CARE IPO opens on Dec 7: Experts say 'Go for it'

Experts are betting big on the Rs 540-crore public offer of credit rating agency CARE which is set to open for subscription on December 7. Analysts feel that its lower price-to-earnings multiples compared to its peers make it a favourable IPO this session.

The issue price is fixed at Rs 700-750 per share for the 72 lakh shares initial public offering. Investor can bid for a minimum of 20 equity shares and in multiples of 20 shares thereafter.

According to SP Tulsian of sptulsian.com the issue is very attractively priced. "Given the strong fundamentals and good institutional shareholding, the share can also be a good long term bet," he adds.

Having 85 percent of its revenue coming from ratings business, CARE earns better margins. It is offered at a very attractive valuations at PE of 22 at the upper price band. However, its peers India's largest credit rating agency and S&P’s 53% subsidiary CRISIL trades at PE multiple of close to 34 times, and ICRA (wherein Moody’s holds 28.5 percent stake) is available at a discount multiple of close to 32 times," Tulsian explains

Most analysts also think that promoters of CARE being Indian banks and financial institutions make it an attractive bet. Arun Kejriwal, IPO Analyst says, "The big advantage is that the company is owned by Indian banks and financial institutions."

Post issue, IDBI Bank will still remain a big shareholder in the company with 17.19 percent stake (down from 25.79 percent) while Canara Bank and State Bank of India will hold 15.21 percent (current 22.81 percent) and 6.41 percent (9.61 percent) stake, respectively.

Manish Bhatt of Prabhudas Lilladher expects high-networth investors’ portion to get subscribed 30-40 times and retail 3 times.

According to Bhatt, the biggest positive is that the CARE entered into a non-binding memorandum of understanding with four credit rating agencies, located in Brazil, Portugal, Malaysia and South Africa.

"For which, the company has received a no objection letter from SEBI to enter into a joint venture for the establishment of an international credit rating agency, which would provide international scale ratings to assist local issuers in mobilising resources from international financial markets," he elaborates.

Background

The 19-year old credit agency company is primarily engaged in the business of providing rating services for debt instruments and bank loans and facilities in the Indian debt market.

Since incorporation, the company has completed 19,058 rating assignments and have rated Rs 44,036 billion of debt as of September 30, 2012. It had ratings relationships with 4,644 clients as of September 2012.
It has graded 52 IPOs - the highest in India since the introduction of IPO grading while its peers CRISIL graded 33 IPOs and ICRA 49.

Last week, The Securities and Exchange Board of India (Sebi) exempted the rating from the grading process before it announced an IPO. The company had sought the regulator's exemption from the mandatory procedure prior to the IPO as it would have resulted in a rival rating agency gaining access to its books and insider information, say media reports.

The company’s unconsolidated total income grew at a CAGR of 41 percent during FY08-12 while operating income rose by 41.8 percent and profit 41.3 percent.

Rating agency reported consolidated profit after tax of Rs 115.77 crore on total income of Rs 218.8 crore for FY12. For the period of six months ended September 2012, the net profit stood at Rs 49.775 crore on total income of Rs 103.97 crore.

It is a debt free company and has been paying a dividend since its first year of operations.

Promoters will dilute 25.22 per cent of their holding in the company through the stake sale and the company will not receive any amount from the issue that will close on December 11.

Kotak Mahindra Capital Company Limited, DSP Merrill Lynch Limited, Edelweiss Financial Services Limited, ICICI Securities Limited, IDBI Capital Market Services Limited and SBI Capital Markets Ltd are the book running lead managers to the issue.

Sunil Shankar Matkar

sunil.matkar@network18online.com