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Re-rating driven by strong earnings visibility
 

Domestic Ratings - On strong growth trajectory

Besides the industry tailwinds, CARE’s consistently improving growth performance
over the past three years (4% in FY22, 14% in FY23/24 and 19% in H1 FY25) reflects
a) strengthening and sharpening of ratings process, b) augmentation in quality of
resources and improved retention of talent (attrition has substantially declined), c)
significant increase in intensity of customer outreach and marketing, d) emerging
efficiencies from reorganization of business development vertical (from a geographic
structure to sector-specific approach), e) healthy growth in active customer base since
FY23 and f) an effort for better pricing of new mandates. Company has held its
significant position in Bank Loan Ratings and is gaining credibility in Bond Ratings
segment. CARE’s revenue growth has been better than ICRA in recent quarters.

CARE could gain further share/penetration in Bond Ratings segment with strong ratings
performance (reflected in latest 5-year ATR and ADR) and strengthened outreach and
business development activities. Reorganization of business development vertical from
the start of FY23 has aligned interest/focus and is translating into stronger growth is
some segments/markets. Company has started to push for surveillance fee
improvement in accounts who are not regular issuers and is renegotiating fee
caps/structures with some large issuers. Improved ratings accuracy and acceptability
should enable these pricing efforts to fructify.

In the domestic market, the adoption of ESG Ratings has been slow. CARE has
completed one comprehensive ESG Ratings assignment and is having a few in pipeline.
It has chosen an issuer-pay model for ESG Ratings. The growth/revenue addition from
this business would be contingent on adoption, regulatory push, and competitive
intensity (many players unlike in credit ratings).

Non-Ratings Businesses - Positive traction in revenue and margins
Since FY24, there has been persistent uptick in non-Ratings revenue (Analytics and
Advisory) on the back of greater management focus, strengthening and market
introduction of products and augmentation of business development activity. The
revenue share of non-Ratings entities has increased from 6% in FY23 to 10% in H1
FY25. The Advisory & Consulting business in benefitting from brisk traction in ESG
advisory and DRHP/IPO related research, and its profitability has improved in the
current year after breaking-even last fiscal. In Analytics, besides products for ALM,
IFRS, Credit Risk Management, etc. for Banks and NBFCs (inside and outside India),
CARE is also evaluating offering services like model validation. This business is
expected to break-even in FY26. Management aspires to improve the revenue
contribution of non-Ratings businesses to 20% over the next 3-4 years.

EBITDA Margin - Significant secular expansion likely
CARE’s EBITDA margin (excl. Other Income) would significantly improve over FY24-27
with operating leverage in Domestic Ratings and substantial improvement in margins
of non-Ratings businesses. In H1 FY25, company’s EBITDA margin was 200+ bps higher
on yoy basis owing to reduction in losses of non-Ratings businesses. With high focus
on ratings quality and rigor, management intends to utilize a significant portion of
operating leverage gains in ratings business for employee compensation benchmarking,
talent retention and technology investments. The likely decline in revenue contribution
of significantly-more-profitable Ratings business could limit the overall margin
expansion by some extent.

We expect 18%/23%/21% CAGR in consolidated Revenue/EBITDA/PAT over FY24-
27. While Domestic Ratings business can likely grow at 15-16% pa (without significant
scale-up of ESG ratings), the non-Ratings businesses can keep growing at brisk pace
on a benign base enabled by the growth investments incurred. Consolidated EBITDA
margin could expand by 300-400 bps over FY24-27, causing a large RoE improvement
notwithstanding further accumulation of Cash & Equivalents. We retain constructive
view on CARE with an ADD rating and have raised earnings estimates by 4-6% and
one-year price target to Rs1630.

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