Credit Analysis & Research Ltd (CARE) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_CARE_IC.pdf · Credit Analysis & Research ... Bajaj Holdings And Investment Ltd 3.5

December 16, 2014

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Well poised to leverage rating business forte Credit Analysis & Research (CARE), the second largest company by market share, is a pure play on the rating business with ~99% (| 230 crore) of its FY14 core revenue generated from rating segment. The highlight of CARE’s business is its best-in class EBITDA margin of 60%+ and PAT margin of 50%+. The business model is asset light in nature with not much capex (| 10-15 crore) while it generates strong operating cash flow. Post its listing, the dividend payout ratio has improved from 30% (FY12) to 63% (FY14), which we expect to grow to ~73% by FY17E. It paid special dividend of |65 in H1FY15 already. Considering the improving economic outlook with the expected upturn in the investment cycle, peaking of interest rates and gradual and structural development of the bond market we have factored in 18% PAT CAGR in FY14-17E to | 210 crore vs. 12% CAGR seen in FY11-14. We initiate coverage with a BUY rating and a target price of | 2175. Exhibiting capability to grow relatively faster since 2008 In 1993, CARE was the third credit rating agency (CRA) to be incorporated in India. However, it gained significant ground to become second largest CRA by revenue post FY09. It clocked 50% revenue CAGR in FY08-11 vs. 30% by peers. CARE is strong in bank loan rating (BLR) & bond market while it does not have a significant presence in SME space as of now. We expect it to maintain its rating revenue market share of ~28%, going ahead. EBIDTA margin among the best in rating industry CARE earns the best margin among rating agencies with 64% EBITDA margin and 56% PAT margin in FY14. These strong margins can be attributed to i) relatively lower employee cost ii) high proportion of large ticket bank loans & bonds (high margin business) and iii) offices being largely owned saving on lease cost. Going ahead, margins are expected to decline from 64% in FY14 to 62% by FY17E owing to a rising focus on the low margin SME business and mainly due to expected rise in staff costs. Optimum utilisation of cash - key to enhance RoE, shareholder returns CARE has been maintaining >| 400 crore of cash equivalents in its b/s that is 10% of its Mcap. Efficient utilisation for propositions like acquisition, higher dividend or buyback of shares, will be positive for shareholders. As profit traction & return ratios improve, scope for further re-rating exists CARE has emerged as a strong player in the rating business with strong margins & improving market share with best brand recall after Crisil. It is trading at a discount to the consolidated business of Crisil & Icra. If we just consider Crisil’s core rating business, CARE, trading at 20x FY17E EPS, is at a steep discount to Crisil’s ~60x multiple. The company has strong RoE of 27% for FY14 & potential to further enhance it to 46% by FY17E. We value CARE at 30x FY17E EPS (~50% discount to Crisil’s core rating business multiple) and arrive at TP of | 2175. We initiate coverage with BUY rating. Exhibit 1: Key Financials

(Year-end March) FY13 FY14 FY15E FY16E FY17ERevenue (| crore) 227.4 265.1 332.2 392.3 445.8 EBITDA (| crore) 133.9 146.6 172.9 207.3 237.1 Net Profit (| crore) 113.3 128.7 161.3 187.6 210.4 EPS (|) 39.7 44.4 55.6 64.7 72.5 PE (x) 37.3 33.4 26.6 22.9 20.4 Dividend Payout ratio (%) 50.4 62.9 143.9 64.9 73.1 ROCE (%) 31.0 29.7 45.0 48.1 51.2 RONW (%) 26.7 26.6 42.8 44.3 46.2

Source: Company, ICICIdirect.com Research

Credit Analysis & Research Ltd (CARE)| 1480

Rating Matrix

Rating : BuyTarget : | 2175Target Period : 18 monthsPotential Upside : 47%

YoY Growth (%)

(%) FY14 FY15E FY16E FY17ERevenue 16.6 25.3 18.1 13.6 EBITDA 9.5 17.9 19.9 14.4 Net Profit 13.5 25.3 16.3 12.2 EPS 11.8 25.3 16.3 12.2

Current & target multiple FY14 FY15E FY16E FY17E

P/E 33.4 26.6 22.9 20.4 Target P/E 49.0 39.1 33.6 30.0 Mcap to sales 18.7 15.6 13.0 11.3 Dividend yield 1.9 5.4 2.8 3.6 Price/BV 8.9 11.4 10.1 9.4

Stock Data ParticularsBloomberg/Reuters Code CARE IN / CREI.NSSensex 26,959.0Average Volumes 17,792.0Market Capitalisation (| crore) 4,305.052 week H/L 1590 /415Equity Capital (| crore) 29.0Face Value | 10DII Holding (%) 49.7FII Holding (%) 25.7

Comparative return matrix (%) Return % 1M 3M 6M 12MCARE 11.1 11.0 46.8 101.7 Crisil (5.0) (5.2) 18.3 78.1 Icra 4.9 3.7 15.7 75.9

Price chart

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CARE (R.H.S) Nifty (L.H.S)

Research Analyst Kajal Gandhi [email protected]

Vasant Lohiya [email protected] Sheetal Ashar [email protected]

Page 2 ICICI Securities Ltd | Retail Equity Research

Company background Incorporated in 1993, CARE is a full service rating company that offers a wide range of rating and grading services across sectors. The company has been promoted by major banks and financial institutions in India. The three largest shareholders are IDBI Bank (16.6%), Canara Bank (12%) and SBI (5.2%). The company has 13 offices in India in Mumbai, New Delhi, Kolkata, Chennai, Hyderabad, Bengaluru, Ahmedabad, Jaipur, Pune and international operation in Male in the Republic of Maldives. CARE has been the third largest rating agency since its incorporation but has gained market share to reach the second position by revenues since FY09.

The research division (still not a significant contributor) was established in June 2006 and added five new sector reports viz. gems & jewellery, shipbuilding, retail, construction and coal. Since then, the company has widened its canvas to cover 116 sectors, publishes economic reports, etc.

In FY11, CARE acquired a license to operate credit rating operations in Maldives. It launched new products including EquiGrade, Esco grading & financial strength grading of shipyards, real estate project star ratings, etc.

In FY12, CARE acquired a 75% stake in Kalypto Risk Technologies Pvt Ltd for ~| 9 crore. It is engaged in the business of providing risk management software solutions and offers products with exclusive focus on banking & financial services domain and addressing areas of enterprise risk management. It garnered revenues of | 6.1 crore and PAT of | 0.97 crore in FY14.

In FY14, CARE invested in Arch rating (20% stake), an international rating agency, to form a JV between five international rating agencies including CARE, CPR- Portugal, SR Rating- Brazil, MARC- Malaysia and GCR of South Africa. The JV has been promoted as an alternative to the current big three agencies (S&P, Moody & Fitch that control 90%+ market). The management has indicated that investment made by CARE is not too significant.

Exhibit 2: Company Evolution

1993 1997 1998 1999 2002 2005 2006 2007 2008 2010 2011 2012 2013

Expansion of rating operations to toll roads, electricity boards, municipal coporations and

structured instruments

Started rating debt mutual funds

CARE Incorporated

Signed MoU with NSIC as an approach

rating agency for SSIs

Launched 'CARE Loan rating' for rating

of term loan

Founding member of ACRAA

Came out with an IPO at | 750 with the objective to provide

exit to existing investors

Launched new products such as

rating of SMEs, SSIs, mutual funds, issuer

rating and IPO grading

Developed grading methodolgy for infra projects, ultra mega

power projects

Executed MoUs with 19 banks to provide rating facilities under Basel II framework

Established CARE Knowledge Centre at

Ahmedabad. Commenced

providing technical assistance to rating agency in Ecuador

Acquired license to operate in Maldives.

Launched new products including equigrade, ESCO

grading, etc.

Acquisition of 75.1% stake in Kalypto

Technologies

Source: Capitaline, Moneycontrol, Company, ICICIdirect.com Research

CARE came out with an IPO issue of | 540 crore (25.22% stake) in December 2012 at | 750. The object of the issue was to provide an exit to existing investors. No fresh funds were raised in the IPO. Sebi mandates a one year lock-in period post IPO for shareholders who sold their part stake in the IPO. Now, since a year has been completed, the major shareholders intend to sell their balance stake. If there is a change in ownership from these PSU institutions to a strategic investor, it will be positive for the stock.

Shareholding pattern (Q2FY15)

Shareholding Pattern Holdings (%)Promoters -Institutional investors 75.4 Others 24.6

Source: BSE, ICICIdirect.com Research

Institutional holding trend (%)

13.4 13.9 15.720.2

25.7

50.2 49.8 50.5 51.7 49.7

0102030405060

Q2FY14 Q3FY14 Q4FY14 Q1FY14 Q2FY14

(%)

FII DII

Source: BSE, ICICIdirect.com Research


Exhibit 3: Major shareholders as on Q2FY15 Name of major Shareholders Shareholding percentage in CARE

IDBI Bank 16.6

Canara Bank 12.0

State Bank of India 5.2

Franklin Templeton Investment Funds 4.3

Bajaj Holdings And Investment Ltd 3.5

Serum Institute Of India Ltd 2.4

The Wellington Trust 1.9

Russell Investments Ltd 1.8

GMO Emerging Domestic Opportunities Fund 1.8

Federal Bank 1.8 Source: Company, ICICIdirect.com Research

Exhibit 4: Key management personnel

Name & Designation Experience & QualificationsOver 36 years of experience in financial sector & credit administrationCertified Associate of Indian Institute of BankersHolds master’s degree in agriculture and in business administrationOver 29 years of experience in finance, commerce and credit risk sectorsBefore joining CARE, worked for Otis Elevator Company India, DSP Financial Consultants & Kotak Mahindra FinanceHolds Master of Management Studies degreeQualified Chartered Financial Analyst 25 years of experience in financial services

PGDM; CFA; FRM18 years of experience in credit rating, training of new recruitsMaster’s degree in management sciences; CFA15 years of experience in credit analysis and research servicesC.A.; Cost Accountant 27 years of experience in development banking, commercial banking, engineering & commodity markets

Masters degree in ecnomics

Madan Sabnavis(General Manager, Chief Economist)

Milind Gadkari(Chief General Manager,Ratings)

Revati Kasture(Chief General Manager, Research)

T.N. Arun Kumar (Chief General Manager,Ratings)

Rajesh Mokashi (Deputy Managing Director)

D R Dogra (Managing Director)


Exhibit 5: CARE’s product profile

Grading Research

Corporate Financial Sector Public Finance MSME Infrastructure • IPO • Covering 49 sectors• Debt loan • Banks • Sub-sovereign • NSIC - SSI Ratings • Power • Shipyard • Customised research• Bank loan • NBFC entities • SME Ratings • Roads • Educational Insti • CARE industry risk • Issuer • Housing finance • Ports • Maritime traniing insti metrics (150 sectors)• Corporate • Insurance • IDF • Construction companies • Economic research reports governance • Mutual funds • Real estate star • Valuation of market

• Securitisation • Equigrade Linked debentures (MLD) programmes • SME fundamental

• Renewable energy companies/project

Ratings

Care Ratings

CARE Ratings



Industry Overview Revenue structure, size and market share dynamics of rating industry The rating industry in India is characterised by an oligopoly. It mainly comprises three major listed rating agencies viz. Crisil, CARE & Icra, which account for 86% revenue market share of total rating industry revenues. Others include India Rating (promoted by Fitch), Brickworks and SMERA. Total consolidated revenue size for three large players is at | 1719 crore as on FY14 with rating income forming 47% at | 805 crore and research income forming 37% at | 641 crore. Crisil enjoys 67% market share among the three in consolidated revenues. Revenue for CARE is almost entirely derived from the core ratings business, Crisil’s revenue is skewed more towards research. Icra has started diversifying but the ratings segment still drives majority of its income.

Exhibit 6: Revenue break-up of top three rating agencies (FY14)

Revenues (| 1719 crore)

Rating (| 805 crore) Other income (| 94 crore)Research (| 641 crore) Others (| 177 crore)

Crisil (| 414 crore)

Icra (| 164 crore)

Crisil(| 641 crore)

CARE (| 227 crore) Crisil (| 39 crore)

Crisil - advisory (| 56 crore)

Icra (| 121 crore)

Icra (| 19 crore)

CARE (| 36 crore)

Rating revenue from India (| 284 crore)

Source: Company, ICICIdirect.com Research, Revenue = Rating + Research + Advisory + other Income

The other three rating companies like India Ratings, SMERA and Brickworks generated rating revenues of | 74 crore, | 27 crore and | 33.6 crore, respectively, as on FY14. In the past five years, the total revenue and rating revenue of the top 3 rating agencies have grown at a CAGR of 17% to | 1719 crore and | 805 crore, respectively, as on FY14. As can be seen in the exhibit below, owing to a weakening economy and the consequent decline in credit levels, the rating revenue declined at a CAGR of 11% over FY11-14.

Crisil, CARE & Icra, accounts for 86% of industry’s rating

revenue market share.


Exhibit 7: In past three years, traction in total revenue declines mainly due to…

789

899

1084

1285

1495

1719

37.0

13.9

20.6 18.5 16.3 15.0

0

500

1000

1500

2000

FY09 FY10 FY11 FY12 FY13 FY14

(| c

rore

)

0.05.010.015.020.025.030.035.040.0

(%)

Total Revenue Growth (%)

Source: Company, ICICIdirect.com Research, Total Revenue = Rating revenue + Research + Advisory + Other income

Exhibit 8: ….declining growth in rating income

371481

584643

74580553.9

29.621.4

10.115.7

8.10

200

400

600

800

1000


(| c

rore

)

0

10

20

30

40

50

60

(%)

Rating revenue Growth (%)


CARE has outpaced industry by clocking rating revenue CAGR of 28% in the past six years vs. 21% in case of Crisil and 18% in case of Icra. Strong CAGR of 24% in BLR volumes during FY08-11 enabled CARE to improve its traction and market share as witnessed in the exhibit below.

Exhibit 9: Rating revenue of individual rating agencies

189 239 284 326 396 41489106 129 139

150 164

94136

171 178199 227

0

200

400

600

800

1000


(| c

rore

)

Crisil (Ratings business) Icra CARE


Exhibit 10: Market share in ratings revenue over the years

50.8 49.6 48.6 50.7 53.2 51.4

23.8 22.1 22.1 21.7 20.1 20.4

25.4 28.3 29.2 27.7 26.7 28.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0


(%)



Exhibit 11: Market share if all six rating players included (| crore)

SMERA, 27, 3%Brickwork, 34, 4%

India ratings, 74, 8%

Icra, 164, 17%

CARE, 227, 24%

Crisil, 414, 44%

Source: Capitaline, ICICIdirect.com Research

Exhibit 12: Market share excluding S&P business of Crisil (| crore)

SMERA, 27, 3%Brickwork, 34, 4%

India ratings, 74, 9%

Icra, 164, 20%

CARE, 227, 28%

Crisil, 284, 36%


Crisil with | 414 crore rating revenues (including | 130 crore from S&P) in FY14 is the market leader and has consistently contributed to more than half of the industry’s revenues. For the second place, CARE and Icra have


been neck and neck over the years. However, CARE has notched up second place by a notable margin in the recent past. In FY09, both CARE and Icra were almost at par with ~25% market share each. However, this gap has widened as CARE managed to grow at higher levels than Icra. We expect rating revenue traction for the industry to be better than 11% CAGR witnessed during FY11-14. Further, the market share should remain steady in this form. However, new players like India Ratings (Fitch) have been growing in visibility and acceptability. This may impact the incremental business of listed players.

Exhibit 13: Absolute rating revenue trend over long period

59.8 52.190.5

130.1

188.8238.9

284.1326.0

396.4 413.9

21.0

169.7

25.660.3

129.1164.3

226.9197.3176.8

137.696.1

51.024.819.2

149.6139.5106.1

38.988.5

31.3

050

100150200250300350400450

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(| c

rore

)

Crisil CARE Icra

CARE climbs to second place in terms of revenue market share

Care has grown at 35% CAGR while Crisil and Icra have grown at 30% CAGR and 23% CAGR, respectively, over FY06-14


Research business… A couple of rating agencies have diversified from their rating business into the research division. Crisil is the major player in this segment, which has grown mainly by global acquisitions like Irevna, which drive its research revenues. Its clients are investment banks, hedge funds, etc. It currently derives ~58% (| 641 crore) of its total revenues from the research business. Similarly, Icra also derives ~40% of its revenue from the research, consultancy and advisory business. The rest of the rating agencies are mainly reliant on their rating business. Exhibit 14: Crisil’s revenue from research activities

164.0 219.5 232.3 284.9423.7

526.0641.1

0

100

200

300

400

500

600

700

CY07 CY08 CY09 CY10 CY11 CY12 CY13

(| c

rore

)

Research Revenue


Rating growth has moderated in recent years as revenue of

the rating industry is linked to a certain extent to the bank

loans disbursed. Total credit growth has steadily dipped

from 24% CAGR during FY08-11 to 14% in FY14 while

growth in the industry segment has declined sharply from

40% CAGR during FY08-11 to 13% in FY14


Strong EBITDA margins in rating business As stated earlier, the rating business is largely divided into three product segments, viz. rating corporate debt, bank loans & SME loans. The margins earned are highest for rating corporate debt, followed by bank loans while SME rating earns the least margin. The ticket size of SME loan is small and more man hours are required to do the same business, that is, of high ticket corporate debt rating. Hence, margins are lower in the SME business. Being an oligopoly market, there is not much price-sensitive competition among rating agencies. Further, efficiency on the cost side is a kicker to margin. Being a service industry, employee cost is the major expense incurred by rating agencies, which constitutes ~44% of revenues. The EBITDA margin in the rating business of the top 3 CRAs has largely remained stable around 48-50% in the last two or three years. CARE earns the highest EBITDA margin of 63.9% vs. 45.6% for Icra and 39.6% for Crisil. Exhibit 15: Rating EBITDA margin of top 3 CRAs on overall basis

584

643

745

805

318

319

364

384

54.4

49.648.9

47.7

0

100200

300

400500

600

700800

900

FY11 FY12 FY13 FY14

(| c

rore

)

44

46

48

50

52

54

56

(%)

Rating Revenue EBITDA EBITDA margin


Some dip in margin was inevitable post FY09 as growth of bank loan rating (relatively low margin) was higher than corporate debt rating. Since 2008, the Basel II accord stipulated lower risk weights for bank loans that are rated. Hence, there was huge demand for rating existing bank loans, which led to a sharp pick-up in the pace of bank loan rating. Exhibit 16: CARE consistently maintaining higher rating EBITDA margin share

41.7 39.6 41.3 39.6

53.148.0 44.6 45.6

76.469.2 67.4 63.9

0102030405060708090

FY11 FY12 FY13 FY14



CARE earns highest EBITDA margin in the rating business

at 63.9% vs. 45.6% for Icra and 39.6% for Crisil


Exhibit 17: EBITDA earned by individual rating agencies over the years

118 129 164 16469 67

67 75131 123

134 145

0

100

200

300

400

500

FY11 FY12 FY13 FY14

(| c

rore

)

Crisil (Ratings business) ICRA CARE


Exhibit 18: EBITDA share of individual rating agency

37.3 40.5 45.0 42.7

21.6 20.9 18.3 19.5

41.1 38.6 36.8 37.8

0

20

40

60

80

100

120

FY11 FY12 FY13 FY14

(%)



We believe that for the industry, as a whole, EBITDA margins may witness slight pressure, going ahead, owing to enhanced staff related costs and rising focus on the low margin SME segment. Rating business enjoys superior return ratios…. The return ratios (RoE) earned by rating agencies are in the range of 20-50%, which is quite attractive. Hence, they ought to command some premium over markets. Superior quality of rating business can be gauged from the fact that all rating agencies earn better return ratios than aggregate Sensex companies. We believe that, going ahead, RoEs of the industry, as a whole, should improve from current levels, owing to better revenue traction than witnessed earlier and a higher dividend payout ratio.

Exhibit 19: RoE profile of rating agencies and aggregate Sensex companies

30.3

39.3

37.1

52.1

49.4

41.7

39.0

31.5

40.3

39.8

30.0

28.5

26.7

26.6

17.4

20.6

24.0

18.4

18.1

17.4

19.0

20.0

17.1

17.1

18.3

17.5

16.2

16.0

0

10

20

30

40

50

60

FY08 FY09 FY10 FY11 FY12 FY13 FY14

(%)

Crisil CARE Icra Sensex



Opportunity size - Scope for revenue growth wide enough in long term India is significantly under-penetrated in all segments including bank loan, bond market and SME ratings.

i) Bank loan rating - Until FY07-08, rating revenues of CRAs were mainly derived from the corporate debt rating (CDR) segment. However, post implementation of Basel II guidelines in 2008, a new revenue segment named bank loan rating (BLR) was opened up for CRAs. This segment led to strong traction of 34% CAGR in rating revenues of CRAs during FY08-11. As on FY14, the BLR segment comprises >50% of CARE’s rating revenue, ~25% for Icra and ~11% for Crisil. For all top 3 CRAs together, the BLR segment is ~40% of rating revenues. Basel II guidelines required banks to adopt a “standardised approach” for credit risk. Under the ‘standardised approach’, the RBI recognised certain rating agencies as eligible CRAs while Indian banks are required to use such eligible CRAs to assess their credit risk to determine compliance with capital adequacy requirements. As per this guideline, banks can benefit from maintaining less capital for loans rated ‘A’ and above as can be seen in the exhibit below. Thus, the extra capital saved could be utilised for further lending, which helps in improving return ratios. Exhibit 20: Basel II provides benefit for bank loans that are rated

Capital release on

Rated exposures Unrated exposures Rated exposure

AAA 100% 9.0% 20.0% 1.8% 9.0% 7.2%

AA 100% 9.0% 30.0% 2.7% 9.0% 6.3%

A 100% 9.0% 50.0% 4.5% 9.0% 4.5%

BBB 100% 9.0% 100.0% 9.0% 9.0% 0.0%

Rating Risk weight Capital required

Basel I Basel II

Capital required

Risk weight for rated exposure

Source: RBI, ICICIdirect.com Research

Such implementation of Basel II standards by the RBI resulted in large scale demand for credit ratings across sectors and geographies, which was previously limited to a small group of clients. There was huge demand for rating existing bank loans along with new bank loans during FY09-12, which has driven the overall rating revenue growth during this period. However, as per our interaction with bankers and the management, this market for mid to large companies has largely got penetrated now. Hence, a further driver for BLR revenues would come from incremental credit growth. India is a significantly under-penetrated market as the credit to GDP ratio of India is low at ~50% compared to 80-150% for other emerging and developed countries. Hence, industry credit has huge scope to grow in the long term, thereby supporting the rating revenue growth. In recent times, credit growth has been modest and in sync with a moderating economy wherein GDP growth has steadily declined from 8.6% in FY10 to 4.9% in FY14. Industry & services sector credit in overall credit size of | 60 lakh crore as on FY14 is around | 38.6 lakh crore. For ratings, this is the main segment of bank loan rating. We expect credit growth of ~12% for FY15E and improvement to 15% traction by FY16E. The industry loans segment is expected to track overall credit growth. Therefore, the opportunity of rating can also be seen growing to an industry loan book addressable size of | 49.7 lakh crore by FY16E or incremental opportunity size of ~| 11 lakh crore by FY16E.

Post implementation of Basel II guidelines in 2008, a new

revenue segment named bank loan rating (BLR) was

opened up for CRAs.

India is a significantly under-penetrated market as the

credit to GDP ratio of India is low at ~50% compared to

80-150% for other emerging and developed countries.


Exhibit 21: Bank loan growth has moderated in recent past; to pick up in CY15

3244

790

3942

080

4611

860

5395

290

6086

880

6817

306

7839

901

2038

241

2521

650

2998

903

3402

700

3859

900

4323

088

4971

551

16.9

21.5

17.0 17.0

12.815.0

19.8

23.7

18.9

13.5 13.412.0

12.0

15.0

0100000020000003000000400000050000006000000700000080000009000000

FY10 FY11 FY12 FY13 FY14 FY15E FY16E

(| c

rore

)

0

5

10

15

20

25

(%)

Total Credit Industry & Services segment

Total credit growth (RHS) Industry segment Growth (RHS)

Source: RBI, ICICIdirect.com Research

ii) SME loan rating - As per SME chamber of commerce, there are ~3 crore SMEs in India. So far, only ~1 lakh SME units have been rated, which implies a large scope left for penetration by CRAs. For each SME unit, rating agencies charge in the range of | 30000-40000 as initial fee. No surveillance business is done in the SME segment. Further, the government under the National Small Industries Corporation (NSIC) scheme provides subsidies to the SME unit on fee payments for getting a CRA to rate them. This subsidy is up to 75% of the fee charged, depending on the turnover of the SME unit as described in the below exhibit. Exhibit 22: NSIC scheme

Turnover Fees to be reimbursed by NSIC

Up to | 50 lakh 75% of the fee charged by the rating agency subject to a ceiling of | 25,000/-

Above | 50 lakh to 2 crore 75% of the fee charged by the rating agency subject to a ceiling of | 30,000/-

Above | 2 crore 75% of the fee charged by the rating agency subject to a ceiling of | 40,000/-


Credit rating facilitates SME units in procuring quicker and cheaper bank finance. Given the low level of penetration, there is a large scope for rating agencies in the SME space and will be their focus, going ahead. A back-of-the-envelope calculation indicates a large revenue opportunity for CRAs in the SME rating space in the long run. Assuming that rating agencies are able to capture just 5% of total SME units i.e. 15 lakh units in the long term, it would translate into revenue opportunity size of | 5250 crore (15,00,000 * 35000). Currently, Crisil is the market leader in the SME rating space having rated ~13,000 SME units in FY14 vs. ~1500-2000 rated by Icra and CARE individually.

Credit rating facilitates SME units in procuring quicker and

cheaper bank finance. Given the low level of penetration,

there is a large scope for rating agencies in the SME space

and will be their focus, going ahead


iii) Indian bond market – G-sec crowding out, corporate bond market yet to evolve India’s total outstanding debt market as on FY13 stood at | 6200000 crore, which is 66% of the GDP. As can be seen in the below exhibit, government securities (G-Secs) account for more than half of the total debt outstanding. The pace of fresh G-sec and T-bills issuance continues to be large, crowding out the entire bond space. Corporate bonds, CPs and CDs that are the main markets for CRAs account for 29% of the total debt outstanding. Exhibit 23: Debt market of India as on FY13

Outstanding (| crore) % of total outstanding As % of GDP

Government Securities 3,244,536 52.1 34.5

Corporate bonds 1,290,147 20.7 13.7

State development loans (SDLs) 889,069 14.3 9.5

Commercial Paper (CP) 109,260 1.8 1.2

Certificate of Deposit (CDs) 389,610 6.3 4.1

T-Bills 299,764 4.8 3.2

Total 6222386 100 66.2 Source: Crisil year book; Company, ICICIdirect.com Research

In terms of fresh issuance each year, the corporate bond segment has witnessed 7.6x increase since FY04. As on FY13, fresh corporate bond issuance (private and public placement) stood at | 368830 crore, which was 3.9% of the GDP. However, compared to other emerging markets, India’s primary market for corporate bonds is significantly under-penetrated as can be seen in the exhibit below. Exhibit 24: Total corporate bond annual issuance over the years

5518479446 92355

115266

175827201578

287048

368830

191978

14.0

44.0

24.8

52.5

9.25.016.2

28.542.4

0

50000

100000

150000

200000

250000

300000

350000

400000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

(| c

rore

)

0

10

20

30

40

50

60

(%)

Fresh corporate bonds issuance Growth YoY

Source: Crisil Year book, ICICIdirect.com Research

Exhibit 25: Indian corporate bond market significantly under penetrated…

1.9 1.92.4 2.3 2.5

3.3 3.22.8

3.53.9

0

1

2

3

4

5


Corporate bonds issuance as % of GDP


Exhibit 26: …..compared to other countries

49.341.7 40 38

30

20

10.63.9

0

10

20

30

40

50

60

Kore

a

Japa

n

Hong

Kong

Mal

aysi

a

Sing

apor

e

Thai

land

Chin

a

Indi

a

Source: Company, Crisil Year Book, ICICIdirect.com Research

Compared to other emerging markets, India’s primary

market for corporate bonds is significantly under-

penetrated at 3.9% of GDP


Corporate bond market evolution – long due to deepen credit availability As we said above, India is very deeply under-penetrated in terms of the corporate bond market. The development of a corporate bond market is long awaited and has the potential to grow exponentially. The opportunity has not yet been wholly captured. The corporate bond market has grown at 25.3% CAGR over FY04-13 to | 3,68,830 crore. The noteworthy part is its strong growth in recent years at 35.3% CAGR over FY11-13, which may be the initial indication of a corporate bond market developing in India. However, the growth has taken a knock in FY14 wherein issuance dropped to | 318437 crore as the RBI tightened liquidity and the rate cycle turned north against expectation. This led to a rise in wholesale borrowing cost, which made bond issuance unattractive. There was a shift in fund raising via the bond and commercial paper segment to bank credit. Various steps have been taken in the recent past by the RBI, Sebi and the government, which have resulted in the development of the corporate bond market in India. However, as we said earlier, India still has a long way to go in the corporate bond space. A strong, vibrant and healthy corporate bond market is a prerequisite for a well developed economy, especially in case of India that requires ~US$1 trillion of infrastructure investment in the next five or six years. This quantum cannot be fulfilled by the banking system alone as it has to meet Basel III capital requirements. Further, with the government, regulators and all stakeholders believing in the necessity of a strong corporate bond market, we believe, going ahead, the bond market would witness a healthy rise and be structurally positive for CRAs. Refer, Annexure II for “Recent steps which led to development of corporate bond market” and “Major factors and steps ahead that may turn out to be key triggers for development of corporate bond markets” and “Some other highlights of India’s corporate bond market”.

The corporate bond market has grown at 25.3% CAGR over

FY04-13 to | 3,68,830 crore. The noteworthy part is its

strong growth in recent years at 35.3% CAGR over FY11-

13, which may be the initial indication of a corporate bond

market developing in India


Investment Rationale Gaining market share

Almost the entire revenue of CARE is derived from the rating business unlike Crisil and Icra that derive 37% and 58%, respectively, from the rating business.

Within the rating business, CARE is mainly active in the BLR segment (63% of fresh debt volume rated, 78% of the fresh assignments & 56% of rating revenues) followed by CDR. It is still at a very nascent stage in SME rating. However, we expect bond market & SME rating to drive overall rating revenue growth as both are significantly under-penetrated markets in India.

In terms of rating revenues, the company remained the third largest rating agency for most of the years since its incorporation. However, implementation of Basel II guidelines in FY08 helped in increasing rating volumes for rating agencies, in general, and proved to be a game changer for CARE, in particular. In the past six years, CARE has outpaced the industry in terms of rating revenue CAGR. It witnessed a CAGR of 28% over FY08-14 vs. 22% for all three rating companied combined.

Exhibit 27: CARE consistently second largest rating agency by revenue since FY09

59.8 52.190.5

130.1

188.8238.9

284.1326.0

396.4 413.9

21.0

169.7

25.660.3

129.1164.3

226.9197.3176.8

137.696.1

51.024.819.2

149.6139.5106.1

38.988.5

31.3

050

100150200250300350400450


(| c

rore

)

Crisil CARE Icra

CARE climbs to second spot in terms of revenue market share

CARE has grown at 35% CAGR while Crisil and Icra have grown at 30% CAGR and 23% CAGR, respectively, over FY06-14


The sharp rise in bank loan ratings (BLR) during FY09 catapulted CARE to the second position in terms of rating revenue market share. The company’s market share rose to 25.4% in FY09 from 21% in FY08. As against this, Crisil and Icra’s rating revenue market share dipped to 50.8% and 23.8% in FY09 from 53.9% and 25%, respectively, in FY08. CARE has since then been able to maintain its second position.

CARE is mainly active in the BLR segment. It derives 63%

of fresh debt volume rated, 78% of the fresh assignments &

56% of rating revenues from BLR segment.


Exhibit 28: CARE has been gaining market share; expect it to maintain its second slot

50.8 49.6 48.6 50.7 53.2 51.4

23.8 22.1 22.1 21.7 20.1 20.4

25.4 28.3 29.2 27.7 26.7 28.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0


(%)



CARE at the forefront in capturing BLR opportunity…

Basel II guidelines required banks to get loans rated by credit rating agencies, which would reduce the capital requirements of banks and, in turn, help them to lend more. This led to large corporate loans of banks being available to be rated by rating agencies and, thus, opened up a large opportunity for rating agencies, in general.

CARE, on the back of its low cost of operations, conscious decision to tap this segment aggressively and owing to support from its parentage of large banks ownership, was able to capture large volumes. The ability to handle lower ticket size instruments profitably was one of the major reasons, which enabled CARE to maintain its stronghold in the BLR segment.

Exhibit 29: Volume of fresh bank loan rated each year

2710

00

3890

00

3550

00

5200

00

6790

00

4820

00

5560

00

2825

00

4004

00

2946

00

2887

00

2839

00

2622

00

2145

00

0100000200000300000400000500000600000700000800000


(| c

rore

)

CARE ICRA


Exhibit 30: CARE’s traction in BLR segment has been strong

43.5

-8.7

46.5

30.6

15.441.7

-26.4

-7.6-18.2

-29.0

-1.7-2.0

-40.0

-20.0

0.0

20.0

40.0

60.0


(%)

CARE growth YoY ICRA growth YoY


As can be seen in the above chart, during FY08-11, CARE’s fresh volumes rated each year in the BLR segment increased at 24% CAGR to | 5,20,000 crore compared to Icra’s volume remaining same at ~| 2,80,000 crore. Icra’s BLR volume dipped to | 2,14,000 crore in FY14.

CARE has rated the highest number of BLR instruments since FY08 among the top three rating agencies. While it rated 21,490 BLR instruments, Icra and Crisil rated about 15,000 to 16,000 BLR instruments. In terms of volume, while CARE rated ~| 3250000 crore in the BLR segment since FY08, the same amount for Icra stood at ~| 2030000 crore.

The ability to handle lower ticket size instruments

profitably was one of the major reasons, which enabled

CARE to maintain its stronghold in the BLR segment


Exhibit 31: Trend in fresh BLR assignments rated each year

3641148 1250 1654

4883

6074 6117

230

18432289

30543933

3392

1103

01000200030004000500060007000


(Nos

)

CARE Icra


Exhibit 32: Expect CARE’s dependence on BLR revenue to continue…..

108 112128

151179

19860.6

56.4 56.055.0

54.152.2

0

50

100

150

200

250

FY12 FY13 FY14 FY15E FY16E FY17E

(| c

rore

)

464850525456586062

(%)

BLR rating income % of total rating revenue (RHS)


Corporate debt rating segment…..

In the corporate debt rating (CDR) segment, CARE is a small player compared to Icra. The volume of fresh debt rated in the CDR segment during FY14 stood at | 2,98,000 crore compared to | 7,61,000 crore rated by Icra. In the past two years, fresh CDR volumes rated by CARE have increased at a CAGR of 10% while the number of instruments rated has been declining. This has resulted in the average ticket size improving, which is beneficial for CARE’s margins.

Exhibit 33: Volume of fresh corporate debt rated

2980

00

2870

00

2480

00

2620

00

2980

00

47.5

-3.7-13.6

5.613.7

0

50000

100000

150000

200000

250000

300000

350000

FY10 FY11 FY12 FY13 FY14

(| c

rore

)

-20-100102030405060

(%)

CARE Growth YoY (RHS)


Exhibit 34: Average ticket size rising for CARE in CDR segment…..

551 595

795

596

742874

479

243 239172 155 201

0

200

400

600

800

1,000


(| c

rore

)

CARE ICRA



Exhibit 35: Expect share of revenue from CDR segment to rise……

67 72 76

94

114

13637.5

36.3

33.0

34.3 34.6

35.7

0

20

40

60

80

100

120

140

160

FY12 FY13 FY14 FY15E FY16E FY17E

(| c

rore

)

30

31

32

33

34

35

36

37

38

(%)

CDR rating income % of total rating revenue (RHS)


Going ahead, with the expected improvement in GDP growth and the likely decline in interest rates, we believe the volume traction in both BLR as well as CDR segment should be better than that witnessed in the past two or three years.

SME segment may be additional leg up to revenue in long run….

SME remains the growth area but is a low ticket size and low margin business. However, it is mainly the volume business for CRAs. At present, merely ~1,00,000 SMEs of the 3 crore SMEs has been rated in India. Hence, the current penetration is very low at ~0.3%. In the SME rating space, Crisil is the leader. It rated ~12,857 SME instruments in FY14 compared to 1407 by CARE and 1563 by Icra. An SME rating does not contribute much to the overall revenues of CARE at present. It has begun investing in manpower but is yet to enter the SME market at full throttle. The management has guided that there is huge scope of growth in this segment and is strongly focused on tapping the same. Overall, rating revenues of CARE are estimated to grow at 18.3% CAGR to | 380 crore over FY14-17E. The focus would be on expanding the CDR segment whose proportion in terms of volumes of debt rated and rating revenue would increase. However, the BLR segment would continue to remain the key segment for at least the next few years. Margins to moderate but would continue to stay best in class…. Limited competition in the rating industry and pricing power enable rating agencies to earn healthy margins. Even among rating agencies, CARE has managed to earn superior EBITDA margins of ~63% and PAT margin of 50%+.

Going ahead, we are factoring in a slight dip in margin from 64% in FY14 to 62.7% in FY15E and 62.1% in FY17E. The company is expected to grow its SME segment, which is relatively a low margin business. Also, the employee cost may go up as it strengthens its middle level management and invests in employees to develop its SME business.

Going ahead, with the expected improvement in GDP

growth and the likely decline in interest rates, we believe

the volume traction in both BLR as well as CDR segment

should be better than that witnessed in the past two or

three years

Overall, rating revenues of CARE is estimated to grow at

18.3% CAGR to | 380 crore over FY14-17E.

Amongst rating agencies, CARE has managed to earn

superior EBITDA margins of ~63% and PAT margin of

50%+


Exhibit 36: Although dipping, EBIT, PAT margin both lucrative

73.779.0 79.6

76.4

69.2 67.463.9 63.0 62.7 62.4

51.056.8

63.2

53.2

60.457.0 56.1

58.7 56.7 55.4

30

40

50

60

70

80

90

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

EBITDA margin PAT margin


Reasons for superior margin of CARE:-

i) Majority of the rating revenue of CARE is derived from bank loan rating and bond rating. Both these segments are high margin businesses. Further, the company has so far focused more on large and medium sized entities which enable generation of better margins. It generates limited revenue from the SME business, which is relatively a low margin business as its ticket size is small and higher employee cost is incurred to generate a similar size of business. ii) Another reason for the better margins is lower employee cost. Its cost per employee stood at | 10.2 lakh in FY14 compared to | 15.1 lakh for Crisil and | 16.6 lakh for Icra. CARE’s staff strength as on FY14 stood at 594. We expect this to rise to 680 by FY15E with per employee cost increasing to ~| 11 lakh. This is owing to its internal knowledge centre based in Ahmedabad, Gujarat which enables senior analysts to concentrate more on the analytical work rather than data entry and processing work, which gets done at this knowledge centre. This leads to better efficiency in terms of time taken between receipt of the mandate from the client till the completion of the final rating process. Besides, the pay scale offered by company at this knowledge centre is on the lower side owing to the job profile and as employees for this centre are hired from tier II or tier III colleges. iii) Also, CARE owns a majority of its offices, thereby saving on lease rental costs.

Exhibit 37: Cost per employee of CARE lower than its peers

10.4 11.713.2

15.1

22.9 22.5

16.1 16.6

10.18.4 9.0 10.2

0

5

10

15

20

25

FY11 FY12 FY13 FY14

(| la

kh)

Crisil ICRA CARE


Exhibit 38: Staff cost as % of sales lowest for CARE, thus, boosting margin

19.215.1 15.4 17.9

23.7 25.5 26.4

41.1 43.7 44.943.0 40.7 42.245.8

51.4 50.9 47.446.4

38.737.237.6

0

10

20

30

40

50

60


(%)

CARE Crisil ICRA



Going ahead, we believe it would be difficult for CARE to maintain employee cost at the current lower levels. We expect the employee cost to rise at 20% CAGR to | 105 crore over FY14-17E with employee cost as a percentage of sales rising to 27.8% by FY17E from 26.4% in FY14.

Enjoys healthy operating cash flows

Owing to the nature of its business, the capex requirement in the rating business is very low. In the past three years, CARE has incurred a capex of ~| 16 crore. To enhance revenue, the major expenses incurred, if required, are for increasing the employee strength (the cost of which is managed well by CARE compared to its peers) rather than for any major capex. Hence, CARE enjoys healthy operating cash flows as witnessed in the exhibit below. As on FY14, on a gross block of | 65 crore, CARE garnered revenues of | 230 crore and PAT of | 130 crore. Over the years, CARE has retained a majority of its profits in the form of investments. The company has been maintaining cash & investments of > | 400 crore, which accounted for ~10% of its current MCap. These investments are mainly made in debt mutual funds, PSU bonds and commercial papers wherein it earns a return of ~8%. The management has indicated that it is scouting for any suitable acquisition. For that also, they indicated that very limited cash is required. In the past, in November 2011, it acquired a 75% equity interest in Kalypto for | 9 crore, a company providing risk management software solutions with a focus on enterprise risk management for banking, insurance and other financial institutions. However, post this acquisition, CARE has been unable to find any suitable opportunity. This was proving to be a drag on its RoE. Hence, during Q2FY15, the company announced a special dividend of | 65 per share. We believe, going ahead, the company would continue to reward shareholders handsomely. We estimate the dividend payout ratio will rise to 73% by FY16E.

Exhibit 39: Asset light business model permits capex to be limited

129

5689 95

116141 149

203

160

228

8.4 11.3 16.4 8.2 5.5 3.2 4.2 4.8 5.3

5587 91 108 113

161188

210

0

50

100

150

200

250

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(| c

rore

)

PAT Operating cashflow Purchase of Fixed assets


Exhibit 40: Strong dividend payout ratio

27.9

80.0

42.0

53.0

6.5 10

20.0

6.826.6

50.462.9

143.9

64.9 73.1

0

20

40

60

80

100

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(|)

020406080100120140160

(%)

Dividend per share Dividend payout ratio (RHS)


CARE generates strong operating cash flow of > | 100

crore+ while on an average its capex is merely | 4-5 crore

each year

We expect the strong dividend payout trend to continue,

going ahead, as the business does not require much capex


Foray into different geographies & products yet to contribute meaningfully…

At present, CARE’s revenues are largely rating business based and only from the domestic market. To reduce concentration risk, the company has made several efforts to expand its business in various geographies and products. The company has already started operations in Maldives and is in the process of starting operations in Mauritius. CARE is recognised by the Hong Kong Monetary Authority and has signed a MoU for exploring possibilities of providing risk management solutions & training in Nigeria. In January 2014, CARE along with four partners from Malaysia, Brazil, Portugal & South Africa, launched an international credit rating agency “ARC Ratings”. It is registered with European Securities and Markets Authority (ESMA) that will give it entry into European markets. The income from such an investment would be in the form of dividend. Also, CARE would ask its Indian clients to get their instruments in the international market rated by ARC ratings for which CARE would receive referral fees.

CARE provides grading services and includes products like Edugrade, Real Estate Star Gradings, EquiGrade, etc. The company has also signed an MoU with banks like Axis Bank, Bank of Maharashtra and Andhra Bank for services in the MSME segment.

We believe that all the above efforts would contribute meaningfully to the P&L only in the long run.

In January 2014, CARE along with four partners from

Malaysia, Brazil, Portugal & South Africa, launched an

international credit rating agency “ARC Ratings”. It is

registered with European Securities and Markets Authority

(ESMA) that will give it entry into European markets.


Potential for return ratios to scale up higher

With limited capital requirement, the incremental profit growth is expected to further enhance return ratios. As discussed earlier, the dividend payout ratio is also expected to improve to 65% in FY16E and 73% by FY17E, aiding the improvement in return ratios. We expect CARE to report an RoE of 44% in FY16E and 46% in FY16E.

The company has a cash and investment pile of >| 400 crore, which may be utilised for acquisition, buyback or returned to shareholder in the form of dividend. The optimum utilisation of this investment pile is key to generate return ratios and shareholder returns from a long term perspective.

Exhibit 41: Return ratios to improve, going ahead

31.5

40.3 39.8

30.0 28.5 26.7 26.6

42.8 44.3 46.244.8

55.349.5

42.4

32.2 31.0 29.7

45.048.1

51.2

0

10

20

30

40

50

60


(%)

RoE RoCE


CARE earns decent return ratios with RoCE of 30% and RoE of 27%, which are higher than Icra and lower than Crisil.

From a long-term perspective, CARE has huge potential to improve its return ratios significantly as and when growth improves. Currently, the credit growth in the economy is sluggish and in line with modest GDP growth. As the economy revives, the credit and debt market volume levels would pick up, the impact of which would be reflected in improving sales and profit traction of CARE. As the business is asset light in nature, the major chunk of higher profits is expected to flow to shareholders in the form of dividend, thereby improving the return ratios significantly.

We estimate the return ratios will inch higher as the

dividend payout ratio increases


Financials Revenue traction to be healthy at 19% CAGR over FY14-17E

The company has grown its rating revenues at 28% CAGR to | 227 crore over FY08-14. However, the growth has moderated considerably in the past three years at 10% CAGR during FY11-14 in line with the slowdown in the economy and credit growth. We expect total revenues (rating + other income) and rating revenue to improve their traction over the next three years with healthy CAGR of 19% to | 446 crore and | 380 crore, respectively, by FY17E. This is owing to the expected improvement in GDP traction over FY14-16E compared to 4.7% average GDP growth witnessed in FY12-14. Further, with regulators and the government’s enhanced focus on developing the bond market to meet long term debt requirements of the infrastructure segment, we believe the volumes of CRAs are bound to increase, going ahead.

Exhibit 42: Total revenue (rating income + other income) growth trend

103.2153.7 176.6

206.3 227.4265.1

332.2392.3

445.887.0

49.0

14.9 16.810.2

16.625.3

18.1 13.60

100

200

300

400

500

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

(| c

rore

)

0.0

20.0

40.0

60.0

80.0

100.0(%

)

Total revenues Growth (RHS)


Exhibit 43: Rating revenue growth trend

96.1137.6

169.7 176.8 197.3226.9

274.5

330.7380.1

88.4

43.1

23.4

4.211.5 15.0

21.0 20.514.9

050

100150200250300350400

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

(| C

rore

)

0.0

20.0

40.0

60.0

80.0

100.0

(%)

Rating revenues Growth (RHS)


Other income traction expected to improve as yields decline.… CARE’s other income includes interest on long term and short-term investments in fixed instruments, dividends on investments. However, a majority of its other income comes from booking profits on sale of investments. Going ahead, with yields expected to be in a downward trajectory, CARE is expected to book further gains on its investment books, thereby improving other income traction. We expect other income to witness 23% CAGR over FY14-17 to reach | 66 crore in FY17E. Exhibit 44: Trend in other income

2.9 5.8

15.8

5.8

28.2 28.635.7

57.761.6

65.7

0

10

20

30

40

50

60

70


(| c

rore

)

Other income



EBITDA growth to remain healthy In the past three years, owing to a substantial decline in EBITDA margin from 76% in FY11 to 64% by FY14, the EBITDA traction fell to 6% over FY11-14. Going ahead, we expect it to grow at 17% CAGR to | 237 crore over FY14-17E largely reflecting an improvement in the topline growth. Further, this is despite the fact that we have factored in a dip in EBITDA margin from 64% in FY14 to 62.4% in FY17E as the employee cost rises. Exhibit 45: EBITDA growth to be healthy but slightly below topline growth

76.9

109.8130.5 123.2 133.9

146.6172.9

207.3

237.1

99.9

42.7

18.8

-5.68.7 9.5

17.9 19.9 14.4

0

50

100

150

200

250

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(| c

rore

)

-20

0

20

40

60

80

100

120

(%)

EBITDA EBITDA growth (RHS)


Yearly PAT expected to cross | 200 crore by FY17E PAT has grown at a modest run rate of 10% CAGR over FY10-14. The majority of the EBITDA largely flows to PAT post tax as depreciation and interest are almost negligible. With an improvement in revenue and EBITDA traction, we expect earnings over FY14-17E to see healthy growth of 18% CAGR to | 210 crore by FY17E. Exhibit 46: PAT growth trend over the years

26.7

55.4

87.2 91.0107.5 113.3

128.7

161.3187.6

210.4125.1

57.5

4.318.2

5.413.5

25.316.3 12.2

107.7

0

50

100

150

200

250


(| c

rore

)

0

20

40

60

80

100

120

140

(%)

PAT PAT growth (RHS)


Going ahead, we expect EBITDA to grow at 17% CAGR to |

237 crore over FY14-17E largely reflecting an improvement

in the topline growth

We have factored in PAT CAGR of 18% over FY14-17E to |

210 crore


Risk & concerns Shift to IRB model by banks may affect revenues…. CARE derives >50% of rating revenue from the BLR segment vs. ~11% in case of Crisil and ~25% in case of Icra. In the event that banks whose clients avail credit services from CARE apply for, and receive, approval from the RBI to adopt the “internal rating based” approach, it could have an adverse effect on its rating business. Even the management agrees that this could affect their revenues. However, currently, very few banks have applied. Even if they get approval from the RBI, they will have to adopt both the IRB as well as standardised approach for the first two years. Hence, we believe that though the risk is there, it will not affect CARE’s revenue much at least in the next three to four years.

Optimum cash utilisation yet to be showcased The company has a huge pile of cash & cash equivalents >| 400 crore, the effective utilisation of which is yet to be decided. If the cash is deployed in an acquisition, which does not turn out well, it may impact the return ratios.

Rise in employee cost The pay scale of CARE’s employees is lower compared to its peers with the cost per employee at | 10 lakh. In an improving economy, demand for skilled employees increases, which can lead to higher attrition. Hence, maintaining staff cost at current levels may be difficult. Besides, CARE has a very lean management at the middle level. As the company is scaling up its size, it intends to strengthen its middle level management, which could further enhance employee cost.

Paring of stake by large investors in open market CARE’s largest shareholders are banks like IDBI Bank (16.6%), Canara Bank (12%) and SBI (5.2%). Canara Bank has pared down its stake in the company to 12% as on Q2FY15 from 13.3% as FY14. SBI has reduced its stake to 5.2% from 6.04% as on FY14. Going ahead, if these banks continue to pare their stake in the open market, then there will be pressure on CARE’s stock price in the medium term. However, the transfer of the stake to a strategic investor will be an upside risk.

Persistent slowdown in economy to impact business growth A delayed revival in the investment/capex cycle could affect issuances in the debt market or/and lead to slower than expected credit traction in the economy. This can significantly affect CARE’s operations.


Valuation CARE has emerged as a strong player in the ratings business, having the best brand recall after Crisil. Currently, CARE is trading at ~40% and 20% discount to the consolidated business of Crisil and Icra, respectively. If we just consider Crisil’s rating business valuations, CARE at 20x FY17E EPS is at a steep discount to Crisil’s ~60x multiple. We are valuing CARE at 30x FY17E EPS (~50% discount to Crisil’s core rating business multiple). We initiate coverage with a BUY rating and a target price of | 2175 valuing it at 30x FY17E EPS of | 72.5 providing an upside of 47%. The company has strong return ratios with RoE of 27% for FY14 and the potential to further enhance it to 46% by FY17E. As the dividend and return ratios improve in the long term, we believe re-rating of the PE multiples will continue.

Exhibit 47: Margin and return ratio profile of CARE vs. peers EBITDA Margin (%) PAT Margin (%) RoE (%) RoCE (%)

FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E FY14 FY15E FY16E FY17E

Crisil 32.5 32.6 32.5 33.3 26.8 22.1 22.6 23.6 39.0 37.6 37.9 39.7 57.5 55.3 55.1 54.8

CARE 63.9 63.0 62.7 62.4 56.1 58.7 56.7 55.4 26.6 42.8 44.3 46.2 29.7 45.0 48.1 51.2

Icra 30.3 30.7 31.1 31.3 24.4 24.2 25.2 25.5 19.0 20.3 20.7 21.3 18.6 18.2 20.3 20.7

Average 42.2 42.1 42.1 42.3 35.8 35.0 34.8 34.8 28.2 33.5 34.3 35.7 35.3 39.5 41.2 42.2

Source: Company, Bloomberg, ICICIdirect.com Research

As compared to its other two listed peers, CARE is still available at reasonably lower multiple. Crisil, the market leader with a diversified business profile and having delivered growth in all market conditions, has always been a preferred bet for investors. Hence, it commands higher valuations. Despite a better margin profile and return ratios, CARE is trading at a cheaper valuation compared to Icra in terms of PE multiple. One of the reasons that Icra trades at a higher multiple could be its strong promoter background (Moody).

Exhibit 48: Valuation metrics

FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Crisil 45.0 37.4 30.2 1.1 1.2 1.4 10.7 9.1 7.7

CARE 26.6 22.9 20.4 5.4 2.8 3.6 15.6 13.0 11.3

ICRA 33.1 27.5 23.5 1.0 1.1 1.4 8.6 7.3 6.1

Average 34.9 29.3 24.7 2.5 1.7 2.1 11.7 9.8 8.4

P/E (1 yr forward) Dividend Yield (1 yr forward) Market cap to Sales (1 yr forward)

Source: Company, Bloomberg, ICICIdirect.com Research

CARE’s core revenues come entirely from the ratings business, which was affected during FY11-14 owing to the slowdown in the investment cycle and credit traction in the economy. With interest rates expected to witness a decline over the next two years coupled with an improvement in the investment cycle, economy and structural improvement in the bond market, we believe CARE’s revenue and profitability traction should improve, going ahead. This should lead to a narrowing of the discount compared to peers. We expect CARE’s revenue and PAT to witness 18% CAGR over FY14-17E compared to ~12% CAGR seen in the past three years. CARE’s major shareholders are Indian banks and financial institutions with no foreign partner as compared to its other listed peers. Any interest on part of a “strategic investor” in the company would be an upside risk to our call.


Exhibit 49: DuPont analysis; RoE expected to improve

(%) FY13 FY14 FY15E FY16E FY17EPAT/PBT 70.9 71.7 71.0 70.7 70.4 PBT/EBIT 121.8 124.8 133.9 130.2 128.2 EBIT/Sales 66.0 62.6 61.8 61.6 61.4 Sales/Asset 46.5 47.0 72.0 77.4 82.7 Asset/Equity 100.9 100.8 101.0 100.9 100.9 ROE 26.7 26.6 42.8 44.3 46.2


Exhibit 50: Free cash flow

| crore FY14 FY15E FY16E FY17E

EBITDA 146.6 172.9 207.3 228.0 Depreciation 2.9 3.2 3.5 6.4 Tax 50.7 65.9 77.8 77.6 NOPAT 93.0 103.8 126.0 144.0 Capital Expenditure 3.2 4.2 4.8 11.2 Change in Working Capital (17.1) (38.1) 30.6 46.4 Free Cash Flow 109.7 140.9 94.1 92.7


Globally, there are three major rating agencies viz. Moody’s, S&P and Fitch Ratings, of which Moody’s is listed. As on FY13, Moody’s earned revenues of US$2.97 billion with EBITDA of US$1.3 billion and PAT of US$0.8 billion. Its market capitalisation is ~US$20 billion while it trades at a P/E of 18.3x on FY17E EPS (as per Bloomberg estimates). Prospects for rating business remain benign and CARE has proved its ability to gain market share in the rating segment along with maintaining best-in-class margins. Thereby, we remain bullish on the stock from the long term perspective. We initiate coverage on CARE with BUY recommendation.


Exhibit 51: Income Statement (| crore)(| crore) FY13 FY14 FY15E FY16E FY17ENet Sales 198.8 229.5 274.5 330.7 380.1 Growth (%) 4.2 15.4 19.6 20.5 14.9 Other Income 28.6 35.7 57.7 61.6 65.7

Total Revenue 227.4 265.1 332.2 392.3 445.8

Raw Material Expenses - - - - - Employee Expenses 50.7 60.6 74.8 91.1 105.8 Marketing Expenses - - - - - Administrative Expenses - - - - - Other operating expenses 14.2 22.2 26.8 32.3 37.1

Total Operating Expenditure 64.9 82.8 101.6 123.4 143.0

EBITDA 133.9 146.6 172.9 207.3 237.1

Interest - 0.0 0.2 - - PBDT 162.5 182.3 230.4 268.9 302.8 Depreciation 2.6 2.9 3.2 3.5 3.8 PBT 159.9 179.4 227.2 265.4 299.0 Total Tax 46.6 50.7 65.9 77.8 88.6

PAT 113.3 128.7 161.3 187.6 210.4 EPS 39.7 44.4 55.6 64.7 72.5


Exhibit 52: Balance sheet (| crore) FY13 FY14 FY15E FY16E FY17ELiabilitiesEquity Capital 28.6 29.0 29.0 29.0 29.0 Reserve and Surplus 395.3 455.3 348.2 394.4 426.5 Total Shareholders funds 423.9 484.3 377.2 423.4 455.5 Deferred Tax Liability 3.9 3.9 4.0 4.0 4.0 Total Debt - - - - - Liability side total 427.8 488.2 381.1 427.4 459.5

AssetsTotal Gross Block 61.5 64.6 68.7 73.5 78.9 Less Accumulated Depreciation 10.3 13.1 16.3 19.8 23.6 Net Block 51.1 51.5 52.5 53.8 55.3 Capital WIP - - - - - Total Fixed Assets 51.2 51.5 52.5 53.8 55.3 Liquid Investments 390.1 467.7 407.7 427.7 447.7 Debtors 21.9 14.2 23.7 37.6 43.3 Loans and Advances 12.7 14.2 14.2 14.1 14.8 Other Current Assets 2.4 3.9 4.7 5.6 6.5 Cash 27.1 26.7 16.7 11.1 35.9 Total Current Assets 64.1 58.9 59.3 68.4 100.5 Creditors 1.7 1.3 1.6 1.9 3.1 Provisions 38.3 47.7 63.4 76.4 87.5 Other Current Liabilities 37.6 40.9 73.3 44.2 53.3 Total Current Liabilities 77.6 89.9 138.4 122.5 143.9

Net Current Assets (13.5) (31.0) (79.1) (54.1) (43.4) Assets side total 427.8 488.2 381.1 427.4 459.5



Exhibit 53: Cash flow statement (| crore) FY13 FY14 FY15E FY16E FY17EProfit after Tax 113.3 128.7 161.3 187.6 210.4 Depreciation 2.6 2.9 3.2 3.5 3.8 Cash Flow before working capital cha 116.0 131.6 164.7 191.1 214.2

Net Increase in Current Assets (4.9) 4.7 (10.3) (14.8) (7.1) Net Increase in Current Liabilities 29.8 12.3 48.4 (15.8) 21.4

Net CF from operating activities 140.9 148.6 202.8 160.4 228.4

(Purchase)/Sale of Fixed Assets (5.5) (3.2) (4.2) (4.8) (5.3) Other Investments - - - - - Deferred Tax Liability 0.6 0.0 0.0 0.0 0.0

Net CF from Investing Activities -115.8 (80.9) 55.8 (24.8) (25.3)

Inc / (Dec) in Equity Capital - 0.4 - - - Other Adj. General Reserve - - - - - Total Outflow on acct. of dividend (66.5) (94.7) (269.8) (141.3) (178.3)

Net CF from Financing Activities -66.5 (68.3) (268.6) (141.3) (178.3)

Net Cash flow -41.4 (0.5) (10.0) (5.6) 24.9 Cash & Cash Equiv. at beginning 68.6 27.1 26.7 16.7 11.1

Closing Cash/ Cash Equivalent 27.1 26.7 16.7 11.1 35.9


Exhibit 54: Ratio analysis

FY13 FY14 FY15E FY16E FY17EPer Share Data (|)EPS 39.7 44.4 55.6 64.7 72.5 Cash EPS 40.6 45.4 56.7 65.9 73.9 BV 148.5 167.0 130.1 146.0 157.1 Operating profit per share 46.9 50.6 59.6 71.5 81.8 Cash per Share 9.5 9.2 5.8 3.8 12.4 DPS 20.0 27.9 80.0 42.0 53.0

Operating Ratios (%)EBITDA Margins 67.4 63.9 63.0 62.7 62.4 PAT Margins 57.0 56.1 58.7 56.7 55.4

Return Ratios (%)RoE 26.7 26.6 42.8 44.3 46.2 RoCE 31.0 29.7 45.0 48.1 51.2

Valuation RatiosP/E 37.3 33.4 26.6 22.9 20.4 EV / EBITDA 28.9 25.9 22.4 18.6 16.1 EV / Net Sales 19.5 16.5 14.1 11.7 10.0 Sales / Equity 0.5 0.5 0.7 0.8 0.8 Market Cap / Sales 21.6 18.7 15.6 13.0 11.3 Price to Book Value 10.0 8.9 11.4 10.1 9.4 Dividend yield 1.4 1.9 5.4 2.8 3.6

Turnover RatiosAsset turnover 0.5 0.5 0.6 0.8 0.9

Debtors Turnover Ratio 9.1 16.2 11.6 8.8 8.8 Solvency Ratios

Debt / Equity - - - - -

Current Ratio 0.8 0.7 0.4 0.6 0.7 Quick Ratio 0.8 0.7 0.4 0.6 0.7



Annexure I Summary - Rating industry business model lucrative as it is cash rich, asset light

The rating industry has a lucrative business model as it is asset light, cash rich and has strong return ratios of 30-50%.

The attractive nature of the rating business lies in its upfront collection mechanism. Hence, rating agencies do not face the pitfall of accrual based accounting wherein revenues are booked but the cash receivable gets stuck up and the debtor days increase. Also, the upfront payment received before assigning the rating ensures that the agency is free of bias on financial interests while assigning the rating.

On the expenses side, the business is asset light in nature as it mainly involves providing services. The major cost involves employee expense, which constitutes 25-28% of revenue for CARE and ~45% in case of Crisil and Icra. No major expense is incurred in terms of raw material, finance cost, depreciation, marketing cost, etc.

This enables rating agencies to earn lucrative EBITDA margins of 30%+ and PAT margin of 25%+. Due to such asset light nature of the business, majority of topline flows to the bottomline. There is not much balance sheet risk for these companies. The dividend payout ratios are attractive with more than 40% of their profit being paid to shareholders. All these factors support healthy return ratios for the rating agency industry.

The competitive intensity within the rating industry is minimal with the top three rating agencies, including Crisil, CARE and Icra, commanding 86% market share as on FY14. Crisil and Icra have international rating giants as their parent, viz. S&P and Moody’s respectively.

Exhibit 55: Credit rating process

Client approval/PR/Rational

Rating Committee

Sector head & qualitycontrol

Preparation of rating note of submission to group

head

Meeting with officials & due

dilligence

Query list

Rating agreement

Three levels of checks & balances



Two main segments largely contributed to the revenues of CRAs i) rating services and ii) research services.

Rating business description The rating services primarily involves providing ratings for bank loans, certificate of deposit, corporate debt, commercial paper, municipal bond ratings, public deposit scheme of NBFCs, rating for insurance companies, rating for securitisation of microfinance receivables, IPO grading, etc. Revenues from the rating business can be broadly classified into three segments including i) bank loans, ii) corporate debt and iii) SME rating a) Bank loan rating (BLR) – The volume of bank loan rated is dependent on demand for corporate credit from banks. Since 2008, the Basel II accord stipulated that less capital is required for bank loans that have been rated. Even though rating bank loans is not mandatory, banks and corporates prefer to get the loan rated as it saves capital for the bank. This can be used for further lending, thus improving the RoE of the bank. b) Bond rating/corporate debt rating (CDR) – This mainly includes rating corporate bonds, commercial papers, certificate of deposits, etc. c) SME loan rating – SME rating is clubbed with bank loan rating by a few rating agencies. The rating of the SME is used by banks as an input for pricing credit to the SMEs concerned. A rated SME benefits from lower interest rate cost. This segment is still at a nascent stage and has large scope to grow as ~only 1,00,000 SMEs have been rated from among ~30 lakh SMEs in India. In terms of margin, the CDR segment earns the highest margin followed by BLR & SME rating. Fees charged by rating agencies mainly in two forms including initial fees, surveillance fees i) Initial fees – This fee is charged by rating agencies at the time of initial rating. It is generally expressed as percentage of total value of the instrument being rated. CRAs charge ~10 bps of instrument value in the CDR segment & ~4-5 bps in the BLR segment. However, there is no such fixed criterion as the fee charged is subject to a cap wherein the same client brings larger business and gets a larger volume of its instruments rated. ii) Surveillance fees – Post assigning the initial rating, the rating agencies provide an update on initial rating known as surveillance, generally on annual basis. For this, the rating agency charges a surveillance fee, which is like an annuity income. For instance, if the instrument with the maturity of 10 years is rated then the rating agencies charge initial rating fees. Also, the rating agencies will release an update each year or on a specific big event to provide an update on rating that particular instrument. For providing this service, the rating agencies charge surveillance fees each year. The surveillance fee provides stability to the topline of rating agencies. According to the discussion we had with the management, surveillance fee comprises ~50% of total rating revenue each year. During the high credit growth phase, the proportion of surveillance fee is low as higher revenue is generated from a fresh rating and vice versa. During an improving economy, surveillance income of CRAs increases. Some clients, owing to a downgrade in their rating during the slowdown, stopped paying surveillance fees. During the economic recovery, as their rating improves, the clients also pay up their pending surveillance fees.


Annexure II Recent steps which led to development of corporate bond market…. The government and regulators are making efforts to increase the interest in the bond market and also ensure long term sustained funding. Some of these measures include:

1) The Employee Provident Fund Organisation (EPFO), which is India’s largest investor with a corpus of ~| 546000 crore, can now invest in the debt of 15 private sector companies vs. seven earlier. It has now also been allowed to invest in longer tenure bonds of up to 25 years of AAA rated public sector companies. These companies include ACC, Grasim industries, Great Eastern Shipping, Reliance Capital, Reliance Industries, UltraTech Cement and Larsen & Toubro. When EPFO had started investing in private bonds in 2006, it had picked up seven companies on the basis of “discretion and logic” and got approval from CBT. These firms were HDFC, IDFC, IL&FS, LIC Housing Finance, HDFC Bank and Axis Bank. Hence, EPFO invests in bonds of only 15 companies suggesting that it is still a nascent market. In the long term, many more companies may become eligible for EPFO to invest in bonds and there is a large opportunity for rating companies as the bond market develops

2) Insurance companies have been permitted to invest in papers rated A or lower (up to 5% and 8% for life & general insurance companies, respectively). Further, a higher proportion of their debt investments (25% for life insurers and 35% for general insurers) can be made in non – AAA or non A1+ papers

3) The limit of FII investment in corporate bonds was hiked from $40 billion in August 2011 to $51 billion in June 2013

4) The withholding tax on interest paid on money borrowed in foreign currency from abroad in July 2012-June 2015 on borrowings under a loan agreement and by way of infrastructure bonds issued in foreign currency has been reduced from 20% to 5%. This will encourage foreign fund flow in debt

5) Limit of tax free bonds has been increased from | 30000 crore to | 60000 crore

Major factors and steps ahead that may turn out to be key triggers for development of corporate bond markets….. 1) As per Crisil, demand from the infrastructure sector in the next five years is expected to be ~| 700000 crore towards debt funding, which the banks alone cannot finance. A well developed corporate bond market provides additional avenues to corporates for raising funds in a cost effective manner and reduces the reliance of corporates on bank finance. Hence, the government is expected to continue measures to develop the bond market Further, banks face the issue of asset liability management (ALM) mismatch as deposits are largely short-term in nature while infrastructure projects require funding for long term, usually 15+ years. Hence, the bond market is the right solution wherein infrastructure companies can raise money at cheaper or reasonable costs for a longer term horizon. 3) Hopes of the RBI providing statutory liquidity ratio (SLR) status to certain corporate bonds in order to increase the liquidity and boost corporate bond market have been always there. However, this does not seem to be a reality in the short-term as government borrowings and issues are on the higher side. However, this measure, if and whenever taken, will significantly boost the corporate bond market


4) The government is encouraging an infrastructure development fund (IDF) to improve financing to the infrastructure sector. India’s first such infrastructure debt fund under the non-banking finance company structure was set up in 2013. The fund was jointly promoted by Bank of Baroda, Life Insurance Corporation of India and Citicorp Finance (India). The fund awarded its first sanction letter to a road project. The rating agency Crisil had assigned ‘AAA’ ratings to India Infra Debt Fund Ltd. 5) Some other measures that could take the corporate bond market to the next level include a reduction in the debenture redemption reserve (DRR) requirement. Currently, infrastructure companies have to create a DRR of up to 50% of the value of debentures. The industry has requested that this limit be brought to 25%, which will enable and encourage more companies to resort to bond funding. 6) Further, having strong bankruptcy laws and liberalising investments by pension funds and insurance companies will go a long way in the deepening of the bond market. Some other highlights of India’s corporate bond market… Over the years, the ticket size of issues has been on an increasing trend as more AA and above rated companies that have larger ticket size have been rated. Going ahead, we expect the ticket size not to increase significantly as more mid sized corporate and SMEs are expected to tap the bond market for fund raising in the long term. Exhibit 56: Average issue size has steadily increased

11499 97 104

167 164

267

182192

140

346484

802952

11081000

1750

1381

11081053

0

50

100

150

200

250

300


(x)

0200400600800100012001400160018002000

(| c

rore

)Number of issuers Average issue size (RHS)

Source: Crisil Yearbook, ICICIdirect.com Research

The below two exhibits suggest that a majority of the corporate bonds are issued by banks and financial services while demand from the industry segment is relatively low and yet to pick up. About 73.9% of the total corporate bonds were issued by the services segment in FY13. The banks and financial service segment together account for a significant 66.3% of the corporate bonds issued in FY13. On the other hand, the industry comprised only 21.4% (| 78993 crore) of corporate bonds issued in FY13.


Exhibit 57: Break-up of corporate bonds issued in FY13

Corporate bonds issued (| 368830 crore)

Private placement (| 351848 crore), 95.4%

Public placement (| 16982 crore), 4.6%

Services (| 272455 crore), 73.9%

Industry (| 78993 crore), 21.4%

Agriculture (| 400 crore), 0.1%

Financial Services (| 105662 crore), 28.6%

Banking/Term lending (| 139084 crore), 37.7%

Others (| 27709 crore), 7.5%

Power Generation & Supply (| 21408 crore), 5.8%

Oil Exploration (| 13760 crore), 3.7%

Steel (| 4965 crore), 1.3% Roads & Highways (| 6525 crore), 1.8%

Food & Food Processing (| 5000 crore), 1.4%

Others (| 27335 crore), 7.4%


Exhibit 58: Trend of corporate bonds issued over the years

(| Crore) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Corporate Bonds 48428 55184 79446 92355 115266 175827 191978 201578 287048 368830

I) Public placement 1500 2500 9451 35611 16982

II) Private placement 48428 55184 79446 92355 115266 174327 189478 192127 251437 351848

a) Agriculture 250 400

b) Services 34195 38233 61090 84632 107320 132713 144688 144706 207762 272455

i) Financial Services 4731 5062 5859 21463 36269 31335 39271 44384 64682 105662

ii) Banking/Term Lending 27662 30485 54118 61519 68204 91916 93778 92029 129161 139084

c) Industry 14233 16951 18356 7724 7946 41614 44789 47421 43425 78993

i) Power Generation & Supply 8303 8725 7660 6748 3468 12671 16474 19025 23615 21408

ii) Oil Exploration / Drilling 1100 2225 4100 6340 4750 1415 13760

iii) Steel/ Sponge & Pig Iron 84 450 50 350 3645 5704 6455 2460 4965

iv) Roads & Highways 407 127 1116 585 381 1552 3370 3897 2862 6525

v) Food & Food Processing 4024 4581 239 149 344 5000


The bonds issued by the industry segment have been at ~| 45000 crore on an annual basis during FY09-12. However, some pick-up was observed in FY13 with bonds worth | 78993 crore issued in FY13. As can be seen in the below table, the largest players in the primary corporate bond market issuance are financial institutions followed by HFCs, NBFCs and PSUs.

Of the total bond issued worth | 368830 crore in FY13,

services alone account for | 272455 crore (73.9%)


Exhibit 59: Corporate bond issuers (| Crore) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

State Fin. Institutions 4,208 2,381 719 1,192 1,309 254 1,337 1,425 1,575 5,394

Public sector undertakings 5,881 6,441 10,719 6,178 3,526 11,814 22,355 12,850 27,176 39,851

State-level undertakings 6,564 3,519 889 752 1,348 4,738 2,085 1,981 4,184 8,584

Banks 9,571 9,301 27,554 36,046 25,902 38,596 38,679 19,481 14,974 24,495

NBFCs 3,337 4,690 5,486 12,050 15,072 17,951 17,643 12,877 26,697 45,777

Housing Finance Cos. 2,430 5,972 6,925 9,370 21,105 12,719 16,805 29,801 36,367 57,850

Fin. Institution & others 13,338 17,535 25,060 25,755 41,051 53,720 53,942 72,112 113,520 109,425

Private Non-financial sector 3,099 5,346 2,093 1,013 5,953 34,533 36,767 41,599 26,946 60,473

Grand Total 48,428 55,184 79,446 92,355 115,266 174,327 189,613 192,127 251,437 351,848 [



ICICIdirect.com coverage universe (NBFC) CMP M Cap(|) TP(|) Rating (| Cr) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E

IDFC (IDFC) 153 174 Buy 23,190 11.9 11.8 13.9 12.9 13.0 11.0 1.6 1.4 1.3 2.5 2.5 2.9 12.6 11.5 12.0LIC Housing Finance (LICHF) 396 370 Buy 19,961 26.1 29.7 37.4 15.2 13.3 10.6 2.8 2.4 2.0 1.5 1.4 1.5 18.8 18.5 19.8Reliance Capital (RELCAP) 490 562 Buy 12,023 30.6 31.4 42.7 16.0 15.6 11.5 1.1 1.1 1.0 2.3 1.6 1.9 8.0 5.9 7.8HDFC (HDFC) 1,087 1,056 Hold 167,131 34.9 39.4 44.9 31.2 27.6 24.2 6.2 5.6 5.0 2.6 2.5 2.5 20.6 21.0 21.7PTC India Financial Services 59 62 Buy 3,347 3.7 4.6 7.5 15.9 12.9 7.8 2.5 2.2 1.8 5.0 3.3 3.5 16.1 17.9 25.2CARE (CARE) 1,484 2,175 Buy 4,303 44.4 55.6 64.7 33.4 26.7 22.9 8.9 11.4 10.2 26.4 42.3 43.9 26.6 42.8 44.3

RoE (%)Sector / Company

EPS (|) P/E (x) P/ABV (x) RoA (%)

Source: ICICIdirect.com Research


RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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Credit Analysis & Research Ltd (CARE) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_CARE_IC.pdf · Credit Analysis & Research ... Bajaj Holdings And Investment Ltd 3.5