CARE Ratings Poised for Growth as Indian Credit Market Recovers

While the Indian economy has been recording healthy growth, there are concerns for the external sector. With the global economy slowing down, India’s economy will definitely feel the pain. At this crucial juncture, the critical aspect would be for the domestic demand revival to be sustained. With capacity utilisation levels improving, the private sector’s intent to invest has improved. Hence, our initial ratings business continued to witness good growth from the bank loan rating as well as the capital market segments. We could expect a gradual rise in private investment in the coming quarters, even while the global and domestic economic uncertainties will prevent a dramatic turnaround, – Mehul Pandya, MD & CEO, CARE Ratings Ltd.

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Company Description:

Care Ratings is the second largest credit rating agency in India with a 22% market share in terms of credit rating revenues. The company has a market cap of around 1,827 crore and offers a wide range of rating and grading services across various sectors and instruments. Care Ratings also provides issuer ratings and corporate governance ratings and has evolved its brand to Care Edge through engagement with a professional global agency, Deloitte. The company also offers rating of innovative debt instruments such as REITs, perpetual bonds, and expected loss.

Critical Success Factors:

• Care Ratings has several strengths that position it well for growth in India’s credit rating industry. The bank credit growth has doubled to 10% in FY22, and Care Ratings is poised to benefit from the growth of the bond market and the corporate capex pickup in India. The share of the retail sector in the total credit offtake was the largest, followed by industry and services. The overall environment in the credit and debt markets has stabilized with higher levels of economic activity and mobility. Care Ratings has a strong portfolio of rating and grading services across various sectors and instruments, and its expertise in innovative debt instruments such as REITs and perpetual bonds is a strength.
• Care Ratings also benefits from the recovery of the capex cycle and the improvement in PAT-to-GDP. The robust bank credit growth and pick up in private capex due to growth in the manufacturing sector support the company’s growth prospects. Care Ratings also benefits from the policies of the Indian government, such as the reduction of corporate taxes and infrastructure investment, which are mostly met through bond issuances. The improvement in high-frequency indicators such as GST collection and state governments’ ability to spend has also driven higher government spending.
• Corporate India’s PAT is also at a healthy level, which bodes well for Care Ratings. With a market share of 22% in terms of credit rating revenues, Care Ratings has a strong position in the credit rating industry. Its evolution to the Care Edge brand through engagement with a professional global agency, Deloitte, reflects the company’s commitment to innovation and growth. Overall, Care Ratings is well-positioned to capitalize on the growth opportunities in India’s credit rating industry.
• The oligopoly in India’s credit rating market presents a strength for Care Ratings. With only three major players, including Care Ratings, the company is well-positioned to capture a significant market share. ICRA and Care Ratings are expected to recover their shares after underperforming CRISIL between FY19-22. The company’s focus on innovative debt instruments such as REITs and perpetual bonds, coupled with its portfolio of rating and grading services across various sectors, further strengthens its competitive advantage in the market.
• The company operates on an asset-light model with high net asset turnover and net profit margins, generating good cash flow and dividends with a negative net debt. It has invested in two subsidiaries to strengthen their segments and is focusing on automation, margin-accretive accounts, and improving contributions from subsidiaries while overhauling internal processes towards stringent compliance regulations. The entry barrier for new players in the highly regulated industry is high, and it takes a long time to build trust for structured finance, money market, and other huge complex corporate debt ratings.
• The company earns the majority of its revenue from rating business and is the second-largest rating company in India in terms of rating turnover. Another revenue contributor is the non-rating segment, which saw significant growth in FY22. The company mainly serves large corporate loans, and management expects a good contribution from the non-rating portfolio and improvements in the subsidiaries in the coming years. The company has also been empanelled as an ESG Rating Provider for AMCs by AMFI, which will generate additional revenue.

Key Challenges:

• One of the major risks faced by Care Ratings is the highly regulated nature of the industry. The company has to operate within the SEBI licensing framework, which can make it difficult for new players to enter the market. It takes a lot of time and effort to build trust and credibility for complex corporate debt ratings, which can limit the company’s growth potential in the long run. Moreover, any changes in regulations could significantly impact the business operations and profitability of Care Ratings.
• Another key risk for the company is the potential for rating downgrades. Any negative ratings assigned by the company could lead to a significant loss of business from clients, who may switch to other rating agencies. As a result, Care Ratings needs to maintain a high level of accuracy and transparency in its ratings to maintain the trust of its clients. Any errors or inconsistencies could damage the company’s reputation and impact its growth prospects.
• Lastly, the company faces significant competition from other rating agencies, such as CRISIL and ICRA, who also have a strong presence in the market. This could lead to pricing pressure and impact the company’s margins. Moreover, the entry barriers for new players are high, but established players like CRISIL and ICRA could still pose a threat to Care Ratings’ market share. The company needs to constantly innovate and improve its services to stay competitive and maintain its position in the industry.