CARE Ratings Limited

Shares in Credit Analysis and Research Ltd (CARE) rose as much as 31.3 percent in their trading debut on Wednesday, after the credit rating service provider attracted strong response for its Rs. 540 crore initial public offering. CARE shares on the National Stock Exchange were up 23 percent at Rs. 923.50 as of 12:13 p.m. from its IPO price of Rs. 750 rupees. The shares had opened at Rs. 940 and risen to as much as Rs. 985). Other peers such as CRISIL and ICRA were down 1 per cent at Rs. 1,455.10. The broader Sensex traded 159 points or 0.8 per cent higher at Rs. 19,414.

Investors were attracted by CARE’s fundamentals as the ratings provider was seen as having a strong net worth position and no debt on a consolidated basis, analysts said. CARE also allocated most of the shares in its IPO to institutional investors, analysts added, boosting the retail bid on the listing day.
“Since people have not been able to get decent allotment in the CARE IPO, there is lot of appetite on the day of listing as investors are looking at this stock as a good long-term bet,” said Hiten Gala, senior manager advisory at Brokerage Sharekhan.

CARE had raised Rs. 540 crore in an IPO that was over-subscribed by nearly 41 times, receiving overwhelming response from institutional buyers. The listing price was higher than the Rs. 900 IPO price expected by most analysts.

Care Ratings shares are no longer cheap in terms of price earnings when compared to peers such as ICRA and CRISIL. The stock trades at over 26-times FY13 PE as compared to CRISIL, which trades at 25.5-times and ICRA, which is available at 22.30-times.

Management commentary:
O.V. Bundellu, chairman of CARE told NDTV Profit that the second half of the year is slightly better that the first half for ratings companies. A lot depends on bond market credit off take and market revival, he added. The market is looking forward to interest rate reduction, which will give a boost to credit off take and boost ratings agencies’ performance, he said. “The underlying demand for ratings opinion is vital from lenders’ perspective. Though credit rating is not compulsory in bond markets, institutional investors ask for it, which is a sign of mature market,” Mr Bundellu added.

In the past, analysts have been concerned with CARE’s one-dimensional revenue model as compared to CRISIL, which has a differentiated model. Some analysts also expect the ratings business to take a hit once banks get permission to start their internal rating in 2014. However, Mr Bundellu said even if the Internal Ratings Based Approach (IRBA) comes in, the company will continue to see substantial growth in business.

Hi All, Request opinion from fellow boarders for investment in credit rating company. Vivek, Hitesh, Donald, Rudra, Dhwaneel, etc. - how should we look at this one from a 3-5 years timeline?

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Here are some risks that I see with CARE vis a vis other credit rating agencies such as CRISIL.

  1. Most of its revenue’s comes from alayzing asserts for public sector banks. Going forward more or less the Private banks will perform better than public sector banks.

  2. Unlike CRISIL, CARE’soverdependence on public sector banks will be a major laggard for it come 2014 after whichthe deadline set by RBI gets over and banks can have thier own internal credit rating mechanisms.

  3. The managment profile is a laggard. They do not seem to be very dynamic.

Because of these reasons I avoided this company.

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thanks for comments Soumya, if that was true - what might have aroused institutional interest in CARE?

I am not an expert, but I think what happened yesterday was catch up on valuations. As CARE was available at a discount to CRISIL, so there was some valuation catch up. Also institutional investors also play on technicals/short term rather than long term. If you see it was a safe bet for them and 2014 is far away.

Againthe reasons for whichI avoided the stock may be completely irrelevent. If the reasons that I mentioned earlier turn out to be a non issue I may well be investing in the stocksome time in rthe future.

As they say “Never say Never”.

Personally I feel CRISIL is a better bet than CARE as the valuationas are alomst same for both of them now and CRISIL has lesser risk over its head.

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From pg 18 of IPO doc, Risk Factor 7, para 2:

“As a part of our efforts to compete effectively, we have adopted a fixed fee cap model for certain clients fora particular duration of time. Once the fee cap is exhausted, we are, as part of our terms of engagement withsuch clients, restricted from charging them any additional fees for additional debt issuances or bank loansor facilities availed for the duration of the period agreed. If we are unable to negotiate fee caps with theseclients at appropriate levels and if we exhaust the fee cap, we will be required to continue to perform ourservices in accordance with the terms agreed with such clients for no additional fees. If this occurs with alarge number of clients, our business, results of operations and profitability could be adversely affected”

Does anyone have a clue of extent / duration of this kind of engagement - This is effectively front loading of sales and profits, but I did not find any further mention in notes to accounts.

And is this a standard industry practice in Ratings industry, or this is part of IPO dressing of numbers?

With Basel III coming into effect, a lot of loans will be rated internally by the banks as they build their databases/ tracks. This could be a negative for the sector. Of course this will take some time to materialise. Also the implementation would be in phased manner.

A player like Crisil with lot of ancillary services might be able to prosper.

CARE held its conference call on 13thNov’13 and was addressed by MD and CEO Mr D R Dogra

Key highlights by Capital Mkt:

During Q2 FY’14 Ratings business was up by 4.4% YoY as the company increased the number of new bank ratings to 1863, up by 25% YoY. However the number of new debt instruments rated stood at 71 as compared to 85 in Q2 FY’14. Total number of new assignments grew by 16.6% to 2188 in Sep’13 quarter on YoY basis.

Employee costs was down by over 20% in Q2 FY’14 on QoQ basis, largely as in Q1 FY’14 there were some provisions made on variable pay of the employees which was not required to be made further.

As per the management, the environment for ratings of debt market continued to be challenging as there was not enough issues and tight liquidity situation in Q2 FY’14. In H2 FY’13, the debt market was lower because of slowdown and lack of confidence, high interest rates, tight liquidity issues etc. So if the situation improves in H2 FY’14, then the ratings on debt market business will improve on YoY.

On an average for any rating agency, as per the management, Q2 and Q3 of every year, the surveillance income will be higher while for the rest of the quarters, Fresh Ratings business will be higher.

The company has cash and cash equivalent of about Rs 443 crore. Management has indicated that the company will utilize the surplus cash for organic and inorganic growth both for India and for expansion in overseas market.

Company aims to grow internationally and the JV Arc Ratings, which is with other 4 credit rating agencies from Brazil, Portugal, Malaysia and South Africa is in right direction. Also the company has started its operations in Mauritius. Going forward management aims to be present and to grow in debt analytics, research and analytics, rating space outside India.

Overall, rating business is expected to grow by around 13-15% in India in FY’14 and the company expects to do better than the industry. Also lot depends upon how the corporate debt market behaves going forward and how interest rates and liquidity panes out.

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D R Dogra, Managing Director & CEO and Rajesh Mokashi, Deputy Managing Director addressed the call

Highlights of the call by Capital Mkt:

For the quarter ended December 2013 total income grew 13.3% to Rs 60.55 crore against Rs 53.46 crore.

Rating income grew 17%. It also benefited from bank facilities and bank segment.

Volumes grew despite slowdown.

EBITDA grew 1% to Rs 39.18 crore against Rs 38.78 crore

EBITDA was 65%.

Net profit improved 0.7% to Rs 28.02 crore against Rs 27.82 crore

In Q3 number of assignments grew 14.1% to 1772.

For the nine months ended December 2013, total income grew 16.4% to Rs 181.57 crore against Rs 156 crore

Improvement in total income was enabled by ongoing surveillances of ratings and acquiring fresh ratings.

EBITDA improved 11% to Rs 123.15 crore against Rs 110.63 crore

Net profit enhanced 12.4% to Rs 87.37 crore against Rs 77.72 crore

During 9m FY14, rating income improved by 12.9%. The growth was driven by expansion in the number of bank facilities rated from 3,838 in 9m FY13 to 4,414 in 9m FY14 and number of debt instruments from 221 in 9m FY13 to 236 in 9m FY14.

The volume of debt rated increased from Rs 4.80 lakh crore to Rs 6.45 lakh crore during 9m FY14, growth of 34.4%. The total number of assignments increased by 13.6% to 5,444 in 9m FY14 as against 4,790 in 9m FY13.

The other component of total income, âother income' (Rs 6.71 crore), which also includes income from tax efficient investments made in fixed maturity plans (FMPs) increased from Rs 20.53 crore in 9m FY13 to Rs 27.77 crore in 9m FY14.

Higher expenses were mainly on account of employee additions, increased provision for variable pay of employees and commencement of new offices at 4 locations.

Expenses as a percentage of total income stood at 33.3%.

PAT margins lowered to 48.1% in 9m FY14 over 49.8% 9min FY13.

CARE's performance was affected by the overall macroeconomic conditions and capital market activity.

Economic conditions have been subdued with the GDP growth in Q2 coming in at 4.8% and GDP in H1 FY14 growing at 4.6%. Industry growth has been deteriorating, with IIP registering a negative growth of 0.2% in April â November FY14 as against a positive growth of 0.9%.

Debt market remained subdued in FY14. Total debt raised between April â December FY14 remained lower at Rs 196,440 crore as against Rs 264,045 crore in the same period FY13.

Inflation numbers have been high since Q2 FY14, resulting in a hawkish RBI policy stance, however some relief was provided by the December inflation numbers.

In December 2013 quarter, the company has achieved notable growth in its performance in what continued to be a very tough period for the Indian economy. Its financial and operational parameters continue to strengthen showcasing the proficiency of its business model and increasing brand salience.

Concerted expansion of business development team and unwavering confidence in CARE's risk opinions continues to aid volume trajectory. A significant development was the launch of ARC Ratings its international CRA. This is a significant milestone towards growing its business and brand footprint in the global arena.

ARC offers a more comprehensive and pragmatic view on credit risk; and is registered with ESMA (European Securities and Markets Authority), thus complying with strict regulation standards.

Distributing value to shareholders is a corporate philosophy. Given the continuous generation of healthy free cash flows, this would be the fifth consecutive quarter where the board has declared interim dividend.

The Rs 6 per share dividend declared in December 2013 quarter added to a total dividend of Rs 18 per share for the nine months ended December 2013 amounting to a strong payout ratio of 69.5%..

In the coming quarters, the management expects subdued macros impacting industrial activity and the credit rating sector resultantly. However, it continues to be comfortable about the future as it has built the foundation for a strong and lasting company that brings a distinctive approach to the credit rating sector. The management is confident that the company is well-poised to navigate through the economic headwinds and capitalize on the anticipated tailwinds.

Its superior business model, growing brand equity, human capital efficiencies, expansive distribution network and strong financial position provides solid underpinnings for sustainable growth.

The company added 2206 new clients during the nine months ended December 2013.

The company sees credit growth picking up. Growth in April to 27 December 2013 stood at 9.4% against 9.0%.

Investments of Rs 3.84 lakh crore on infrastructure announced can provide boost to the debt rating market during the second half, however implementation of investments will be a key challenge.

Rating coverage of bank loans is expected to continue to grow.

Credit policy growth target of 15% is likely to be realized in FY 2014.

The company has relationship with over 7469 clients.

Significant annual cash flow generation enabling strong cash on books of Rs 441 crore.

This provides sizable platform to deliver future growth. The company is evaluating organic and inorganic opportunities to create value.

As on Dec 2013 it had net worth of Rs 495.6crore.

If inflation continues to fall, interest rates will also fall and investments will increase.

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Call addressed by Mr D R Dogra, MD & CEO;Key Highlights by Capital Mkt;

Net sales of CARE for FY'14 was up by 15% while PAT was up by 14% to Rs 113.33 crore. As per the management, under the backdrop of slowdown in the economy the performance was satisfactory.

During FY'14, about 2500 new clients were added to bring total number of clients to 7754 as on Mar'14. Also during FY'14, total number of assignments handled by the company stood at 7865 as compared to 7439 on YoY basis.

The company continued its focus on client additions although with small ticket sizes. Despite challenges, in FY'14 the volume of bank facilities and debenture and bond segments expanded due to concentrated efforts to capture fresh business.

Globally, ARC Ratings business was launched in London on 16thJan 2014. Along with CARE, other rating agencies from Brazil, Malaysia, Portugal and South Africa are also equally partnered in this venture.

The company also has plans to start its Mauritius subsidiary in H1 FY'15, which will look out for ratings business in Mauritius.

The company has also just started its own Advisory business for advice on infrastructure and financial markets.

Currently the SME ratings constitute only about 10% of total ratings turnover and management expects the segment to do well in future.

Also with stable government, things on bond and corporate ratings should improve in future. However, as per the management, all this will still take some more time before things fructify.

Overall, management is cautiously optimistic for debt market in FY'15 and bond ratings business as well.

Call was add by MD & CEO Mr D R Dogra. Key highlights by Capital Mkt;

761 new clients were added in Q2 FY’15, taking the overall client base to 8692.Total volume of debt rated increased from about Rs 1.8 lakh crore in Q2 FY’14 to about Rs 2.12 lakh crore in Q2 FY’15. Total number of instruments rated stood at 1655.Most lending is happening only in retail, infrastructure yet to pick up in India.

Growth in credit continues to be sluggish with ground reality is yet in a waiting mode. However management expects things to recover slowly from here. Investments should pick up gradually in H2 which should see some debt activities in H2 FY’15.Roughly Bank Loan Ratings constitutes around 50% and rest are others. Once debt market start doing well, debt instrument ratings will go up.OI includes profit on sale of investments of around Rs 16 crore.H2 FY 15 will be even better than H1 FY’15 with improvement in macros expected to occur in H2 FY’15.Going forward, dividend payout ratio will continue to be healthy.

Company is adding employees towards SME ratings, as is confident of this segment to improve going forward, as operating leverage is yet to appear in this segment. SME rating is around 7% of total business and SME business is under investment stage.Mgt.exp.OPM to further improve due to SME ratings & further pick up of debt instruments business.

Arc Ratings which is a JV with Brazil, Portugal, Malaysia and South Africa, is working on Government of India Ratings and will soon announce its ratings and will then further proceed towards other ratings thereafter.

Hey everyone,

CARE has been the pillar of my portfolio since long. Its done alright and I am very bullish on its overall prospects specially from the development of Bond markets and Capital markets in the coming 5-10 years.

Obviously, the valuation gap to Crisil and ICRA are a major positive.

The company is a cash generating COW which is what I love most about it. Completely debt free and has a ‘negative’ working capital which is incredible in today’s world!

Its a major play on India’s growth and upcoming recovery. The company is managing to grow at 16%-18% YOY despite sagging credit growth.

I see CARE as a great story.

Any views?

Neil Bahal

Dear Neil,

I have been tracking this company right since the time it was at 700 but have always been afraid to dip in due to the recent Basel 3 regulations which allow banks to rate their own debt. Even though it may take time for banks to set up their own rating divisions, isnt this a huge long term negative specially for a company like CARE which depends on this business? What is your view on the same?

Hello Abhishek,

True, this is a threat. But the management has indicated (and also I have spoken with PSU bankers) that:-

1- This internal rating system will take a LONG time to implement.

2- Also, this defeats the purpose of 3rd party rating and can re-ignite major scams and bribery cases in PSBs as the banks could possibly give any rating the company wants!! (imagine bhushan steel type cases during basel 3).

Hence, despite the fact that banks will be encouraged to do internal ratings, they will still ask for 3rd party certification just for saving their backs incase a particular account goes bad!

3- The management has indicated that Bond ratings & Capital markets are expected to be the major earning streams for the company in coming years anyways.

These are the reasons why I am calm.



Dear Neil,

What part of their total portfolio do bonds and capital markets currently form? Also, I appreciate that it will take time but nontheless, the company is going to be part of a market (debt rating) which is perhaps not going to grow significantly (perhaps might even shrink). As a wise investor once told me “change is slow at first and then sudden.” What happens when more and more banks start rating their own debt. With PSU’s i understand the concern but I dont see private banks continuing with rating companies for a long time to come. I guess this is where a more diversified CRISIL tops out on CARE.


With ICRA being acquired by Moody’s now, going might get difficult for CARE. ICRA used to be a clear No. 2 in Indian rating business till a few years back. But, they did not let Moody’s acquire them and came up with an IPO. They avoided interaction with Moody’s and kept on destroying value. The asset of rating agency is its brand, and Moody’s has multiplied that for ICRA. In a few years CARE might become No. 3 again.

An unrelated subject but for your information Pranav, you might perhaps already know that Warren Buffet completely sold out of Moody’s after the 2008 crash because their reputation got completely destroyed after the housing crash. Apparently, many of the distressed unsecured subprime loans were actually rated investment grade by Moody’s! Thats not the ideal partner to have. That was the whole reason norms regarding credit rating agencies, about reducing their dependence came into effect!

To me, the only investment worthy CRA today is CRISIL (due to their diversified portfolio with less dependence on rating bank debt) but at current valuations, margin of safety is inadequate, if not absent.

Going back to CARE, I would be seriously concerned about where they are headed because as per my understanding more than 2/3rds their revenue actually comes from rating bank facilities which after Basel 3 is definitely going to come under threat.

Dear Abhishek,

I have worked with a rating agency, including in their structured finance rating business which you mentioned about. And I would not use very strong phrases like _“their reputation got completely destroyed after the housing crash”._World still uses credit ratings and will use them.__Buffet made huge money investing in Moody’s and never said that their reputation has got completely destroyed. I hope that you are convinced of your reasons behind the quality of ratings given by CARE being much better than Moody’s.

I thought of posting about what Chris Sims (Nobel in Economics: 2011) told me about rating agencies, but then, I would save it for the audience who would be kind enough to appreciate it.

~ Best of luck with your investing!


I agree I might have used words which are a bit extreme. I think “destroyed” can be replaced by “tarnished” and “completely sold out” can be replaced with “trimmed” but the sentiment however remains same. The way this forum adds value is to allow everyone to express their opinions without getting personal. I have been mulling over CRA’s for a long time and posting my concerns allows me to get counter views from people such as yourself who are in the opposite camp. I do regret and apologize for not posting entirely accurate facts and I never intended to un"kind." Incase, you felt that way, I apologize again. However, what Im not sorry for is posting my view.You are obviously free to post what you want on this forum (and not post what you dont want to!) but with all due respect to you, I dont think you get to decide what I will appreciate and what I wont!

Here are 2 articles which I had read which made me make these comments. They are for your “kind” attention.

Dear Admin, I apologize for this message but I think there is a hint of personal attack in the message posted before this one. I dont wish however, to dilute the quality of this forum and this will be the last message I will be posting on this thread which doesn’t relate to CRA’s!

P.S. I would be happy to continue the conversation on CRA’s though!

I work in corporate banking, and none of my clients have moved to / intend to move to a system where they have their internal ratings done themselves. I really think it will not be easy for clients to migrate to such a system. Besides, an external rating acts as a validator amongst banks - I reckon rating agencies are not going to lose the bank debts business anytime soon.

Disclosure: Invested

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