CARE IPO Analysis

Credit Analysis and Research (Care) is the 2nd largest rating company in India by rating turnover. Promoted by major banks and financial institutions, its three largest shareholders are IDBI Bank, Canara bank and SBI. The company's main product is rating of debt instruments and bank loan facilities. With rating relationship with 4,644 clients, Care has significant rating coverage of Indian banks and financial institutions. Apart from rating, the company also provides specialized grading services including IPO grading, equity grading and grading various types of enterprises including energy service companies, renewable energy service companies, shipyards, maritime training institutes, construction companies, rating of real estate projects etc. The company has graded the largest number of IPOs since the introduction of IPO grading started in India. Care is also into providing general and customized industry research reports, economic research reports on debt markets, budget analysis, policy analysis etc and customized research covering key areas such as market sizing, demand estimation, demand supply gap analysis etc upon request of clients. Ratings of debt instruments and bank loans and facilities constituted about 86% of total revenue in the fiscal ended March 2012 (FY 2012). However, the company intends to diversify by expanding various income-generating pool of products such as rating small and medium enterprises equity and real estate projects, grading educational institutes and debentures, and going international Company is already recognized as a Rating agency in Maldives to carry out ratings of debt instruments and bank loans and facilities in Maldivian companies. Care has entered into a non-binding MOU with 4 credit rating agencies located in Portugal, Brazil, Malaysia and South Africa to establish an international credit rating agency which would provide international scale ratings to assist local issuers in mobilizing resources from international financial markets. Company also has plans to provide rating services in Nepal and Mauritius in future Care is entering the capital market through an offer for sale by IDBI Bank, Canara Bank, SBI, IL&FS, Federal Bank, IL&FS Trust, Milestone Trusteeship, ING Vysya Bank, and Tata Investment. About 72 lakh equity share of face value of Rs 10 each in a price range of Rs 700 to Rs 750 per share are being offered by the selling shareholders. There will be no issue of fresh shares. Strengths Was the third rating agency approved by the Securities and Exchange Board of India and the Reserve Bank of India to enter the rating business. Today, among the six rating agencies, it is the second largest in terms of rating revenue. Diversifying its range of products and is also going global. Weaknesses The business is concentrated on rating revenue, which accounted for 86% of total turnover in FY 2012. Migration of banks, whose clients avail credit rating under the Basel 2 framework, to internal rating for credit risk (known as the IRB approach) could have an adverse effect on the rating business. The operating profit margin (OPM) has come down from about 79.2% in FY 2010 to about 71.6% in FY 2012, and further to 65.9% end September 2012. This is largely due to lower number of debt instruments available in the market for rating due to unfavorable financial and economic conditions and higher interest rates in India. Does not have the benefit of support of global parent like S&P, Moody's or Fitch. So, scope for outsourcing activities and global reach and recognition that an international rating parent can provide to its Indian subsidiary (like Crisil and Icra) is missing. Valuation Unconsolidated net sales were up by 12% to Rs 188.98 crore, while lower number of debt ratings resulted in OPM declining 360 basis points to 71.6% in FY 2012 over FY 2011. Other income was up 79% and depreciation down 18%. Finally, PAT rose 24% to Rs 115.70 crore. EPS on post-IPO equity of Rs 28.55 crore of face value of Rs 10 each stands at Rs 40.5. Net sales stood at Rs 89.90 crore, OPM 65.9% and PAT Rs 50.05 crore in the six months ended September 2012 over a year ago. Due to higher debt issuances, sales and profits should be higher in the second half compared with the first half. Hence, first half figures have not been annualized. The shares are being offered in the price band of Rs 700 to Rs 750 per equity share. The P/E at the lower band works out to 17.3 times and at the upper band 18.5 times FY 2012 earning. On FY 2012 consolidated EPS, Crisil is trading at 35 times and Icra at 26 times. However, given the already strong diversified business model and global parents of the listed competitors, the P/E discount that Care is offering compared with Crisil and Icra is justified.