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Q3 FY22 was weak; sustained revenue growth pick‐up and prudent utilization of cash key monitorables

Our view

CARE delivered a meek performance in Q3 FY22 with Revenue/EBITDA/PAT miss of 6%/20%/15% on our expectations. The consolidated revenue growth decelerated and to 8% yoy for 9m FY22 from 11% yoy for H1 FY22. Revenues for the quarter were flat yoy, a combination of modest 5.5% growth in Ratings business (91% of consolidated revenue) and a steep 29% decline in non‐rating revenues. Ratings revenue growth was modest with anemic improvement in underlying rated debt volume ‐ a) sluggish trends in corporate bond issuances and wholesale credit growth and b) absence of incremental market share gains (healthy IRF traction set‐off by some decline in SF). There was no recovery in EBITDA margin trend seen during H1 FY22, as Q3 margin was 6 ppt lower yoy on flat revenues and higher employee and IT expenses. At PBIT level, the non‐ rating businesses continue to be loss making.

We cut FY22‐24 earnings estimates by 4‐8% by lowering revenue growth and margin assumptions. We estimate 9‐10% earnings CAGR and a modest expansion of RoE during FY21‐24. Stock is trading at a relatively undemanding valuation of 15x FY24 P/E and is a pure‐play (90% of revenue v/s 60% for ICRA and 18% for CRISIL) on an impending rating upcycle. We thus maintain BUY, but lower 12 PT to Rs750 (previous Rs820). Key monitorables /positive triggers for the stock would be a) pick‐up in bond issuances (particularly in infra and NBFC segments) and industry credit growth, b) demonstration of consistent market share gain, c) growth rebound in non‐rating businesses, d) significant margin recovery and e) utilization of BS cash (28% of M‐cap) for larger dividends or buy‐back.

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