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Wednesday, December 5, 2012

Credit Analysis & Research Ltd. (CARE), the second largest full-service credit rating company in India, is coming up with an Initial Public Offering (IPO) consisting of 7,199,700 Equity Shares of Rs.10/- each for cash in a price band of Rs.700/- to Rs.750/- per equity share. Applications can be made in a bid lot of 20 Equity Shares and in multiples thereof, translating into minimum application size of Rs.15,000/-. The Equity shares are proposed to be listed on both BSE and NSE

Company Profile and Promoter Background:

CARE offers rating and grading services across a diverse range of instruments and industries including IPO grading, equity grading, and grading of various types of enterprises, including shipyards, maritime training institutes, construction companies and rating of real estate projects, among others. They also provide general and customized industry research reports.

The Company as such, has no promoter, domestic banks and financial institutions being the chief stakeholders. IDBI Bank, Canara Bank, SBI are amongst CARE's current shareholders. Post IPO, IDBI Bank will continue to be the largest shareholder retaining 17.2% stake in the company


IPO Grading:

CARE itself is the top rating agency of IPOs in India, having graded the largest number of IPOs since the introduction of IPO grading in India. CARE Ratings has completed over 19069 rating assignments having aggregate value of about Rs. 44051 Billion (as of September 30, 2012), since its inception in April 1993. As such, none of the rating companies including CRISIL, ICRA, Fitch, Brickworks would be rating the Initial Public Offer of CARE, which goes on air from Friday, December 7, 2012. The IPO is exempted from credit rating


Strengths and Positives:
  • The company gets most of its revenue from the ratings business, which is clearly a high margin business. This coupled with debt free and cash rich status of the company, translates into a concrete strength for the company
  • The Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margin for the half-year ended September is 69%, comparing very well to listed peers with ICRA at 32.9% and CRISIL at 31.7%. CARE's Return on Equity also was 30.7% in FY12, clearly better than ICRAs 16%, though lower than CRISIL's 42%
  • The Company has a low-cost back-office in Ahmedabad, which helps it restrict its employee costs to less than 25% of its sales, compared with nearly 50% as in the case of CRISIL and ICRA
  • If an estimated Rs.100 Crore of Net Profit for FY 2013, translating to EPS of about Rs.35. Thus, the shares under IPO are offered in a relatively attractive prospective PE of about 20-22 times

Significant Risks:
  • For the year ended March, 86.4% of its revenue came from ratings. Thus, the mainstream revenue come from concentrated pocket. If banks decide to rate their loans internally, which the RBI may allow them to do so in future, it may impact CARE Ratings significantly
  • The company is planning to emulate its listed peers by expanding and diversifying its business into research wings, which may take time to materialize

Overall Comments:
The strengths of the company clearly outweigh the risks involved. The quality of financials coupled with relatively attractive pricing offers a very strong reason to go for the IPO

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