Credit Analysis & Research Ltd.

TM
12 March 2013
Credit Analysis & Research Ltd. (CARE) ` 772.1 (7/3/13)
BUY
Second largest rating agency – in terms of ratings
revenues – available at near IPO price
CARE came out with the Offer for Sale (OFS) in Dec. ’12 at ` 750/- per share. The issue was
oversubscribed by 41x and stock touched a high of ` 938.65 on 11/1/13. Due to subdued activity in
both equity and debt markets, as well as lower ratings and surveillance fees income, rating agencies
stocks have been underperforming the market. This presents an excellent opportunity to acquire the
stock for medium term gains. Three PSU banks held majority stake of 58.2% before OFS, which has now come
down to still sizable 38.8%. Till date 99% of revenues (other than investment income) are derived from rating
operations.
A CONSILIUM INFORES & ADVISORS INITIATIVE FOR BALANCE EQUITY BROKING (INDIA) PVT LTD

Credit Analysis & Research Ltd.
BSE SENSEX/CNX NIFTY 19413.54 / 5863.30
Sector
Shareholding Pattern
Dec. ‘12 (%)
Other Financial Services
Market Cap./Free Float (` Crs.) 2204/2204
Market Price as on 07/3/13 ` (FV `10/-) 772.1
52 Week High/Low ` 986.20/763.00
Equity Shares Outstanding (in Crs.) 2.855
P/E Ratio (Times) (for FY ‘12) 20.4
P/B (Times) (for FY '12) 5.8
EV/EBITDA (Times) (for FY '12) 17.4
ROE % (FY '12) 28.6
8%
Highlights
u In the past few years CARE has acquired market
share from its globally affiliated peers and maintained overall
superior margins due to higher share of ratings income in
the revenues. Even rating margins are higher than peers due
to low cost back office operations in Ahmedabad, resulting in
lower staff cost as a % of revenues and lower contribution
of small & medium enterprise business where ticket size is
small.
u While CARE earns higher rating margins due to low
cost structure, default rates on investment grade instruments
rated by it, are also higher. Therefore, aggressive sales
strategy adopted in bank loan rating business may not be
replicable in bond rating business.
42% FII
DII
50%
Others
Share Price Performance
u Challenging economic environment has reduced the
debt market activity and new equity issues. Company has,
however, been able to increase the number of assignments in
FY ’12 to 5980 from 2187 in previous year.
u For the first nine months of current fiscal, bank
credit growth was lower as compared to previous year and
debt markets were subdued. CARE tends to correlate its
performance with growth in bank credit and conditions in
debt markets.
u However, despite the challenging environment, total
number of new assignments completed were 4801 during
9 mths ended Dec. ’12, as against 3179 in the same period
previous year. Company undertook 1559 new assignments in
Q3 of FY ’13, growth of 32% on y-o-y basis.
u Staff cost accounts for about 75% of total expenditure.
With a view to increase the volumes and to expand business
across geographies through new branches, Company
increased employee strength from 456 in Dec. ’11 to 546 in
Credit Analysis & Research Ltd. is also available on www.balance-equity.co.in

Credit Analysis & Research Ltd.
u Both initial ratings and surveillance incomes were impacted during the nine months ended Dec. ’12. Initial ratings income was
mainly affected due to smaller ticket size and pricing pressure. Surveillance fees suffered on account of suspension of ratings as well as
rating downgrades.
u
Company is debt free and had surplus cash & investments of ` 334.53 Crs. as of March ’12 – 15.2% of market cap today. Strong
cash position will help CARE to grow inorganically in to other related areas, to diversity income streams.
u
Although higher default ratio among the corporate rated by CARE and higher dependence on bank loan ratings cause concern,
we believe present valuations with opportunities to diversity revenue stream lend comfort.
Offer For Sale (OFS)
Company came out with IPO in Dec. ’12 through OFS, at ` 750/- per share (FV ` 10/-). The issue constituted 25.22% of the capital.
Before that, it issued bonus in the ratio of 2:1 increasing the paid up capital from ` 9.5 Crs. to ` 28.55 Crs. Company is professionally
managed and has no identifiable promoter. Domestic PSU banks, IL&FS & Federal Bank held 73.4% stake before OFS and still hold
49.1% stake after divesting 24.3% in the OFS. Other major shareholders include Aditya Birla PE, ING Vysya Bank and Bajaj Holdings.
Background
Company is the second largest rating agency (in terms of rating turnover) in the country, among 6 players and is in operation since
1993. It provides a wide range of rating and grading services across a diverse range of instruments and industries. Company
focuses more on rating of debt instruments and bank loan facilities which provide higher volumes than other products. Till Sept. ’12, it
completed 19,058 assignments and had 4,644 rating relationships. Debt rated till that date amounted to ` 44.04 lacs Crs. It has graded
highest number of IPOs since the introduction of IPO grading.
Company covers wide range of sectors such as manufacturing, services, banks and infrastructure. Ratings are done for
most kinds of short, medium and long term debt instruments such as commercial papers, bonds, debentures, preference shares and
structured debt instruments, bank loans and facilities, both fund based and non-fund based, and deposit obligations such as intercorporate
deposits, fixed deposits and certificates of deposits. Company’s ratings revenues are directly linked to the volume of debt
instrument issued and bank loans/facilities provided, as ratings income is typically a % of the volume rated. The volumes of debt
raised is again dependent on client’s current debt position, credit worthiness, prevailing interest rates, investment environment and
alternative funding options, most of which are correlated with economic and credit growth.
Credit Analysis & Research Ltd. is also available on www.balance-equity.co.in

Credit Analysis & Research Ltd.
Further, there are also issuer ratings and corporate governance ratings which are becoming popular. CARE added 2037 new
clients during FY12.
Over and above existing focus areas, CARE started focusing on MSME segment in FY ’11 and on specialized grading services
during FY ’12. The services offered include IPO grading, equity grading and those of various enterprises such as shipyards, maritime
training institutes, construction companies and real estate projects among others. During the year, Company concentrated on specific
products like Edu-grade (educational institution rating), Equi-grade, (equity research for assessing fundamentals and valuation of
the company) and Project Star Rating (Real Estate project rating). These products will contribute progressively more to the revenue
base of the Company going forward.
Although, the product is not mandatory, the concept of independent equity research and grading is now getting accepted
amongst both corporate and investor community. In FY12, CARE executed 14 EQUIGRADE mandates. It is also engaged in preparing
reports for Bombay Stock Exchange for the companies listed on it.
Like most of the rating agencies, Company has started leveraging its research division which is an integral part of rating
exercise. Its research division now covers 39 sectors and reports are sold on subscription basis, with focus on institutional clients.
Further, the independent research team also provides risk evaluation reports covering 88 sectors, which is subscription based.
Revenue from research has been negligible till now due to lower sector coverage compared to peers and lesser market awareness of
its research capabilities. Company is expected to take at least few years to experience any meaningful contribution from its research
division.
Besides sectors, CARE also provides real time economic analysis through reports. These reports are circulated widely to
clients, banks, mutual funds, government officials and the media. The purpose is to both showcase CARE Ratings brand, as well as
disseminate Company’s viewpoint on all issues relating to both, the global and domestic economy.
To ensure steady business from its various products, Company has entered into tie ups with various banks to rate their MSME
borrowers and with a fund for rating their real estate projects investments.
Overseas Operations
The company has expanded its footprint outside India in its rating business, apart from providing technical know-how to credit
rating agencies, one each in Mexico and Ecuador for a fee. It has been granted recognition for various levels of rating activities in
Maldives and Mauritius. In Hong Kong, the Company has received approval to act as an external credit assessment institution for the
purposes of the regulatory capital framework.
Credit Analysis & Research Ltd. is also available on www.balance-equity.co.in

Credit Analysis & Research Ltd.
Acquisition of risk management Solutions Company
CARE acquired 75.13% stake in Kalypto Risk Technologies Pvt. Ltd. (KRTL), at an investment of ` 8.94 Crs. KRTL is engaged in
developing specialized risk management solutions, addressing the area of credit and operation risk for financial institutions and
banks. Credit risk product serves as a foundation to meet evolving regulatory risk environment for Basel II recommendations and
integrating bank’s entire credit risk information. The operational risk product facilitates banks in assessing, controlling and reporting
of losses resulting from inadequate or failed internal systems. This acquisition should help Company in building up an alternate
revenue stream over the years.
Financials
99% of revenues are derived from ratings business, which earns better margins, which explains highest margins of CARE among the
listed peers like CRISIL and ICRA.
Volume of debt rated by CARE witnessed 21% CAGR during FY ’08 - FY ’12. Ratings revenues of CARE grew at CAGR of 38.7%
during FY ’08 – FY ’12, while net profits grew at CAGR of 44%. Ratings revenues constituted 86.4% of total income in FY ‘12, while
balance was contributed by investment income.
Company changed accounting policy for surveillance fees in FY ‘12. Till FY ’11 it was recognized in full in the year it which it
became due. From FY ’12, CARE has started recognizing that portion of these fees which is commensurate with the efforts put in on
completion of surveillance activity. The balance portion is recorded equally over the 12 months surveillance period.
FY ’12 reported only 4.2% increase in income from operations mainly due to change in accounting policy. The increase would
have been 15.8% if there was no change in accounting policy. Similarly net profit which went up by 18.6%, would have been higher by
32.9% if the policy had remained the same. Company increased employee count during FY ’12 to 500, from 303 in the previous year,
resulting in wage bill increasing by 33.2%.
Rating business will drive the topline of the Company for the next few years as it forms majority of revenues – 99% now – as
against 67% for ICRA and 40% for CRISIL. Considering that credit growth will be at least 15-17% for the next few years, CARE can be
expected to report similar rise in volumes of debt ratings. However, since the Company intends to increase focus on small & medium
enterprises, revenues growth might lag behind volume growth. Also, as revenue stream has stabilized now, which is reflected in lower
contribution of initial fee income of 20%, in total ratings income in 1H of FY ’13, as against 30% in FY ’10, the revenue growth will be
moderate. The growth can be higher as Company plans to increase business development manager count by 30%.
Credit Analysis & Research Ltd. is also available on www.balance-equity.co.in

Credit Analysis & Research Ltd.
Concerns
u Basel II framework provides for two broad methodologies for banks to calculate capital requirements for credit risk –
Standardized approach and Internal Rating based (IRB) approach. IRB approach will be subject to meeting certain requirements and
RBI approval. It will get implemented over period of time and may have an impact on the bank loan rating business. However, we
expect impact of IRB only by FY ’16. Those agencies which have higher portion of business from small & medium enterprises will be
the hardest hit as these companies tend to deal with single bank for loans, which may be approved for IRB, as against consortium of
banks for larger enterprises, all of which may not be IRB approved. Small share of small & medium enterprises rating business and
time available to develop alternate revenues, make the impact of this development manageable for the Company.
u Company is presently dependent on rating services for 99% of its revenues which are largely from debt instruments. Although
it is making efforts to derisk the business model by diversifying in to small & medium enterprises ratings, equity ratings, geographical
expansion by entering other countries and growing its research business, these efforts can bring results only in medium term.
u Margins of the Company will have declining trend with higher contribution from small & medium enterprises business &
research division, although Company will enjoy better margins compared to its peers, due to employee cost advantage. Thus, even if
Company is expected to maintain revenue growth of 12-15% in line with credit growth, declining margins will have negative impact
on profit growth.
Comments
u
Aggressive efforts in client building should set foundations for further leveraging in the future.
u Acquisition of risk management solutions company will result in diversification of revenue streams by enhancing product
offerings and building up alternative revenue streams for the organization.
u Company’ high margins compared to peers may gradually decline as its focus on research products as well as on small &
medium enterprises segment for ratings increases. This is already evident in results for 9 months ended Dec. ’12.
u Underpenetrated debt market and possibility of high debt issuances with reforms in debt markets in India, offers tremendous
opportunity to rating agencies in general and CARE in particular as it focuses mostly on debt rating.
u Company is available at present at about 20 x its historical earnings for FY ’12. However, considering the knowledge oriented
and cash generating nature of the business, combined with 12-15% revenue growth expectation, we think that present price offers
good opportunity to enter the stock. Stock is expected to keep pace with growth in economic activity.
Credit Analysis & Research Ltd. is also available on www.balance-equity.co.in

Credit Analysis & Research Ltd.
Name/Details
(TTM Dec. '12)
Promoter/Major Shareholder
Peer Group Comparison
CRISIL
(Cons.)
S & P -
53%
ICRA
(Cons.)
Moody's -
28.5%
CARE
(Standalone) 9 mths
Dec. 12 (Annualised)
IDBI Bank,
Canara, SBI - 38.8%
Revenues (` Crs.) 977.72 241.14 180.6
EBITDA (` Crs.) 329.22 62.39 120.12
EBITDA Margin(%) 33.7 25.9 66.5
Net Profit (` Crs.) 220.4 57.58 103.6
Net Profit Margin (%) 22.5 23.9 57.4
EPS (`) 31.4 57.58 36.28
Face Value (`) 1 10 10
Market Price (`) (7/3/13) 931.7 1093.7 772.1
P/E (Times) 29.7 19.0 21.3
Market Cap (` Crs.) 6628 1093 2204
Enterprise Value (` Crs.) 6370 1052 2136
EV/EBITDA (Times) 19.3 16.9 17.8
EV/Sales (Times) 6.5 4.4 11.8
ROE (%) (as on 31/3/12) 41.7 20.1 28.5
52 Weeks High (`) 1262.8 1582.1 986.2
52 Weeks Low (`) 855.25 1040 763
Note:
1) CRIS IL ROE is for year ended 31/12/12 (unaudited)
2) Research accounts for 50% of revenues for CRISIL
3) CARE - 9 months ended Dec. 12 figures annualised
Standalone Financial Results
Period Ended (` Crs.) FY '11 FY '12 9 mths
ended
Dec. '12
Net Income from
Operations
Qtr.
Ended
Dec. '12
170.87 178.08 135.46 45.57
Employee Benfit Exp. 30.51 42.24 35.1 11.54
Other Expenses 9.9 12.65 10.27 3.13
Total Expenses 40.41 54.89 45.37 14.67
EBITDA 130.46 123.19 90.09 30.9
EBITDA Margin (%) 76.4 69.2 66.5 67.8
Depreciation 2.21 1.88 2.1 0.49
Tax 43.15 41.97 30.81 10.46
Other Income 5.76 28.21 20.53 7.89
Non Recurring Items 0.15 0.39 0 0
Net Profit 91.01 107.94 77.71 27.84
Net Profit Margin (%) 53.3 60.6 57.4 61.1
Equity Capital
(FV ` 10/-)
9.52 28.55 28.55 28.55
Equity Shares (in Crs.) 0.952 2.855 2.855 2.855
Reserves 284.74 348.56
EPS (`) 95.6 37.8 27.2 9.8
Book Value (`) 309.1 132.1
ROE (%) 30.9 28.6
Note: During FY ‘12, Company issued bonus in the ratio of 2:1
Credit Analysis & Research Ltd. is also available on www.balance-equity.co.in

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