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It is not often that a Credit Rating Agency/Company trades at valuations of 15X Earnings and certainly not if it is among the top 3 rating agency in the country. But such was the impact of the IL&FS and DHFL episodes especially on CARE Ratings, that the company saw a continuous erosion in its share price from peak of ~INR 1,700 in March 2017 to INR 305 in March 2020. Even in October 2020, the company was trading at ~INR 300 at valuation of 10X Earnings!

This was on account of consistent decline in company’s revenue and profitability during fiscal 2018 to fiscal 2020 as it lost its market share in Ratings Segment.

Trend in Revenue and PAT for CARE Ratings during Fiscal 2018 to Fiscal 2020

Note: Financials of Standalone Ratings Arm; Source: Company Filings

As compared to its peers as well, the performance of the company was lackadaisical during the last three fiscals. The same was mirrored in company’s valuation.

Peer Comparison

Source: Company Filings

The margin for CARE Ratings is higher as it has presence only in Ratings segment (98% of PAT from Ratings segment)

Following SEBI’s action on the company’s key management on account of irregularities reported in IL&FS ratings, the company appointed Mr Ajay Mahajan as new MD & CEO in April 2020. The company re-constituted its various internal committees as well.

However, the downward spiral continued in Q1 Fiscal 2021 as well with the company reporting a 27% and 23% drop in revenue and PAT respectively.

The Q2 FY 21 numbers put pause on free falling business performance

However, the company sprang a surprise of sorts in Q2 Fiscal 2021, by reporting 148% increase in revenue sequentially and 280% increase in PAT. The stock prices surged by more than 50% during last three weeks to trade at INR 458 per share as of November 26 2020. Further, the company also announced dividend of INR 8 per share.

The management had suggested in its commentary post Q1 Fiscal 2021 results that the steep fall in revenue was on account of delay in filings of Annual Results by many of its portfolio companies. This led to rating activity being shifted to Q2 Fiscal 2021. Therefore, Q2 Fiscal 2021 numbers also partially includes the pie of previous quarter. Let us compare the results of H1 Fiscal 2021 of top 3 rating agencies

Performance of top 3 Rating companies during H1 FY21

Note: CRISIL reports its financials of Ratings business under segmental reporting as it has presence in consulting, Advisory and research businesses as well; For CARE Ratings, data of Standalone entity is considered as it is has only presence in Ratings Business; For ICRA as well data of Standalone entity is considered, but the same also includes a very portion of revenue from other business apart from core Ratings

Note: CRISIL follows January-December accounting cycle; however, for sake of comparison we have considered numbers reported during April-September 2020

  • Therefore, among the top 3 Rating companies, ICRA witnessed the biggest dip in performance of its Core Ratings business
  • It is important to note that despite the downturn due to Covid-19 in H1 Fiscal 2021, CRISIL was able to show slight uptick in its revenue from Ratings business; this should largely be attributable to mandates from large corporates which accounted for majority of fund-raise during the period

Profitability in Ratings segment for top 3 players

  • ICRA was the worst impacted in terms of profitability as well in H1 FY 21, whereas CRISIL and CARE were able to maintain their profitability compared to year ago period

Therefore, the H1 FY 21 numbers suggest that CRISIL and CARE Ratings were able to tide through peak Covid-19 period without any major impact on rating performance, but ICRA witnessed some deterioration in its performance. But the valuations for these players suggest otherwise

Q2 numbers flash in a Pan or suggests uptick in business trend for company?

  • While the company’s performance in Q2 Fiscal 2021 is promising, it would be prudent to wait for Q3 numbers which will give further indications on trend
  • Further, the new road charted by the management under new MD & CEO will certainly require few quarters to show their positive impact (if any)
  • The new MD & CEO – Mr Ajay Mahajan – has clearly indicated the company’s intention to invest in analytics and generate more revenue streams for the company ex-ratings
  • Another major factor for company’s languishing valuation may also be due to absence of any promoter. All the other major Rating Agencies in India, CRISIL, ICRA & India Ratings are backed by a strong global rating agency.
  • The above may have added further apprehensions in the minds of Investors regarding its ability to turnaround
  • As of September 2020, the company has ~INR 500 Crore in cash & short-term investments
  • At market cap of INR 1,320 Crore, cash equivalents of ~INR 500 Crore and P/E of ~16.5X, the company is certainly a candidate for upgrade of valuation multiple if the Q3 Fiscal 2021 numbers also suggest a turnaround story for the company

HAPPY INVESTING!

Disclosure: The Author has a small position in the company constituting less than 2% of portfolio

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