Credit Analysis and Research (CARE) is entering the capital market on 7th December 2012 through an offer for sale of 71.99 lakh equity shares of Rs.10 each, by 9 of its shareholders (IDBI Bank, Canara Bank, SBI, IL&FS, Federal Bank, Milestone Fund, Milestone Army Trust, ING Vysya, Tata Investment). The issue is priced in the band of Rs. 700 to Rs. 750 per share and will raise Rs. 504 crore and Rs. 540 crore at the lower and upper end of the price band, respectively. Representing 25.22% of the fully diluted post issue paid-up capital of the company, the issue closes on 11th December 2012.
19 year old full service credit rating company, CARE is India’s 2nd largest rating company among 6 players, in terms of rating turnover for FY12. The company offers rating and grading services for corporate debt, bank loans, public and structured finance, besides general and customized industry research reports. Having completed 19,058 rating assignments in its 19 year history and graded the highest number of IPOs in India since the introduction of IPO grading, it has rating relationships with 4,644 clients as of 30th September 2012.
It also has international presence in Maldives, Nepal, Mauritius, Hon Kong, Eucador, Mexico and has entered into non-binding MoU with credit rating agencies in Brazil, South Africa, Malaysia and Portugal for establishing an international credit rating agency. For FY12, consolidated revenues from operation stood at Rs. 190 crore with net profit of Rs. 116 crore, resulting in net margin of 60.8% and EPS of Rs. 40.55.
On a consolidated basis, for 6 months ended 30th September 2012, company’s total income was Rs. 104 crore, while revenues from operations stood at Rs. 91 crore with net profit of Rs. 50 crore, resulting in net margin of 54.6% and EPS of Rs. 17.43, on equity of Rs. 28.55 crore. Keeping personnel expenses in check at less than 30% of revenue from operations, company is able to report such healthy net margins, unlike other listed peers such as S&P’s CRISIL and Moody’s ICRA which have personnel expenses comprising of 45%-55% of revenues.
Being a dividend paying company every year since its first year of operations, its networth stood at Rs. 427 crore, as of 30th September 2012, resulting in BVPS of Rs. 149. Company is debt-free and has surplus investment and cash equivalents to the tune of Rs. 260 crore, similar to its listed peers which are also cash surplus. Since issue is an offer for sale, no fresh funds will flow into the company, keeping its networth unchanged. Being a grading company, SEBI has exempted CARE from IPO grading.
Company being professionally managed has no identifiable promoter. Domestic banks and financial institutions are its key shareholders. Post-listing, IDBI Bank will continue to be the largest shareholder with 17.19% stake, down from current 25.79%. Canara Bank will the second largest shareholder with 15.21% stake (current 22.81%), followed by SBI with 6.41% stake (current 9.61% stake). Company counts Bajaj Holdings, Aditya Birla PE, ING Vysya Bank among its other shareholders.
Estimating Rs. 100 crore as net profit for FY13, leading to EPS of close to Rs. 35, shares are being issued to the public at a PE multiple of 20x and 21.5x, at lower and upper end of the price band respectively, which is quite attractive in relationship to peers.
India’s largest credit rating agency and S&P’s 53% subsidiary CRISIL reported annual revenue of Rs. 810 crore last fiscal with PAT and EPS of Rs. 206 crore and Rs. 29 respectively. With research accounting for almost 50% of its revenue pie, CRISIL had revenue, PAT and EPS of Rs. 717 crore, Rs. 160 crore and Rs. 23 respectively, on net margins of 22%, for 9 months ended 30th September 2012. At CMP of Rs. 1007, this indicates PE multiple of close to 34 times for the stock.
On the other hand, ICRA, in which Moody’s holds 28.5% equity stake, earned PAT of Rs. 54 crore on revenue of Rs. 207 crore during FY12,resulting in net margin and EPS of 26% and Rs. 54 respectively. During H1FY13, its revenue were Rs. 113 crore, comparable to CARE’s Rs. 91 crore. However, ICRA reported PAT of Rs. 22 crore as against CARE’s Rs. 50 crore for the first six months of the current fiscal! Thus, CARE enjoys much stronger margins on its business. ICRA’s currently trades at Rs. 1,432, indicating a discount multiple of close to 32 times.
CARE, having 85% of its revenue coming from ratings business, which earns better margins, is thus being offering to the public at very attractive valuations at PE of 22 at the upper price band, in the current public issue. Financials of rating agencies India Ratings (formerly Fitch), Brickworks and SME Rating, being unlisted, are not available for peer comparison. CARE is seeking a market cap of Rs. 2,141 crore and enterprise value of Rs. 1,881 crore, at upper end of the price band of Rs. 750.
Thus, we find the issue very attractively priced and recommend subscribe to the issue. Given the strong fundamentals and good institutional shareholding, the share can also be a good long term bet.
Indeed, a good start to probably a bumper IPO season ahead!