India Infoline recommends ‘Subscribe’ to CARE IPO

The Initial public offer (IPO) of Credit Analysis & Research (CARE) has opened  for subscription today (December 7). The rating agency plans to raise about Rs 540 crore  by issuing 7.2 million shares of the face value of Rs 10 each through the issue. It has fixed the price band for its initial public offer (IPO) of shares at Rs 700-750 a share. The issue will close on December 11. Promoters will dilute 25.22% of their holding in the company through the stake sale.

India Infoline Ltd (IIFL), the leading brokerage and research house has recommended ‘Subscribe’ to CARE IPO. CARE is one of the leading rating companies in India, is a proxy play on economic growth. It is likely to materially benefit from rising secular demand for rating services from corporate and banks. Expansion of rating product portfolio would also support a strong revenue growth in the medium term.

CARE is the most operationally efficient rating company earning significantly higher operating margin than listed peers (65‐70% v/s 30‐33% for peers during FY12). Superior profitability is underpinned by high employee productivity and a relatively low‐cost resource base.

Though competitive dynamics may sober margin going ahead, healthy earnings growth could still continue driven by strong headline growth. The top end of the price band values the company at 21.5x annualized H1

FY13 earnings. This is significantly cheaper than extant valuation of CRISIL (33x annualized 9M CY12 earnings) and ICRA (31x annualized H1 FY13 earnings).

Growing demand for rating services

Demand for rating services from the corporate sector has been strong driven by increasing capital mobilization via debt capital markets. Rating is mandatory for CPs and medium and long term debt instruments. Business growth, capacity creation and M&A activity would continue to drive higher volume of debt issuances in future. Further, increasing number of corporate are coming forward to get their bank facilities rated. Government has been trying to develop the corporate bond market which stands relatively small at 8.8% of GDP as compared to other countries. In recent times, FII investment limit in corporate bonds including infrastructure bonds has been raised to contain the current account deficit. In July 2012, SEBI permitted Qualified Foreign Investors (QFIs) to access Indian corporate bond market.

Commercial banks have been getting their loans rated for effective utilization of capital. In response to credit growth, banks issue Tier‐II bonds/hybrid bonds to meet capital requirements which are rated. The market for MSME rating, structured finance rating and IPO grading is expected to witness robust growth in coming years.

CARE has strong brand recognition and credibility in ratings market

CARE is the second largest rating company in India by rating turnover. Other listed rating companies are CRISIL and ICRA. The company offers a wide range of rating and grading services across a diverse range of instruments and industries. Since incorporation in April 1993, CARE has completed 19,058 rating assignments and has rated Rs44tn of debt as of September 30, 2012. Presently, it has rating relationships with 4,644 clients. CARE has strong brand recognition and credibility in the ratings market gained through years of experience. Fees from rating of debt instruments, bank loans and facilities and deposit obligations form bulk of the revenues. CARE also charges surveillance fees over the lifetime of the rated debt. Company has experience in providing specialized grading services such as IPO grading, equity grading, and grading of various types of enterprises. CARE has graded the largest number of IPOs since the introduction of IPO grading in 2009.

A large in‐house research team provides in‐depth research inputs to the ratings team on various sectors. The research team also periodically publishes industry research reports and does customized research for clients. Volume of debt rated by CARE has witnessed 21% CAGR over FY08‐12. In the aforesaid period, standalone revenues and profits have witnessed 41% and 44% CAGR respectively. In the recent years, CARE has expanded its rating product portfolio to include SME/MSE rating, Edu‐grade (educational institution rating), Equi‐grade (equity research company rating), Real Estate (project rating) and market linked debenture valuation. The company has a highly independent Board.

Company Background

CARE is the second largest rating company in India by rating turnover. It offers a wide range of rating and grading services across a diverse range of instruments and industries. Since incorporation in April 1993, CARE has completed 19,058 rating assignments and has rated Rs44tn of debt as of Sept 30, 2012. Presently, it has rating relationships with 4,644 clients. CARE has strong brand recognition and credibility in the ratings market gained through years of experience. Fees from rating of debt instruments, bank loans and facilities and deposit obligations form bulk of revenues. In recent years, CARE has expanded its rating product portfolio to include SME/MSE rating, Edu‐grade (educational institution rating), Equi‐grade (equity research company rating), Real Estate (project rating) and market linked debenture valuation

IPO – Offer for Sale

This IPO is a pure offer for sale by existing shareholders viz IDBI Bank, Canara Bank, SBI, Federal Bank and ING Vysya Bank among others. Therefore, CARE will not receive any proceeds from the issue but listing benefits.