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Business overview

CARE Ratings is the third largest rating agency in India after CRISIL and ICRA Ltd. In terms of revenues, it clocked Rs2.2bn in FY21 and Rs1.9bn in 9MFY22. Ratings business contributes ~90% to total revenues.

Investment rationale

* The strength visible in the economy is leading towards a reviving investment cycle and the company is well poised for a better future growth with the help of its 4 defined pillars being Group Approach, Technology, Talent and Rebranding while the recent budget may further support growth.

* The company is betting on Infrastructure and BFSI to lead its growth. Metals continues to witness traction helped by budget announcements. Margin improvement depends on operating leverage which is key a focus area.

* With the economic bounce back in sight, the capex cycle could revive leading to strong systemic credit growth. In times of high inflation, CARE could be a hedge as it runs a ratings heavy business which is largely driven by nominal credit growth. Hence BLR, corporate bond and CP issuances

Key triggers and risks in the near to medium term

* Triggers – Strong system credit growth could see lead to better revenues; Improvement in overall market share in the near term

* Risks – Slower economic recovery leading to lower revenues; yield pressure

Valuation

* Over FY21-24E wee see a 10.4%/15.3%/12.8% CAGR in Revenue/EBITDA/PAT.

* The stock trades at an attractive valuation of 14x Sep’23 EPS

* We ascribe a multiple of 18.7x on Sep24E core EPS to arrive at a TP of Rs700

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