India Ratings & Research Pvt. Ltd (earlier known as Fitch Ratings India Private Ltd.), ICRA Ltd, SME Rating agency of India Ltd (SMERA)and Brickworks ratings India Pvt. Ltd.


Rating agency business is continuously rising in India


Increasing bank credit to the industry
 corp. bonds as a % of GDP are rising 
 (4)    Company profile
CARE’s rising prowess in the IPO market

The company was established in 1993 and is mainly engaged in providing credit rating and grading services primarily for debt instruments. Revenue from this source accounts for the 85 % of the total income. Besides rating services, CARE earns from investment activities.
In terms of turnover CARE holds second position among Indian rating companies.
CARE’s client list includes reputed banks and financial institutions like IDBI bank, Canara Bank, SBI and IL&FS. The company offers rating services for instruments like Commercial Paper, Debentures, Bonds, Preferential Shares, and Bank Loan Facilities etc.
Besides this, CARE also offers grading services like IPO grading, equity grading and various types of grading for enterprises.
CARE covers a diverse range of sectors like manufacturing, services, banks and infrastructure. CARE’s product pool includes product like SME & MSE rating, Edu-grade (grading of educational courses), Equi-grade (equity research and grading), Real estate Project Grading and Market Linked Debenture Valuation.

(5)    Objects of the Issue

·         This issue is a stake sell by existing shareholders and company shall not get any proceeds from it.
·         CARE shall be availing listing benefits
·         Only a few issue expenses shall be borne by the  CARE (rest shall be borne by the stake sellers )

       (6)    Strengths & opportunities

·         The company has already started its operation in Maldives and intends to fortify its presence in countries like Nepal & Mauritius.
·         The company holds 75%  stake in Kalypto- a company providing risk management software, could turn into  a game changer in future

        (7)    Concerns

·         High interest regime is unfavorable for overall debt market and is capable of hampering the new issuances of debt instruments thus negatively affecting the profitability of the company.
·         Besides ailing Indian economy and tight monetary policy, unfavorable global economic and political conditions could cause a negative  impact on the Indian debt market  and the same could act negatively on the company’s  profitability
·          Under Basel 2 framework banks can migrate to IRB approach or Internal Rating Base approach and the same could turn fatal for the company as around 24% of the total rating income (better called as income from bank facilities which involves initial rating  income and annual surveillance fee ) comes that way.
·         Limited exposure to overseas markets

        (8)    Financial Analysis #

·         All calculations at the upper price band of Rs.750
·         FY 12 data was considered for the calculation


Parameter
FY 12
FY 13(Annualized)

P/E
40.5
21.5

P/B
5.7
5

ROE
30.7 %
23.3%

ROCE
26.4  %
21.4 %

NPM
53 %
48 %

Current Ratio
5.7
5.4

M-Cap/Sales
9.8
10.3
Profit CAGR  (4 year) #
44.3%
NA
Net Asset per share
Rs. 132
149

# derived from restated standalone/unconsolidated data

       (9)    Comparison with peers #

  
#  Peer data as per moneycontrol site for FY 12 


CRISIL **
ICRA
CARE
P/E
36.87
22.88
40.5
P/B
19.68
4.89
5.7
ROE #
44.12
12.99
30.7%
NPM #
28.39
35.12
53%
Profit CAGR (4 years)
27 %
17.58 %
44.3%

**CY 11 data
      
     (10)Inference

In terms of turnover, CARE is the second largest rating agency in India and since its inception way back in 1993 CARE has rated debt instruments worth around Rs. 44,000 billion.
The company is registered with SEBI as a Credit Rating Agency under CRA (Credit Rating Agency) regulations. CARE boasts an awesome client count in excess of 4600.
The company mainly draws its income from the rating of debt instruments in India. CARE is now treading successfully on the path of IPO grading and since FY 11 it has been surpassing the market leader CRISIL in the IPO business. CARE is steadily expanding its footprints abroad as mentioned earlier.
If we go by FY 12 data, CARE issue seems little expensive but its awesome profit CAGR justifies it. CARE’s annualized FY 13 results make it a lucrative bet with a Price to Earnings Multiple of 21.5. Besides, CARE has seen impressive net profit margin of 44 % in FY 12 and that is a way higher than its peers.
CARE is a debt free company and holds a consistent dividend paying track record. In the rating business what matters is the credibility and the absence of any foreign parentage makes it more credible in the Indian context by ensuring absence of any possible foreign vested interest.
This stock might not give overnight returns but over a longer term this defensive play is expected to give good returns. This stock being eclipsed by the Bharti Infratel’s forthcoming IPO might miss retail investors’ patronage but long term investors should go for this issue.

       Disclaimer

Analysis is for the information purpose only. Though due diligence has been taken while preparing this  report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.

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