We have always been extremely optimistic and bullish about the “Credit Rating” business, but we were never able to point any of the listed companies viz- CRISIL, ICRA or CARE- calling any of them “A Value Buy”
|31st Mar’ 2019 Price/5 Yr Avg EPS | 31st Dec’ 2020 Price/5 Yr Avg EPS
> CRISIL | 33.36 x | 45.15 x
> ICRA | 31.96 x | 30.78 x
> CARE | 20.92 x | 12.11 x
Ever since the IL&FS upheaval the Indian BFSI Sector has been under pressure.
Rating Agency’s have been under pressure by the regulators for having given IL&FS higher ratings, however CARE was the worst hit along with penalties, SEBI had ordered CARE to shuffle key management.
“The Securities and Exchange Board of India (Sebi) has issued show-cause notices to former CARE Ratings chairman SB Mainak and the agency’s ex-MD & CEO Rajesh Mokashi for their interference in the rating exercises at various companies, including defaulting financier Infrastructure Leasing and Financial Services (IL&FS) and bankrupt mortgage lender Dewan Housing Finance (DHFL), said a person close to the development.“
– An Article on Economic Times dated 15th Feb’ 2020
The stock price of CARE RATINGS crashed from 687/sh on 6th Feb’20 to 267.3/sh on 23rd March’ 20, exacerbated by the COVID-19 panic selling.
While at 267.3/sh the stock was trading at 1.3778x Price to BV– but to catch a falling knife has never been our style. We continued to wait for our “key trigger”.
The Key Trigger
On 15th April’ 2020, the company appointed Ajay Mahajan as their new CEO. Appointing new management with a strong track record, allows them to bring in a new team with whom they can potentially work on a newer vision for the company.
But for CARE to make it to our MWI portfolio we were still lacking such vision and performance under the new management.
All of which came to us post the announcement of their Q2 Results on 3rd November’ 20.
Key Highlights from Results
- Revenue– slightly higher YoY (Sept’19 vs Sept’20) at 76 Cr from 72Cr
- Operating Margins– higher YoY (Sept’19 vs Sept’20) at 55% from 51%
- Dividend– Remained same at 8/sh
- Profit before Tax– 11.63 % higher YoY (Sept’19 vs Sept’20) at 48 Cr from 43 Cr
- Volume of Debt Rated– Increased to 5.67 Lk Cr in H1 FY21 from 5.01 Lk Cr in H1 FY20
Considering how the management could sustain the operations and dividend post transition shows no major glitches, however for a business like “Ratings” a lot business is from longer term contracts so we can not be too sure.
The future vision
We were very impressed with what the current MD & CEO had in mind about the huge volumes of data the company is sitting at, however we are not sure how much of it can they pull off.
The management acknowledges the need to diversify away from the core Rating Agency business towards “Risk Consulting” capitalising on their already available data using ML&AI as ancillaries to their current business.
Since end of Financial Year’ 2020, globally interest rates are lower which we believe would trigger an increase in financing and re-financing activities most of which would require credit ratings considering how since the IL&FS debacle regulators have increased lending constraints and most lenders are looking for higher quality borrowers.
Going ahead, even if the management fails to work through their vision- we strongly believe Care Rating’s legacy business alone would have enough growth to justify a 12.11x P/ (5yr Avg) EPS, debt free company with a consistent track record of a high dividend yield.