IGI Logo

Structurally moving right

CARE’s PAT in Q4 FY24 was below our estimate on account of softer growth in Domestic Ratings (Stand-alone Rev.), lower-than-expected margins (reflecting growth investments in Analytics business), lower other income and higher tax rate. On structural basis, the performance was healthy characterized by 1) steady progression of market share in Ratings, 2) margin in ratings business trending up due to operating leverage, and 3) significant built-up of traction in nonRatings businesses (Analytics and Advisory)

Fortifying market position in Domestic Ratings with gains of wallet share and new clients

CARE continues to gain share in industry’s incremental rating volumes through a combination of wallet share gains and client addition. The slower 10% yoy revenue growth in Domestic Ratings needs to be looked in the context of significant moderation in bank’s credit flow to the NBFC sector after increase in risk weights. CRISIL’s domestic rating revenue growth also decelerated to 12% in this quarter. The share of IRF (initial rating fees) has been consistently improving as per the management. Operating leverage, wallet share gains and improving IRF contribution is reflected in Ratings’ segment margins being much higher in H2 FY24 v/s H2 FY23. Continuance of healthy-to-strong growth is likely to drive further margin improvement.

Non-ratings businesses gaining traction; awaiting profitability turnaround

There has been a consistent uptick in non-Ratings revenue (Analytics and Advisory) over the past three quarters on the back of greater management focus, market introduction/strengthening of products and strong client outreach/marketing. The revenue share of non-Ratings entities has increased from 6% in FY23 to 10% in FY24 (stood at 13% in Q4 FY24). The growth in Advisory & Consulting business has been relatively steady, and it is making marginal profits. Greater focus and investments are going into the Analytics business where product focus has been reprioritized, new products are being developed and go-to-market has been accelerated, all entailing higher expenditure. Management expects this business to improve its profitability as Revenue increases. Currently, the analytics products are in the areas of credit risk management and monitoring catering to Banks and NBFCs inside and outside India. Co. aspires to improve the revenue contribution of nonRatings businesses to 20% over a few years.

Ready to launch ESG Ratings

Recently, CARE received approval from SEBI to function as ESG Ratings Provider (ERP). With this, the co. plans to immediately launch its products/services (team in place) and solicit business. Three rating products are ready which are ESG Rating, Transition Rating and Combined Rating. Strong corporate relationships and data/information repository of the Domestic Ratings business would be leveraged for growth.

Expect strong revenue/earnings growth to continue

Without building any meaningful contribution of ESG Ratings, we expect 18-20% consolidated Revenue CAGR over FY24-26. While Domestic Ratings business can likely grow at 13-14% pa, the non-Ratings businesses (particularly Analytics) can keep growing at prolific pace on a benign base. Even though revenue contribution of non-Ratings would significantly increase, the consolidated EBIDTA margin could still expand over FY24-26 on incremental operating leverage gains in Ratings business and substantial improvement in profitability of Analytics business. Hence, a large RoE improvement is likely over next 2-3 years. We retain constructive view on CARE with an ADD rating and have raised earnings estimates and 12m PT.

please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632

Above views are of the author and not of the website kindly read disclaimer