Care ratings ltd dr. equity

CARE RATINGS LTDCARE RATINGS LTD
Sep 2013
Research Report

Wisdom from great investors..
3

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

Contents
• Company Details
• Care Ratings Ltd – Company Details
• Industry Overview
• CARE Performance• CARE Performance
• Credit Rating Industry – Opportunity
• Shareholding Pattern
• Valuations
• Conclusion
5

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

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

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
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
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
Debentures/Bonds - No. Of
Instruments Rated
Debentures/Bonds -
No. Of Instruments…
8Source: Company Annual Report

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
Volume of New Bank
Facility (in Lakh Crore)
1.11
1.46
0
0.5
1
1.5
Volume of New
Debentures/Bonds
Rated (in Lakh Crore)
9Source: Company Annual Report

• 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

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

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

0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
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.
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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.
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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

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

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

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

Filter #4
Strong MoatStrong Moat
20

These are the
Strong Moats of
CARE Ratings
which helps the
company to earn
exceptional
returns on its
capital.
21

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
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

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

Performance Q1FY 14
26
Source: Dr Equity Research

Shareholding Pattern
27
Source: Dr Equity Research

Filter # 6
and now Valuations...and now Valuations...
28

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)
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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.

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

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.

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

• 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

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
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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.
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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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