CARE Ratings - Company Update - Management meeting update

CARE Ratings - Company Update - Management meeting update

Rating: Hold; Target Price: Rs1,540; CMP: Rs1,388; Upside: 10.9%



Management meeting update



Our meeting with CARE ratings (CARE) management revealed that it was
taking considerable efforts on increasing coverage of large clients
(LME) and making inroads into SME ratings. Increased clientele across
both LME and SME segments will enable the company to diversify its
revenue pool. Superior margin profile, FCF yields of 3.5%+ and healthy
RoE / RoCE remain key strengths. Though we retain positive stance on
CARE and prefer it as a play on revival in rating opportunities in
India, valuations at 27x FY15E EPS / 22.7x FY16E EPS limit upside in
the near term. Downgrade to HOLD with revised TP of Rs1,540 (valued at
23x Sept’16E EPS).

$ SME business gaining traction: While clientele acquisition from the
LME segment remains an on-going task, the management highlighted steps
taken to improve its SME ratings business. These measures included
recruitment of SME dedicated teams, identifying SME clusters and
starting training programmes to enhance awareness. The management
expects these efforts to improve SME rating opportunities and
contribute to overall revenues over the next two to three years.

$ Sector dynamics favourable; pricing improves: Though banking credit
remains moderate and corporate bond issuances flat yoy, our
interaction with managements of credit rating agencies (CRA) suggests
slow but steady improvement in overall rating opportunities. This,
coupled with better pricing, has led to an increase in rating
revenues. We expect CARE, a pure play on rating, to achieve 19% / 18%
CAGR in revenues / PAT respectively over FY14-17E vs 10% / 12% during
FY11-14.

$ Q2FY15 quarterly preview: Driven by improved pricing, surge in bond
issuance and higher surveillance fees (more of a quarterly
phenomenon), we expect CRAs under our coverage (CARE and CRISIL) to
show 16.3% yoy growth in revenues. While margins are expected to
remain stable yoy, PAT growth will be higher at 19.5% yoy. CRISIL’s
revenue growth at 15% yoy will be driven by research revenues (have
grown at 25% yoy vis-à-vis 12% yoy in rating revenues in the past
8-quarters).

$ Valuation, view and key risks: We have tweaked our estimates for
FY15E / FY16E marginally. Our preference for CARE ratings given its
superior margin profile and healthy return ratios (both RoE and RoCE)
against its peer ICRA has spurred the stock to outperform (47% vs 10%
for ICRA) since our initiation and narrow its PE multiple discount gap
to 10% from 34% earlier. Judicious deployment of cash and stake sale
by the key holder will narrow the gap further or see that CARE trades
at a premium to ICRA in the long-run. The gap to CRISIL PE multiple
has narrowed to 47% vs 55% earlier.  While we continue to retain our
positive stance on CARE ratings from a medium to long  term
perspective, valuations at 27x FY15E EPS / 22.7x FY16E EPS limit
upside in the near term. Downgrade to HOLD. We have rolled over our
estimates to Sept’16E and arrived at a revised target price of
Rs1,540.