Care ratings ltd dr. equity

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Care ratings ltd dr. equity

  1. 1. CARE RATINGS LTDCARE RATINGS LTD Sep 2013 Research Report
  2. 2. 2
  3. 3. Wisdom from great investors.. 3
  4. 4. Our Research Process • Dr. Equity follow the principles of Value Investing as practised by the worlds greatest investor Warren Buffett. • Our belief is that buy quality companies whose management is honest and• Our belief is that buy quality companies whose management is honest and able. • We follow lot of Buffett led criteria's in picking quality companies. 4
  5. 5. Contents • Company Details • Care Ratings Ltd – Company Details • Industry Overview • CARE Performance• CARE Performance • Credit Rating Industry – Opportunity • Shareholding Pattern • Valuations • Conclusion 5
  6. 6. Company Details • CMP – 526 as on sep 2013 • BSE Code – 534804 • Market Cap – Rs 1500 cr. • Face Value – Rs 10.00• Face Value – Rs 10.00 • Dividend Yield – 3.8% • NSE Code – CARERATING • Total Equity Shares – 2.855 cr. • 52 Weeks High/Low – Rs 986/Rs 415 6
  7. 7. Care Ratings Ltd – Company Details • Established in 1993 • 3 Major Shareholders - IDBI Bank, Canara Bank and State Bank of India • Care Rating provide services in Credit Ratings• Care Rating provide services in Credit Ratings and Information Services • Second largest credit rating company in India. 7
  8. 8. 1579 1808 2187 5980 7439 0 1000 2000 3000 4000 5000 6000 7000 8000 FY09 FY10 FY11 FY12 FY13 No. Of Assignments No. Of Assignments 711 758 1114 3900 5263 0 1000 2000 3000 4000 5000 6000 FY09 FY10 FY11 FY12 FY13 No. Of Clients No. Of Clients 1.11 1.46 1.97 1.96 2.62 0 0.5 1 1.5 2 2.5 3 FY09 FY10 FY11 FY12 FY13 Bank Facility - No. Of Instrument Rated Bank Facility - No. Of Instrument Rated 1.11 1.46 1.97 1.96 2.62 0 0.5 1 1.5 2 2.5 3 FY09 FY10 FY11 FY12 FY13 Debentures/Bonds - No. Of Instruments Rated Debentures/Bonds - No. Of Instruments… 8Source: Company Annual Report
  9. 9. 1.97 1.96 2.62 2 2.5 3 Volume of New Bank Facility (in Lakh Crore) 1.46 1.97 1.96 2.62 1.5 2 2.5 3 Volume of New Debentures/Bonds Rated (in Lakh Crore) 1.11 1.46 0 0.5 1 1.5 FY09 FY10 FY11 FY12 FY13 Volume of New Bank Facility (in Lakh Crore) 1.11 1.46 0 0.5 1 1.5 FY09 FY10 FY11 FY12 FY13 Volume of New Debentures/Bonds Rated (in Lakh Crore) 9Source: Company Annual Report
  10. 10. • As it can be observed from the previous charts that while there is no linear increase in the Bank Facility and debenture rating but the no. of clients and Revenue has been increased. • Care also has its international operations in Maldives. It has a 20% stake in the ARC Ratings based in Maldives.the ARC Ratings based in Maldives. • Grading Services: Care also do the grading of IPOs, grading of various enterprises in various sectors. 10
  11. 11. Industry OverviewThe Credit Rating Industry In India, the first credit rating agency, Credit Rating and Information Services of India Limited (“CRISIL”), was set up in 1987. A second rating agency, ICRA Limited (then known as, Investment Information and Credit Rating Agency of India Limited) (“ICRA”) was established in 1991 and a third agency, CARE, was established in 1993. Duff and Phelps Credit Rating India which started its operations in 1996 was renamed Fitch Ratings India Private Limited (Fitch) in 2001 and renamed again to India Ratings and Research Private Limited in 2012. Brickworks Ratings India Private Limited (Brickworks) began its rating business in 2008. SME Rating Agency of India Limited (SMERA) also began its rating business in 2008. In the initial stages, the rating agencies faced several challenges, as the corporate debt market in India was nascent. In 1992, credit rating became mandatory for the issuance of debt instruments with1992, credit rating became mandatory for the issuance of debt instruments with maturity/convertibility of 18 months and above. Subsequently, the RBI guidelines made rating mandatory for issuance of commercial paper. RBI also made rating of public deposit schemes mandatory for NBFCs. Since then credit rating has made rapid strides in terms of the number and value of instruments, which have, been rated. Further, within Basel II, the second of the Basel Accords which contains recommendations on banking laws and regulations issued by the Basel Committee on banking supervision, various approaches for banks to determine credit risk have been prescribed with progressively increasing risk sensitivity. The RBI introduced a phased approach to the implementation of Basel II in India. In the first stage, Indian banks were required by the RBI to adopt a ‘standardized approach’ for credit risk. Under the ‘standardized approach’, the RBI recognized certain rating agencies as eligible credit rating agencies and Indian banks are required to use such eligible credit rating agencies to assess their credit risk in order to determine compliance with capital adequacy requirements. The implementation of Basel II standards by the RBI resulted in large scale demand for credit ratings across sectors and geographies, which was previously limited to a small group of clients. 11
  12. 12. Filter # 1 Track record of high returns on capital. "Here's what we're looking for...businesses earning good returns on equity while employing little or no debt." - Warren Buffett's letter to shareholders, 1987shareholders, 1987 12
  13. 13. 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% FY09 FY10 FY11 FY12 FY13 ROE ROE As it can be seen from the above graph CARE Ratings is earning average 35% ROE on the capital. Although growth rate is dipping due to economic slowdown but we believe that as the economy uptick takes place CARE Ratings will resume its uptrend in ROE. 13
  14. 14. 14
  15. 15. Filter # 2 ...else pays it back to shareholders "Most high return businesses need relatively little capital. Shareholders of such a company usually will benefit if it pays out most of its earnings in dividendssuch a company usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases."- Warren Buffett letter to shareholders, 1992. 15
  16. 16. Dividend Policy Dividend Details FY13 FY14 Interim Dividend 12 6 Final Dividend 8 NA Dividend Payout 50.39% NADividend Payout 50.39% NA As CARE got listed only recently in Dec’12, there’s not much data in terms of dividend payout history of the company, however one can get an idea about the company’s prospective dividend policy from its dividend payout for FY 13. For FY 13, the company has announced a total dividend of Rs 20/- per share (Rs 12/- already paid in Mar’13 and Rs 8/- shall be paid in Sep’13) which is 50.39% of the reported net profit of the company. For FY 14, they have already paid first interim dividend of Rs 6/- per share and we expect 1-2 more interim dividends before a final dividend. 16
  17. 17. Care is paying huge dividends year on year, FY09 dividend payout ratio was 6.67% which has increased to 58% approx. This proves the warren buffett principle above. 17 Source: Company Annual Report
  18. 18. Filter # 3 A word on the management. ..."the certainty with which management can be counted on to channel..."the certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself..."- Warren Buffett letter to shareholders, 1993. 18
  19. 19. D.R. Dogra is the Managing Director and Chief Executive Officer of the Company. He holds a Bachelor's and a Master's degree in agriculture from Himachal Pradesh University and a Master's degree in business administration (finance), from University of Delhi. He has more than 33 years ofHe has more than 33 years of experience in the financial sector and in credit Administration. Care’s management is aggressive and most of the senior people are veterans. 19
  20. 20. Filter #4 Strong MoatStrong Moat 20
  21. 21. These are the Strong Moats of CARE Ratings which helps the company to earn exceptional returns on its capital. 21
  22. 22. Filter # 5 Generates a lot of capital "Almost by definition, a really good business generates far more money"Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally." -Warren Buffett's letter to shareholders, 1994 22
  23. 23. 23 Cash Flow from Operations Cash Flow from Operations and Return on Equity is good on an average. As business is not capital hungry since it receives advance payments from its clients and tender service subsequently, CARE has a negative working capital cycle. It has Rs. 400 cr cash on its books which is affecting its ROE, its actually facing the problem of plenty. Very few business face such situations where they have excess cash.
  24. 24. 24 Source: Company Annual Report
  25. 25. Care has maintained a ROE of 32% average on its capital during the last 5 years, though last 5 years has been extremely challenging. Book value has also increased 3 times during the last 5 years. 25 Source: Company Annual Report
  26. 26. Performance Q1FY 14 26 Source: Dr Equity Research
  27. 27. Shareholding Pattern 27 Source: Dr Equity Research
  28. 28. Filter # 6 and now Valuations...and now Valuations... 28
  29. 29. As far as valuations are concerned, Current Price: 525-530 CARE market cap: Rs 1,500 crores. It’s a debt free company, holding close to Rs. 400 crores as cash and cash equivalents. The business model is good, being very low on capital requirement, negative working capital requirement backed by up-front payment of fees and recurring revenue stream from existing clients. FY 13 the company delivered pre-tax operating profit of Rs 131.2 crores Enterprise value of Rs 1100 crores (market cap + debt – surplus cash) 29 Enterprise value of Rs 1100 crores (market cap + debt – surplus cash) Present pre-tax AAA bond yields are 9% p.a. If CARE continues to generate Rs 131.2 crores pre-tax operating profit till perpetuity, the value for this will be Rs 1460 crores (at present rates) as compared to Enterprise Value of Rs 1100 crores. Care is a Strong BUY at current levels looking at its valuations currently and the future growth prospects with rich return ratios.
  30. 30. Filter # 7 Margin of safety Having ascertained that CARE Ratings Ltd is one of the contenders for becoming aHaving ascertained that CARE Ratings Ltd is one of the contenders for becoming a part of a portfolio that Warren Buffett would love to own, let us have a look whether there is sufficient margin of safety in the company's current stock price and whether one should invest in the stock at the current levels. 30
  31. 31. Buffett always insist on the Margin of Safety of 25% from the current share price. Because an analyst can go wrong in estimating the fair value of a company. That is why buffett always look for a fair amount of Margin of Safety. Care’s current enterprise value stands at Rs. 1100 Crores, while Fair Value comes at 31 Care’s current enterprise value stands at Rs. 1100 Crores, while Fair Value comes at Rs.1460 Crores. So there is a margin of safety exist in the current share price. There is a 32% undervaluation calculated at the current price compared to its fair valuation which offers a very good Margin of Safety.
  32. 32. Concerns • Business and revenues of CARE are impacted by changes in the volume of debt instruments issued and bank loans and facilities provided in the Indian debt market • CARE’s business and revenues may be adversely impacted by changes in interest rates in the Indian debt markets. • Business of CARE is concentrated in the rating of debt instruments and bank loans and facilities; if it is not able to diversify its business, its financial condition and results of operations may be adversely affected.operations may be adversely affected. • If the banks whose clients avail credit rating services under the Basel II framework migrate to the internal rating based approach for credit risk it could have an adverse effect on its rating business, which may in turn have an adverse effect on the business, financial condition, results of operations and revenues. • Competition may affect market share or profitability, which could have an adverse effect on CARE’s business, financial condition and revenues. 32
  33. 33. • Any damage to the trust and confidence that CARE’s clients has in it, which is largely dependent on its brand recognition and reputation, may adversely affect its business, financial performance and results of operations. • CARE’s performance and success depends largely on its ability to retain the continued service of its management team, rating committee members and skilled personnel who can perform functions such as sophisticated credit and financial analysis.perform functions such as sophisticated credit and financial analysis. • If CARE is not able to adequately manage its growth strategy, it will not be able to sustain its growth level, which may reduce its profitability. • Material changes in the regulations that govern its business could adversely affect results of operations. 33
  34. 34. 1. Any action you choose to take in the markets is totally your own responsibility. 2. Cerebral Advisory Services Pvt Ltd (Dr. Equity) will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. Information in this report is believed to be correct & reliable. Information & data in this report is been taken from publicly available data. We do not guarantee correctness of Information. 3. Stock market Investing may result in losses as well as profits. Stock Investing is not suitable for many members of the public and only risk capital should be applied. 4. Cerebral Advisory Services Pvt Ltd (Dr. Equity) does not take into account special investment goals, the financial situation or specific requirements of individual users. Disclaimer Result Update March 2014 CSL Un-Earthing Multibagger Stocks www.drequity.in 34 5. You should carefully consider your financial situation and consult your financial advisors as to the suitability to your situation prior to making any investment or entering into any transactions. 6. If you want personal advice, then you should seek a registered investment advisor. 7. Price and value of the investments referred to in this material may go up or down. 8. This service does not assure specific amount or percentage of return and it does not guarantee number or periodicity of recommendations either. 9. Investment / disinvestment decisions are entirely at the discretion of the subscribers and the entire gains/losses are theirs. Hence, Cerebral Advisory Services Pvt. Ltd. or any of its employees will not be liable for any loss suffered. (CASPL – Cerebral Advisory Services Private Limited)
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  36. 36. For any query contact, Dr. Equity Cerebral Advisory Services Private Limited 36 Cerebral Advisory Services Private Limited H.O. – Mumbai Branch Office: Udaipur Contact: +91 7665514555

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