CARE Ratings Limited (CARERATING) Q2 FY22 Earnings Conference Call Transcript

CARE Ratings Limited  (NSE:CARERATING) Q2 FY22 Earnings Concall dated Nov. 01, 2021

Corporate Participants:

Kumari Nisha — Corporate Communications

Ajay Mahajan — Managing Director & Chief Executive Officer

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Mehul Pandya — Executive Director

Analysts:

Praful Kumar — Dymon Asia — Analyst

Samarth Singh — TPF Capital — Analyst

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Rohan Samant — Multi Act — Analyst

Presentation:

Kumari Nisha — Corporate Communications

Good afternoon, ladies and gentlemen. I am Kumari Nisha from the Corporate Communication team and on behalf of CARE Ratings, welcome you to our Q2 FY ’22 and H1 FY ’22 Earnings Conference Call. We wish to inform you that all participants are in listen-only mode and there will be a question-and-answer session once the presentation concludes. [Operator Instructions] Also please note that this conference is being recorded. Ajay Mahajan, Managing Director and CEO, CARE Ratings Limited, will be interacting on this call.

Now I would request Mr. Ajay to take over the proceedings, please.

Ajay Mahajan — Managing Director & Chief Executive Officer

Thank you, Nisha. Good afternoon, friends, and welcome to the investor call of CARE Ratings. I trust you’ve had the chance to go through and analyze our results, which were announced on October 29, 2021. I’m here with the Senior Management of CARE Group to explain to you how the Company has fared so far this year and address questions that may pose after my preliminary remarks. I’ll also take you briefly through our vision for the coming years, which will give you a perspective of our plans that we have in place. The current financial year, as you know, started on a somber note with the reimposition of the lockdown across states. Although not as stringent as the national lockdown of March-May, this time around however the intensity and the spread of the pandemic was more severe. This has had adverse implications on the economic and business activity, which was only beginning to see tentative signs of recovery late last year.

For a major part of Q1, the pandemic restrictions were in place. Lower economic activity was accompanied by reduced rate of investments, which had a bearing on the borrowing appetite of corporates. As is well known, fund raising from the debt markets and the bank loan segment is crucial for new business for us. Corporate bond issuances in quarter one were 57% lower than a year ago and the bank credit growth was over — or rather over March was negative 1%. Following the calibrated reopening of the economy since June 2021, there has been a faster than anticipated pickup in activity. The increased mobility as well as the higher pace of vaccination has improved consumer and business sentiments. Data has been reflecting the advancement in various segments over the first quarter of this fiscal. There’s been some improvement as well in terms of stability in the overall environment in the credit and debt markets following the easing of the lockdown restrictions, which is actually a good sign certainly so for rating agencies.

Bond markets witnessed some semblance of stability in quarter two with issuances for three-month period between July and September being 1.77 lakh crores as compared to 1.71 lakh crores last year. These issuances, however, continued to be tilted towards the finance sector. In any case financial sector, as you know, has a higher weightage in the overall distribution of the overall capital raising in the debt markets. The manufacturing sector faced with surplus capacity has not embarked yet on fresh investments in a meaningful manner though that’s a wide expectation that all of us hold. Also the infrastructure investments are largely being led by the government as a public sector with the legacy NPA issues continuing to be a limiting factor for private sector participation yet in particularly infrastructure sector. Also, some of the large borrowers have been PSUs.

And therefore these two factors, which is largely infrastructure spending coming from the government as also most of the large borrowers being PSUs, is having a relatively strong bearing on the revenues accruing to us as the rating agency. On the side of bank credit although growth has improved from a year ago, it nevertheless was subdued overall. Bank credit growth during the first five months, which is April to August 2021, to industry and services sector continues to be on tractionary territory. The credit growth to industry and services dropped 1.8% year-on-year for this period April to August. CP issuances, however, have been higher on a sequential basis as well as on an annual basis. Issuance in the second quarter of this fiscal amounted to INR6.22 lakh crores, which reads as a 50% increase over the year-ago and a 60% rise from Q1. However, this was largely due to rollover of commercial paper as the growth in the outstanding CPs as of September end was only 1.6% compared with 5.2% in 2020.

Here too, as in the case of corporate bonds, the issuances were dominated by the financial sector. Even though there were improvements in the quarter gone by, there were challenges that we had to contend with. We did work hard to combat these challenges and capitalize on the opportunities that came along the way. It is with this backdrop that our results should be viewed. Forced by circumstance, we have adapted well to the flexible work style, which enables our employees to work from home in a seamless manner when the need arises. Even as our offices across regions continue to operate with less than full physical attendance on all working days, we continue to complete all our mandated assignments both new and surveillance within the stipulated timelines. Given the uncertainties regarding the pandemic, we are confident of being able to work effectively and efficiently for the smooth functioning of our businesses even in the future.

Now let me give you a quick overview of our financial performance for the second quarter of the ongoing financial year, which I’m sure most of you have already seen and perhaps analyzed. On consolidated basis, revenue from operations remained flattish with about INR76 crores for the current quarter and similar figure for corresponding quarter previous year. The other income, which largely consists of interest income, has declined on the back of subdued interest rate scenarios during the year. That’s been the case and we have actually budgeted that accordingly. However, to explain the portal variance, it’s important to note that lower interest rates has actually led to a little decline in our interest income. Elevation in employee cost and other expenses has led to some moderation in operating profit margin. However, it still continues to remain robust. Elevation in employee cost is partly on account of inclusion of ESOP charge to the tune of INR2 crores for quarter two FY ’22 and INR3.7 crores for the entire first half of FY ’22.

The elevation in employee cost is in line with our strategy of acquiring and retaining talent. We believe in the longer run higher talent density becomes key sustainable competitive advantage. The other expenditure also elevated on the back of our focus on improving IT infrastructure across the organization. This is not just good hygiene building again, but it is being viewed by our Board and Management as a key differentiator in the making. On standalone basis, which represents ratings part, the financial performance has been stable with Company reporting INR69 crores of revenue from operations for Q2 FY ’22 as compared to INR71 crore reported for the corresponding quarter last year. The margin decline that is seen during the current quarter is largely due to base effect. There was some spillover effect last year wherein some income from Q1 FY ’21 had spilled to Q2 FY ’21 and that was not the case repeated this year.

As a result, it is preferable to look at H1 to H1 comparison and revenue from operations has actually improved like I mentioned about by 6% or so, which indicates that on rating side we have actually reported moderate growth for the first half of this fiscal on the back — despite the backdrop of a challenging private capex environment. I’m glad to inform you that the Board of Directors also announced an interim dividend of INR7 per share for the second quarter FY ’22. During the quarter gone by, we further strengthened our outreach efforts through a series of webinars on various sectors with a panel comprising of industry experts. We were able to reach a larger audience given that these were conducted virtually. The participation of external experts enriched these webinars as it helped bringing industry perspective even as we put forth the house view.

Our research reports continue to be widely circulated and have been well received by various stakeholders encouraging us to continue to do even better in sharing knowledge through a very elaborate marketing and outreach exercise. We have also collaborated with various chambers of industry to broaden and deepen the CARE brand in the marketplace. We continue with initiatives to cement our transformation agenda. In this, we would like you — we would like to touch upon the following key points. CARE Group is open to achieve growth both through inorganic and organic means. As I have stated before, we continue to scout for good opportunities in our known domain. However, given this decision needs to be taken with a lot of care and thought and with the valuation skyrocketing, we are relatively more focused in the immediate future on strongly building breadth and strength to our new invigorated plans for CARE Advisory and CARE Risk Solutions businesses organically.

On organic side, we continue to employ the following strategy. First, Group approach. CARE in its quest for diversification would focus on building new and exciting businesses through its two wholly owned Indian subsidiaries, which is CARE Advisory and CARE Risk Solutions Private Limited. The international subsidiaries in Africa and Nepal continue to do very good business and contribute profits and we are in the process of critically examining expansion opportunities there as well. Turning to Indian subsidiaries, we are happy to share that critical high quality resources have been systematically onboarded at CARE Advisory and CARE Risk Solutions over the past nine months to support the build-out of these businesses at a much higher scale. More details will follow as we roll out more products for targeted segments going forward.

Second point is technology, the second key differentiator or key area that we are building our diversification strategy with. Technology is one of the key identified enablers for our transition endeavor as we have been upgrading, modifying, and establishing new innovative solutions for our businesses as an ongoing process. In quarter two alone, we undertook migration of our data center, enhanced system security, and upgraded end user technology. In our endeavor, we are trying to marry technology with analytics for new product development. We are also in the process of deploying artificial intelligence and machine learning to enhance efficiency at every level so that we can rationalize costs where possible and enhance value addition. Point number three, human resources. Talent density is an important piece in our overall strategy as judgment calls will always need to be finally made by fine human talent. Thus acquiring and retaining the right talent becomes one of the key aspects of our business.

Our focus and emphasis on our human resources has been continuous and multi-pronged. We have systematically increased our learning and development budgets to offer more and more training programs for our staff to keep them up to date with the evolving and latest skill requirements. Sessions and workshops on mental well-being and employee assistance programs are also being held. We have also introduced the employee recognition program to promote quality and thoroughness in our working. On the side of leadership, we have also hired some very senior professionals to assist in the transformation of the Company. We have a new CEO at CARE Risk Solutions Private Limited. Hence, almost all the top positions have been filled across the Group with the best talent that’s experienced in their respective fields. Lastly, rebranding. We are in the process of rebranding the CARE Group, which will go far in strengthening the image of our Company.

In conclusion, therefore, we are confident that the economy would have a stronger bounce back in the remainder of FY ’22. We have projected country’s GDP to grow at 9.1% in FY ’22. The strengthening economy is bound to stimulate investment sentiments and climate albeit at a gradual pace. This will be reflected in the debt and credit markets. That said, even though the economy appears to be on a strong footing, the pandemic still remains somewhat of a threat and carries with it some uncertainty. Despite this, we believe we are better positioned to navigate these challenges due to the valuable learning from the past as well as our transformative process that is underway. The clue is — or rather the subsidiaries that we have, we are very confident of seeing acceleration in their businesses. We remain committed to systematically build and transform CARE to one of India’s leading ratings and analytics companies.

With that, I close my speech, but not before thanking you all and wishing you all a very Happy Diwali to you and your loved ones. Thank you very much. Back to you, Nisha.

Questions and Answers:

Kumari Nisha — Corporate Communications

Dear participants, we now will begin our Q&A session. [Operator Instructions]

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

[Operator Instructions] The first query is from the line of Mr. Praful Kumar. Mr. Praful, I have unmuted you. You can please self unmute yourself.

Praful Kumar — Dymon Asia — Analyst

Hello. Am I audible?

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Yes, please. You go ahead.

Praful Kumar — Dymon Asia — Analyst

Just wanted to check, in our previous interactions, you have been telling us in terms of people, processes, systems, things are in place and now we are looking for a materially better next three years. Can you just overall in terms of rating and non-rating, split in terms of your aspiration in terms of revenue CAGR, what are you looking at versus industry assumption of, say, 5% to 10% growth, and how do you intend to achieve that in each of the verticals, both rating and non-rating? And also for that, what resources you need in terms of people, processes and technology, and where are we in those milestones?

Ajay Mahajan — Managing Director & Chief Executive Officer

Sure. So thank you for your question, Praful. Let me start by saying that in the ratings business, our objective is multifold. That’s the cornerstone of our key — of our overall performance. As you know, predominantly we are a ratings business today. And we did lose market share in the last two or three years. We are rebuilding that market share slowly, but surely. I think, over last year, broadly we gained about 1% market share, and we are trying very hard to try and increase that market share or continue the momentum of acquiring market share by at least 1% per annum over the next three, four years and try and get back to high-20s from low-20s. That’s our objective, and we are working towards it.

The — both the business development teams and the rating teams are entirely focused on making sure that we provide the highest level of attention to clients, while maintaining total quality of our ratings exercise so that the overall sort of business grows on the back of strength, quality and fairness of our ratings. Our total focus is on that. So that’s to answer on the ratings side.

In terms of resources, we have had very good resources in CARE Ratings, historically. We have a 27-year track record, as you know, in that business. And there only in very select parts we have had to make some hires from outside, especially to fill gaps as some people moved. But otherwise, we have quality talent in that business, and we are not really looking to change much from a standpoint of human talent. There will be some changes, but those changes are par for the course. We’re not expecting large disruptive changes in our ratings business. So we are pretty much well staffed in that business, and we look to grow market share as well as our revenues in that business. So that’s on the ratings side.

On the non-ratings side, we are hoping and working. It’s can’t just we hope, we have a strategy in place and we are working on that strategy. As they say, the trick lies in execution, it’s one thing to strategize, it’s another to execute. So our focus is on execution. And in that context, I’m happy to report that both our Indian subsidiaries, which is where we expect substantial growth in the next few years, are working well in terms of acquisition of quality human talent. I think we are set — almost set for our phase one on both these companies in terms of having the critical mass of people in place, and we are now looking to grow these businesses.

We haven’t set annual or quarterly targets in the public domain yet. We may do that over the next few months. But at this moment of time, I can tell you, and I’ll reiterate what I’ve been saying and communicating to investors very transparently that we will be unhappy with ourselves if we can’t get to one-third of our total revenue and earnings coming from non-ratings business by March of 2025, which is exactly, let’s say, roughly three, 3.5 years away.

That’s to answer part one of your question. Part two of your question, I think, partly I’ve answered. Resources, phase one growth. We are — they are broadly in place and we should now look to cement our position in these new areas of growth as well and look to grow business, and therefore, more outreach to clients and more focus on business development will be our next steps.

As far as technology is concerned, we have been rightly focused, I think, on technology for the last year, year and a half. We have improved hygiene considerably, but hygiene by itself does not bring more business. So next step on hygiene is to improve productivity, and we have an internal workflow system that should be ready in the next month or two, and that should, after testing, be — put in the production environment very quickly. That’s on workflows.

But more importantly, we are building technology across the board, technology in CARE Ratings, technology in CARE risk solutions and technology in CARE advisory as well in certain areas that we believe will help us roll out products in CARE Ratings for our own consumption and in CARE risk solutions and CARE advisory for third-party consumption. But I would wait another quarter before I start talking about those products in detail.

I hope I’ve answered your question.

Praful Kumar — Dymon Asia — Analyst

Yes, that’s very useful, Ajay. Thanks for this. So just summarizing what you said, if industry grows by X on rating, we are higher because we are gaining market share. And plus, assuming industry grew by 7/10 [Phonetic] plus we add one-third of the revenues in three years, so another 10%. So we are looking at a significant momentum on the revenue side over next three years CAGR. That’s a fair assumption. That’s what you said?

Ajay Mahajan — Managing Director & Chief Executive Officer

Absolutely. That’s what I said. And that’s what [Technical Issues] to working — it’s our strongest and highest level of commitment and endeavor to get to what we just commenced.

Praful Kumar — Dymon Asia — Analyst

Okay. And just final question, in terms of a scale of one to 10, 10 being the best, your preparation in terms of — because you have been doing this for the last two years — 1.5, two years now and significant efforts, I know, you have put in. So in terms of people, processes, systems, making subsidiaries, everything, so you will be today at eight or nine in terms of now it’s the acceleration that you will do over the next three years. That’s the way. So the building blocks are in place?

Ajay Mahajan — Managing Director & Chief Executive Officer

Yes, Praful. Happy to — I’m happy to actually be — I’m happy to confirm to you that where we stand today with respect to product, with respect to quality, with respect to quality of people and with respect to technology, where I can say confidently that we are at a point where we should now look to substantially accelerate. But one of the only riders, I normally don’t put riders, is the credit markets in India, they need to start growing. That defines the core of our earnings until such time that we diversify substantially. And there — that’s an extraneous factor. Leaving the extraneous aside, we are now on a very strong footing in terms of product, people and processes.

Praful Kumar — Dymon Asia — Analyst

Understood. Understood. And finally, Ajay, want to pick your brains on the cash that you have on the balance sheet. You’ve been generating — given the growth momentum, you’d be generating significant cash flows as well. What are the plans — is some inorganic to augment non-rating revenue also a part of the overall strategy that you have devised? Or it’s more of a normal organic growth over next two, three years? And if any acquisitions, what would they be, it will be more tech-based, some platforms or what exactly? Because you emphasized in your opening remark as an analytics — rating and analytics company, and you emphasized on analytics as well. So some more thought there. Thank you.

Ajay Mahajan — Managing Director & Chief Executive Officer

Yes. So on that, in the speech also that I actually talked about, I did mention that CARE Ratings is absolutely open to both inorganic and organic growth in our strategies. Organic we have discussed in detail. Inorganic is so hard to discuss because there is a lot of work that goes in, but then you suddenly realize that by the time you filter down to the right set of companies, you have to also think about valuations. This is not necessarily culturally an organization that laps up entrepreneurially whatever comes its way. We have to be very mindful of we being in a very regulated sector firstly, our mindset is relatively conservative and rightly so to my mind. So, I think it is important to fit many, many criteria and make people absolutely comfortable certainly the Board before we actually take a plunge into the inorganic. So, I would say — I’ll sum it up by saying that we will continue to scout around there for the right opportunities, but it’s very hard to provide any timeline on it. So we keep the powder dry and not committed to any long-term investments, but we will keep scouting for the right opportunity.

Your second question is which areas will we be focused on? On that again in the past, I have given some guidance and we stay committed to that guidance until that guidance changes, in which case we will communicate it. But we don’t see a reason to change that guidance. The guidance is that we are a knowledge company. We want to take pride in saying that we know hopefully well across multiple sectors that we rate, we know clients, we know businesses, we know global, domestic situation in many sectors. So, we therefore call ourselves a knowledge company and as a knowledge company, we believe that what sits contiguous to that knowledge and helps us refine the communication of that knowledge to better decision making at the customer end includes the following two or three areas. One, something to do with data interest us. Data, database platforms interest us. Something to do with research interests us, right. And then likewise, there are one or two other areas which interests us. It could be credit process outsourcing, that would interest us. So we are looking at those areas which are synergistically aligned to our area of strength. We are not interested in anything that’s unrelated to our core strengths. I hope I’ve answered.

Praful Kumar — Dymon Asia — Analyst

Yes. Finally, one suggestion, Ajay. I think I was seeing on LinkedIn as well, you have some great resources. You have head of ratings from CRISIL and few other guys at the top. Maybe when is opportune time we should I think let the second level also interact with investors just to see the conviction from the guys who will execute this plan over next two, three years. That’s the suggestion that will give us lot more confidence.

Ajay Mahajan — Managing Director & Chief Executive Officer

Certainly, Praful. All my senior management is on this call. I am happy for some questions to be answered by them so that you can hear them live.

Praful Kumar — Dymon Asia — Analyst

Sure. Thank you, Ajay. All the best.

Ajay Mahajan — Managing Director & Chief Executive Officer

I’ll try to pass a few questions to them in case you want to just hear some of my colleagues.

Praful Kumar — Dymon Asia — Analyst

Just showcase the kind of depth you have built in for the last two years so that we can appreciate the people who are holding the guns in the field of work. Thank you.

Ajay Mahajan — Managing Director & Chief Executive Officer

Sure, Praful. Noted for, yes.

Praful Kumar — Dymon Asia — Analyst

Thanks, Ajay. All the best.

Ajay Mahajan — Managing Director & Chief Executive Officer

Thank you. Mradul, back to you. Can you hear me?

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

The next query is from the line of Mr. Samarth Singh. Samarth, I’m putting you on unmute.

Samarth Singh — TPF Capital — Analyst

Good afternoon. Am I audible?

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Yes.

Samarth Singh — TPF Capital — Analyst

Hi Ajay. How are you? Ajay, first question was on just the competitive environment and the latest notice by SEBI regarding one of your competitors. Can you just talk about what’s going on? Are you seeing your ability to take up pricing now or is it still more of the same?

Ajay Mahajan — Managing Director & Chief Executive Officer

So competitive environment, I want to be gutford honest always, Samarth. I don’t see a change in the competitive environment. Yes, we have also heard about the speculative — I would call it speculative because we haven’t seen like a final decision yet. I’ve also heard about that, but it’s best Samarth that we don’t talk about it. I have no additional knowledge to share. I’m not being evasive. I simply don’t have additional knowledge to share on that. I would simply say that should something like that happen, we would then figure out what it means for the industry. But I think it’s premature right now to talk about it. The competitive pressures in the industry regardless I think remain quite strong and quite sharp. There are seven rating agencies vying for that share of that 1,000 crore, 1,100 crore, 1,200 crore of rating fee pool.

I would expect that as each one of us takes a slightly stronger stand for the quantity of work we do and the paths we undertake to make that product happen for our customers, we need to gently but firmly communicate to our clients what we think is fair pricing. And I think it’s a process, Samarth. We have started engaging in that process just the last one, 1.5 years perhaps even from before. But I would still think that because the pricing pressures were quite intense, they continue to be intense, but I think the clients are becoming a little more discerning. I wouldn’t say that they are specifically asking for us only, but they are now beginning to value the work my rating teams and business development teams are doing. And I think it’s a process. It’s not something that one can say we have arrived, but we are getting there and I think we are definitely building credibility in the marketplace with influencers as well. That includes banks, mutual funds, AIFs, and lots of financial market players, intermediaries included. So I think we’re getting there, but price pressures are still there Samarth, I wouldn’t be in denial of that yet.

Samarth Singh — TPF Capital — Analyst

Okay. Thanks for that. And you mentioned that until the other businesses kick in, essentially the growth of the credit market in India is what’s going to drive our business. So, could you talk to me about just one or two regulatory issues that have — that are coming up over the next year or so that you think could give a significant boost to the market if any? And what would you like to see — what do you think would really help grow the Indian credit market?

Ajay Mahajan — Managing Director & Chief Executive Officer

Well, maybe on the first part of the question, I can’t necessarily immediately think of a regulatory step that would add fillip to the market other than the fact that regulators are quite focused. I think from whatever I see, both RBI and SEBI are focused on improving the corporate bond markets from where they are today. As we all know, corporate bond markets in India are really domained for very few large or substantially large or ultra large or mega large corporations in India. AA and plus are able to access markets consistently, get good pricing, The others are not able to do that. So barring that and focusing therefore — regulatory attention is focused development and deepening of the corporate bond markets. That will augur very well for rating agencies. Other than that, I can’t offhand think of anything else that’s regulatory likely to give a fillip to the rating industry definitely. But to answer the second part of your question — I’m sorry. Could you highlight the second part of your question again? I may not have fully got it.

Samarth Singh — TPF Capital — Analyst

Sure. Just according to you, what are the one or two changes that the regulators can make that would actually give that fillip to the industry?

Ajay Mahajan — Managing Director & Chief Executive Officer

Well, I think — from a regulatory standpoint, I think the most important thing that I keep saying meeting after meeting is the development of the corporate bond market and I think there is some work that’s happening in terms of some recommendations at the SEBI are there probably in the final stages about working on market making and appointing intermediaries with certain commitments and issuers, earmarking a part of their total bond raise to provide buyback to a certain extent of the issues that they come out with from time to time. But it’s in early stages to the best of my knowledge. There will be more work I’m sure SEBI and RBI would be looking to do to deepen the bond markets. It has been a challenge on the horizon for a very long time, but has not necessarily resulted in deep bond markets in India yet.

I think a lot of emerging markets suffer from this. But I think there is a lot of external outside the country capital that can also be attracted should we make the bond markets lot more accessible and take out the pain in taking out money. The duration of the bond market or the commitment of the FPIs to bring in money for minimum three-year duration that was eased in the last couple of years. That did lead to overflows in the short end. But overall, India has not necessarily attracted a lot of external sort of FPI flow into the bond markets as opposed to equities, which have done exceedingly well in the last 20, 30 years of opening up the market. So, I think that remains the big promise of the future. I hope we are able to capitalize on it.

Apart from that, just to answer your question. I think that with massive geopolitical disturbances, which is a big theme that’s prevailing in the global arena today with supply chains breaking across the board particularly with China now starting to get alienated somewhat in terms of its overall predominance in supplying manufactured components and various products to the rest of the globe. I do believe that India has a better opportunity in the next few years to play a larger role in the global economy in terms of producing for other countries. I think that certainly is an opportunity for India that India should grab with both hands. Certainly PLI, certainly capital expenditure as a result of massive demand globally putting pressure on supply of very critical products, raw materials, commodities at this moment of time should lead to capital expenditure in the next year and beyond.

I would say it’s a calculated guess for the future. I won’t say it’s just hope and I won’t say it is bound to happen. I would say that that’s a calculated call we are making that we definitely see credit markets in the wholesale area because you see retail credit doesn’t help us as much. Indirectly through NBFCs, yes; but not directly. But I do suspect that corporate credit will be — will definitely start seeing pickup both for capital expenditure purposes as also increased enhanced lines in working capital that corporates would need given price pressures across the board. So, that’s another calculated guess, Samarth.

Samarth Singh — TPF Capital — Analyst

Okay. Thanks. Last question from my side. We continue on this policy of giving out dividends and I think it’s been asked of you multiple times. And I’m not talking about the cash on the balance sheet, I’m talking about the dividends that we give out and many investors have asked you to consider buyback instead of the dividend, which is a tax inefficient way of returning capital to shareholders. But we still continue on with this policy. Could you just explain why? I mean have you reached out to your large shareholders to see what they would prefer as a capital return policy?

Ajay Mahajan — Managing Director & Chief Executive Officer

Samarth, I know that this may not necessarily be one of those things that we have been able to get to. But in our Company, it’s a very strongly Board managed company as well. We have managed to at least get this subject going for a discussion at the Board meeting. But yet, we have not yet been able to get to a firm answer for you. So, I’d say this is WIP. But we have made some progress. It’s not that we have not — that the requests from large shareholders has fallen on deaf ears. As the CEO of the Company, it’s my absolute responsibility to accept a request like these and take them to the Board. Final decision is obviously the Board’s and we are — we have one round of discussions on this. But these things do require more sustained conversations and discussions before a final decision can be made. I did mention that every company culturally is different. We are not necessarily a company that very quickly makes decisions. We think, we discuss, and then we make decisions. That’s the way the company operates. I can assure you that we are not ignoring this point. We have tried our best to get some discussions going, but we are still a distance away from the final answer.

Samarth Singh — TPF Capital — Analyst

Okay. Thanks. I appreciate it.

Ajay Mahajan — Managing Director & Chief Executive Officer

Thank you.

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Thanks, Samarth. The next query probably we can take from the line of Ms. Urmila Bohra from Motilal Oswal.

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

Hi Ajay. Mahesh Jain from Motilal Oswal. Good afternoon, sir. Just two questions. Firstly, on the corporate bond market, the MSCI inclusion of India to the bond market. How do you see that panning out for the Indian bond markets going in the medium to longer term? Will that be a watershed event for the way it was for Indian markets a couple of decades back? So, that is my first question. Secondly, from a more longer-term perspective, how do you see the ESG ratings business coming into play for India as well as for CARE Rating? Thirdly, you mentioned about rebranding in your opening remarks. Could you elaborate on that as to what do you mean by rebranding of CARE? And lastly, a book keeping question on other expenses. What led to the sharp jump in other expenses?

Ajay Mahajan — Managing Director & Chief Executive Officer

Could you ask the last question again? There was disruption, I couldn’t hear it.

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

Sure. The other expenses which have jumped sharply in the quarter both on Y-on-Y and sequential basis. What was the reason for the sharp jump and what should we think about the same from a more medium-term perspective?

Ajay Mahajan — Managing Director & Chief Executive Officer

Okay. I’ll answer all the four questions. They are quite — I’ll answer all of them. Some answers will be short and some will be detailed so bear with me. The first one is how do we see the — sorry, I missed the first one.

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

MSCI bond market.

Ajay Mahajan — Managing Director & Chief Executive Officer

So on the first one, I would say that definitely it will be a direct/indirect shot in the arm for Indian bond markets. There is no doubt about it. To represent India — even at the sovereign level if it gets represented in the indices, it does play a very strong role in terms of putting India on the radar — on the sort of radar of all the global debt funds, ETFs, various players in the fixed income markets where the mandate is to put money into fixed income and right now that may be just what India may be missing out. So, certainly it will be a shot in the arm even if it does not mean that we would be a part of corporate bond index from day one. It does mean that the Indian yields will be up on the radar of all the large debt funds and that augurs well for the Indian fixed income markets for the future for sure. So that’s a short answer, but I’m quite clear that this will be very positive for all parts of the fixed income market in India. That’s first question’s answer.

Second, you said what do you think about the ESG business? In the long term, what happens to that? Early stages and lot many of us are focused on ESG. Multiple players are focused on ESG. It’s not just a buzzword, but it is now defining the way capital will flow in and to which sectors will it flow in, which players it will flow in. It will get — it’s already getting linked to certain negative sectors, to positive sectors, to how much of money can come into which companies and which sectors is all be decided substantially by also another dimension, which is the ESG dimension. CARE will definitely play a strong role in this. But CARE is taking its time in doing all the background work because without thinking through, we just don’t want to jump in the fray and say look, we also do gradings and we also do screenings. There’s a substantial amount of work that’s underway and we are working on providing appropriate, but top-notch products in this domain considering we carry a lot of knowledge in our company in various areas, particularly infrastructure, financial services, to name a few.

So, ESG is very critical from a CARE perspective and from the markets’ perspective both. In terms of what happens to rates, eventually this is where I will speculate. I would say in a few years’ time, ESG will be a dimension that our ratings folks, our rating analysts will consider also while assigning a rating. At this moment of time, it is being seen as a separate standalone product from an ESG perspective. My own guess is that over a few years, it will coalesce into the standard rating product and there would be a strong ESG dimension that would have to be seen. That’s speculative, it’s not possible for me to say anything more definitive because regulators will play a big role in deciding whether ESG stays separate or becomes a vital component of the rating analysis by rating agencies. That’s to answer your second question.

Your third question, little — I mean it’s not premature, but there is a plan to redo the logo of CARE Group. And I don’t want to say more as I would then steal the thunder from our rebranding launch, but we’re planning one soon. The idea is to have one common website and overall overarching group approach, which I referred to in my speech as well, so that all parts of CARE feed off the same brand, the brand property. The brand promise is shared across the multiple businesses of CARE and not as CARE Ratings independent of CART, independent of CRSPL, independent of other subsidiaries in international markets. So, the rebranding is a part of the Group approach and there will be more that you will hear from us so kindly wait for not too long, but wait on that one to see for yourself as we launch a rebranding campaign soon.

And then the fourth one is your question on other expenses. Now on other expenses, what we have done even better this year is we have tried to normalize the accrual of expenses from any fluctuations that we expect. We have tried to normalize that fluctuation as in something we can get to as an expense that will accrue in Q3 or Q4. On prudent accounting policy, we have tried to normalize it through the year. And also there are some regulatory changes. For instance CSR, there is a regulatory change that we must recognize the expense upfront. So, CSR expenses have gone up by INR1 crore. You were mentioning that other expenses have gone up by about INR5 odd crores. I see the numbers on first half other expense number has gone up from INR9.3 crores to INR14.2 crores. That’s about INR4.9 crores.

That INR4.9 crores can be explained as follows. CSR up INR1 crore, IT expenses up INR1.7 crores, professional and legal fees up INR1 crore. So, that gives you the breakup. IT expenses have to go up as I mentioned because we are investing in technology, it can’t happen without making the investment. CSR is a compulsion and professional legal fee one can argue is also an inelastic expense. I can’t do much about it, it’s to do with the sort of legal cases, some continuing and some that keep happening as a part of this industry. We have to accept it. I hope I answered all the questions.

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

Thank you for all the elaborate answers, sir. Just one last question. The issue of the IMCR — the issue of non-cooperative ratings, there was a sharp jump and so what are the numbers there right now as to what proportion of our volumes are under that category? And how do they impact our revenue and profitability?

Ajay Mahajan — Managing Director & Chief Executive Officer

Okay. So, this is a good question and we have talked about it even in the past meetings. It’s hard to give numbers, but I would say that the industry apparently is at about 50%, 55%, which was non-cooperating across almost all rating agencies. We are in the vicinity of that number, but somewhat lower than that number. So, it is beyond us to be able to help that number. We have been requesting the regulators to see if we can exit a non-cooperating issuer a little ahead of the timelines that are currently required to be adhered to regulatorily. But I think it’s a matter of time that some of these regulations eventually get a little better and friendlier for rating agencies because right now keeping a issuer non-cooperating with us for long periods of time does not help anybody. It doesn’t help the investor either because the client is not sharing information.

So if the client doesn’t share information, for us to continue to carry a rating set in the past with past data does not make a whole lot of sense even for the investor. So we are hoping that at some stage, the regulators will hopefully listen to our request. They must have some reasons why they are keeping away from relaxing here. But our statistics are broadly in line with industry statistics if not somewhat better. That’s all I would say. The other thing I would say is that internally we have reorganized that business to ensure that we are more productive as in that the INC category does not sack our productivity across the group. So, we have created a separate group to follow up and through that, we believe we have addressed productivity measure across the company at CARE.

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

Thank you. Sir, can you through some light as to how does — a company going to INC rating, how does it impact our revenues and profitability?

Ajay Mahajan — Managing Director & Chief Executive Officer

Actually I did not understand your question very well. The line is a little disturbed. So, could you repeat your question, please?

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

So basically the company who we are getting rating revenues from, surveillance fees; that company gets into a INCR rating. How does it impact our revenue and profitability because we continue to give ratings right, but we are not getting revenues? So are we booking those in our revenues as our receivables and how do we account for that INCR ratings?

Ajay Mahajan — Managing Director & Chief Executive Officer

So again I’m not an expert. Maybe my colleague Mehul, if he’s on the line. Mradul, could you unmute Mehul if he’s on line?

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Yes, sir. One second, sir.

Ajay Mahajan — Managing Director & Chief Executive Officer

Mehul, may I request you to answer this question.

Mehul Pandya — Executive Director

I’ll answer if I’m heard. See first and foremost, as you rightly pointed out since the issuer goes into the non-cooperation category, it does impact the revenue and the profitability in the sense that we don’t get the fees from them. To your pointer whether or not we are booking the revenue from them, the plain answer is no because the issuer is in the non-cooperation category and we are unsure in terms of whether the revenue would flow in from that customer irrespective of whether the regulatory driven review is undertaken by us. So, we simply don’t look what is not sure for us. So, that’s the simple answer to that. Thank you.

Mahesh Jain — Motilal Oswal Financial Services Ltd — Analyst

I’ll connect later to understand this more. Thank you so much for all the detailed answers.

Ajay Mahajan — Managing Director & Chief Executive Officer

Yes. Thanks.

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Thank you. The next query probably we can take from the line of Mr. Sanjay Kumar from ithought.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Good afternoon, sir. Two questions broadly. In the AGM, the Company says that the structured products would drive growth. I wanted to know what our market share in the current setup of REITs and in which NHAI and possibly few of the PSUs might go on a spree as laid out in the National Monetization Policy. So, how can we gain market share in this segment? That’s the first question.

Ajay Mahajan — Managing Director & Chief Executive Officer

Okay. So yes, in the AGM we said so and we stand by it. But some of these developments of securitization, we have invested very well in our teams. We have now a fairly strong team that works within the sectoral experts of infrastructure for InvITs. And likewise on the securitization of financial instruments, loan, receivables, all of that, direct assignments and PTCs; that sits within the financial sector vertical and we have specific teams that are focusing on these opportunities as you rightly point out. To specifically address the flow of money in these instruments, I firstly totally agree with you that more and more instruments are likely to come out in the structured space and particularly for subscription not necessarily by just qualified institutional buyers, but in my judgment a lot of HNIs will be buyer from these instruments as opportunities to invest in high yield will constantly be sought by HNI platforms, which are now very big platforms across this country, wasn’t the case five years ago.

So, I think a lot of these instruments will find investment appetite from HNI desks and private wealth and family offices as well. So, there is a huge demand for these instruments and agree with you that there’ll be more issuances in this space. Now are we seeing — till now some of these markets are still more talked about than there being actual flow. Will the flow back all of this talk is our expectation. But have we started to see very large flows yet from multiple players, not really. Are we looking for these opportunities all the time and our business development team? Yes. And our ratings teams? Yes, we are. So, that’s my quick reaction to what you asked. Maybe I could ask my colleague, Mehul, to comment if I’ve missed out any dimension.

Mehul Pandya — Executive Director

I guess you’ve covered the things in a quite elaborate manner. Just to add to the few pointers that yes, the teams are indeed in place and the reach outs in terms of engaging more with the potential investors as well as the originators on the securitization side becomes one of the focus areas as far as business teams are concerned and we are seeing good traction on that. But unfortunately, it’s also a fact that for the first few months of the first half of the current year, we did not see too many transactions. And there was one large transaction which had happened, which was a large bilateral deal. But more or less, we are likely to see the traction coming into specifically this space going into the second half now and hopefully we should be maintaining a good share of that. Certainly in the other aspects, which you mentioned, in terms of the InvITs and REITs, certainly we also tend to see good potential over there and our teams are quite engaged in this aspect. We have done a few good ratings as far as the InvITs are concerned and hope to see some more activity in this space. Thanks.

Ajay Mahajan — Managing Director & Chief Executive Officer

Thank you, Mehul. So Sanjay, I trust this answers…

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Yes, sir. So, is it early to talk about market share? Wait a bit to see how the sector as a whole evolves.

Ajay Mahajan — Managing Director & Chief Executive Officer

I would suspect so because till now, there have been very few select high profile deals; one or two by public sector, two or three by private sector in specific areas like InvITs and REITs as you said, but still the deal flow is somewhat limited. It’s not broad based to multiple builders, multiple commercial properties coming out this way. But I suspect this will be the directionally an important product to set our eyes on and be prepared on for the future.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Okay, sir. Second question, can you give us more insights on the Tresata partnership and how it will help us? What products are we building? I did go through their website, it’s kind of interesting. And even our annual report did not give any more details on this. So, something on this would be great.

Ajay Mahajan — Managing Director & Chief Executive Officer

Yes. So very quickly, Tresata is a US based company set up in 2010. It’s been in business 10, 11 years. They do a lot of work with specific sectors like healthcare, financial services, and a few other manufacturing sector companies as well. They do a lot of business with Fortune 500 companies. Their focus really is that they have put out a proprietary technology in place for AI, ML, in the intelligence layer that I keep talking about. Without getting too technical, I myself not most sound to be able to talk about the details here. But I would simply say that they have — largely it’s a data driven analytics service that provides a higher order of predictive analytics to time series data that you can provide to them.

So now for a rating company like ours, it does make a lot of sense to be able to fulfill even a regulatory expectation that we need to be building models to be able to predict default across sectors, across companies. And I think this will add that very high level of caliber to our otherwise smart analysts and group heads and rating head teams to be able to give them that additional input from a predictive analytic standpoint. That’s really what Tresata is about. They also have some inbuilt models that we can use from time to time both for our internal consumption as also when we start doing some analytics work for our clients hopefully soon, then some of that can come to our help both for in-house as well as for third-party products. I hope this answers.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Yes, sir. So, it is more of intellectual property so it will take some time to reflect in the numbers, is it?

Ajay Mahajan — Managing Director & Chief Executive Officer

This is a capacity and capability building effort and the monetizable part of this effort would be indirect in ratings and could be more direct as we launch our analytics businesses for the future. So, it’s hard to directly link this to revenues at this stage, it’ll be premature.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Excellent, sir. Last question, just a bookkeeping one. Few years ago our employee expenses used to be less than 30%. After you joined, we did a lot of — we spent on employees so it’s right now at around 45%, 408. So, where will this number settle at? What is your guidance on EBITDA margin if you can give one?

Ajay Mahajan — Managing Director & Chief Executive Officer

You see — this is a question that troubles me very often and the trouble is not of any other reason, but that the headline revenues of the business if they remain single digit, then it obviously gets more challenging to support expectations of employees in terms of giving them inflation related or even otherwise salary corrections and salary increases from time to time. So, it is obviously one of the biggest challenges for any company that has a relatively low growth trajectory in the industry that that company sort of happens to be in. So we are currently in that phase where we mustn’t forget that there are parts and there are many, many pockets of opportunities in the past where the business grew at a much faster clip than the costs grew. So I think at a time like this when we just discussed the opportunities that could potentially come in the credit space going forward, I would think that some of this is a little bit of uncertainty so nobody can predict with 100% confidence.

But I would think that this should be less of a worry going forward as it has been in the last two or three years because of the fact that CARE was losing market share for the first two years out of the last three years and then it arrested its downslide, but it’s still bottoming out and it only grew by 6% this year. I would say given where credit growth for the country is, we have still done okay. But as credit picks up, this should be less of a worry going forward than it has been because percentages are somewhat misleading. If revenues stay flat, the same cost as a percentage even with 5% inflation related pay or 10% pay will start showing as a very accentuated increase in percentage. The fact of the matter is that we are in business and we must grow our business. So, I think the rest of this call would be useful for you to assess whether we will be able to grow our revenues or not. I think that is more important than continue to focus on trying to push the cost down because unless we have good people, we will not be able to build topline.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Excellent, sir. Thank you and all the best.

Ajay Mahajan — Managing Director & Chief Executive Officer

Thank you.

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

We are nearing our scheduled time so I’ll take the last question for the day. This is from the line of Mr. Shalabh Agarwal from Snowball Capital. Yes, Shalabh. There’s an audio issue probably. So, we’ll take the other question from the line of Mr. Rohan Samant from Multi Act.

Rohan Samant — Multi Act — Analyst

Thanks for the opportunity. So, couple of questions. One on the other expenses. So the INR11 crore that we have as other expenses in this quarter, should we assume this to be the run rate going forward? Because you mentioned that we have kind of normalized the lumpiness in this line item.

Ajay Mahajan — Managing Director & Chief Executive Officer

Now could you repeat the question? You said INR7 crores, right?

Rohan Samant — Multi Act — Analyst

INR11 crores other expenses.

Ajay Mahajan — Managing Director & Chief Executive Officer

Okay. Are we talking at the consol level or at the standalone level?

Rohan Samant — Multi Act — Analyst

Consolidated.

Ajay Mahajan — Managing Director & Chief Executive Officer

Okay. Well, at consol level, it will be hard to give you a trajectory because the three businesses, Rohan, are very different. The ratings business is a very different business, a mature business. It has the most predictable set of expenses. Whereas the expenses that will show up in CARE Risk Solutions which is company which is still not yet sort of broken out of its past growth trajectory, but will break hopefully soon going forward, is a company where there will be lots of partners that will be involved in selling. And therefore, there the margins — net margins will drive our business as opposed to just the revenue line. So, revenue will have a lot of concomitant expenses coming from partners. Likewise, the third business, which is the Advisory business, will have both partners as well as some tech costs that will come in. So, it’ll be very hard to give you one normalized trajectory of other expenses at the consol level.

But at individual company level, I could say that at CARE Ratings level certainly — standalone level CARE Ratings, I think there should not be any surprises. I think even this time to my mind at least, there are no surprises. We have committed ourselves toward technology expenses so there is a little bit of expense increase. If you see standalone, our Q2 expenses are INR7 crores versus INR4 Crores last year and that INR3 crore increase — or rather if you take first half, we have gone from INR9.3 crore to INR14.2 crore. And that INR5 crores increase explained as INR1.7 crore coming from IT and the balance INR3 crores is largely CSR and professional and legal fees. So, it’s very hard to predict these numbers. These are inelastic costs, these are not costs in my control. I would say more than inelastic, these are non-discretionary costs and these costs are not being undertaken specifically by management to achieve something. These are almost semi-regulatory or like I said, non-discretionary costs. So, I can only explain status quo. It’s very hard to give you direction for the future.

Rohan Samant — Multi Act — Analyst

Sure. And second question was on receivables, which have kind of jumped up to around INR50 odd crores. So, anything to call out there in terms of why the jump is there or is it more of a timing issue?

Ajay Mahajan — Managing Director & Chief Executive Officer

So, two things. We changed our accounting policy around the unbilled revenue. So what we are now doing is that we are trying and billing clients with a forward date. So if you actually see the receivables mix, I would assume more than half of that would be accounted for money that’s not even due and the balance money is well in control, it’s in the shortest time bucket. And I would say that there is no worry at all on the receivable side. There is not much growth in working capital as a result and quarter ends tend to obviously accentuate that number, but the receivables position across the Group is in control. Other than some pressures that we have seen in CARE Risk Solutions where project deliveries have suffered as a result of COVID in some of the international markets and there some receivables have bunched up, but we are working at war footing to get some of those sorted out as well.

Rohan Samant — Multi Act — Analyst

Okay. Thank you and all the best.

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Thank you. Due to time shortage, that was the last query taken up for the day. Over to you, sir, for the closing remarks.

Ajay Mahajan — Managing Director & Chief Executive Officer

Well, nothing more to say than this that we continue to remain committed to strategy that has been shared several times over with all of you if you’ve been attending the past sessions as well. We have remained consistent on our growth story. We will work towards adding more businesses. We will work towards strengthening our ratings business further and growing our market share. We have good teams, good people in all parts of the Company and we remain committed to delivering on what we have committed to you. As the both medium to long-term strategy, we continue to chip away at executing and we will come back every few months to showcase to you how we are on that path to achieving our strategic objectives in the medium to long term. Thank you for your support.

Mradul Mishra — Assistant General Manager – Brand & Corporate Communications

Thank you, sir. And thank you all participants for your participation and wish you a Very Happy Diwali.

Ajay Mahajan — Managing Director & Chief Executive Officer

Happy Diwali to all. Thank you.