SPA Research has come out with its report on Credit Analysis and Research Ltd (CARE) IPO. The research firm has recommended investors to subscribe to the issue for listing gains as well as a good long term investment.
SPA Research has come out with its report on Credit Analysis and Research (CARE) IPO. The research firm has recommended investors to subscribe to the issue for listing gains as well as a good long term investment.
CARE is the second largest credit rating agency in India in terms of rating revenue. It offers services across a diverse range of instruments and industries and operates broadly through two main verticals 1) Bank Loan Rating and 2) Corporate Debt Rating. Its clients include BFSI, private sector companies, central PSUs, sub-sovereign entities, SMEs & micro-finance institutions, among others.
Second largest player: CARE is the second largest player in Indian credit rating industry in terms of rating revenues. It is the 3rd rating agency established in India (1993) after CRISIL (1987) & ICRA (1991). Company’s top 3 shareholders are all public sector banks which provide company strong network across banking and other financial intermediaries. Owing to its long years of experience, company has developed strong brand recognition and credibility in the ratings market, gained through years of experience in the ratings business.
Regulations ensure good long term opportunities: Mandatory (Private Placement, Commercial Paper, IPO grading etc) and incentivized rating (Basel II) of credit on the back of stringent risk assessment measures adopted by regulatory institutions ensures continuous long term growth of the credit rating industry.
Diversification into newer products category: CARE has entered in fast growing new product categories such as the SME, education institution grading, real estate ratings and valuation of market linked debentures. CARE has the freedom to enter into overseas markets as its major shareholders do not have the same business out of India, unlike CRISIL and ICRA.
Revival in GDP growth rate would boost rating business: Demand for rating services is driven by overall capital mobilization in the economy which is linked with economic growth that fuels demand for both capital and operational related funding. Planning commission’s target of 8.2% GDP growth rate for the XIIth Five Year Plan (2012-2017) requires estimated doubling of investment in infrastructure that would boost the demand for capital and thus ratings.
Strong Financials: CARE registered robust revenue and PAT CAGR of 38% and 44% in last four years. CARE is a debt free company with cash and cash equivalent of INR 3,375mn, as of Sep 2012, which translates into 118/share. Company generates high free cash flow (FY12 FCF/PAT is 78%) and RoNW of 34%.
Valuation & Recommendation: We are optimistic on the huge long term opportunities for the credit rating sector on the back of development in debt market which is at nascent stage in India. CARE, being one of the largest players in the industry is positioned strongly on back of years of rating experience across various industries along with high brand recognition and strong industry network. On the valuation front, at upper band, stock is available at 21.5x annualized H1FY13 EPS. Historically, industry PE has oscillated between 20x-30x. CARE, however, is more comparable to ICRA in terms of size but outscores in terms of operating margins and CAGR over the last 4 years which has been 38% vis-à-vis 20% for ICRA. Hence, it should command better multiples enjoyed by ICRA. We recommend SUBSCRIBE to the issue for listing gains as well as a good long term investment.
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