Credit Analysis and Research Limited (CARE) is tapping the capital markets with its IPO which opens on Friday the 7th of December and closes on Tuesday the 11th of December. The IPO is an offer for sale by nine entities and would be for a total of just under 72 lac shares. The issue price band is Rs 700-750 and would raise Rs 540 crs at the upper end of the price band. The company has allotted 22 entities a total of 10.8 lac shares through the anchor allocation at the top end of the price band of Rs 750.

Business

CARE is a leading, full service credit rating company in India, and for the year ended March 31, 2012, was the second largest rating company in India in terms of rating turnover. CAREoffers a wide range of rating and grading services across a diverse range of instruments and industries. It also provides general and customized industry research reports. Since incorporation in April 1993, it has completed 19,058 rating assignments and has rated Rs. 44,036.03 billion of debt as of September 30, 2012. Care has rating relationships with 4,644 clients as of September 30, 2012.

Care operates as a professionally managed company with a Board of Directors comprising a majority of independent directors. It has an internal rating committee comprising senior executives from the Company and an external rating committee, which comprises a majority of independent members. The rating committees are the final authorities for assigning ratings on behalf of CARE. It strives for the following values:

Integrity and transparency: A commitment to be ethical, sincere and transparent in our dealings;


Pursuit of excellence: A commitment to strive relentlessly to constantly improve ourselves;

Fairness: Treat clients, employees and other stakeholders fairly;

Independence: We take pride in our independence, are unbiased and fearless in expressing our opinion; and

Thoroughness: We endeavour to do rigorous analysis using advanced techniques of research on every assignment that we undertake.

The company has an established presence in rating debt instruments, bank loans and facilities. It has domain experience across a range of sectors. It has a strong rating credibility and brand presence. It is promoted by banks and is an Indian rating company against being the Indian arm of a foreign rating agency having an Indian arm. The other two listed companies from this sector are CRISIL and ICRA. CARE has a strong rating credibility and brand presence. To strengthen its case CARE has published from 2007 default and transition studies evaluating the performance of its ratings. CARE has strong origination capabilities and relationship management. The company since inception has completed over 19,000 rating assignments and has a relationship with over 4,600 clients. Being an Indian entity promoted company CARE is allowed to expand to other countries as well. This is different from other companies in the same space.

Objects of the Issue

There is no fresh issue of shares and comprises of only an offer for sale. Therefore there would be no funds which would accrue to the company. Listing would however offer benefits to the company as it would provide a public market for the shares of the company. Secondly a listed entity enjoys a pride of place in the community and also offers multiple choices of using the shares as currency for acquisitions and mergers. Secondly it would be of interest to readers to note that other than listing fees and some portion of advertising expenses, all other expenses would be borne by the selling shareholders in proportion to the shares offered for sale.

Selling Shareholders

The selling shareholders in the issue are as follows:-

Financials

CARE has a very profitable business with very high margins which could be said to be better than the industry. The financials given below are the stand alone numbers as the consolidated are available only for one and a half years. There is hardly any difference in the same and they can be ignored.

The results for the company clearly show that the organization is a lean mean and fir one. Compared to their competitors there cost of manpower is significantly lower on two counts. CARE is promoted by Indian entities and hence they have no international employees or expats or international salaries. Secondly being in the business where they are not an associate of somebody else they have been able to outsource low end work to their own associates and reduce costs significantly. All of this is reflected in terms of bottom line and higher margins.

CARE reported a net profit of Rs 856.90 million in the year ended March 2010 which has risen to Rs 1,157.02 million in the year ended March 2012. It has fallen in the six months ended September 2012 to Rs 500.49 million

Track Record of Merchant Bankers

CARE has a total of six merchant bankers.
The track record of each of these merchant bankers is given in brief.

1. Kotak Mahindra Capital Company Limited.  Of the total 14 issues handled by them, 4 are trading at a discount after 30 days while 10 are trading at a premium
2. DSP Merrill Lynch. Of the total 4 issues handled by them, 2 are trading at a discount after 30 days while 2 are trading at a premium.
3. Edelweiss Financial Services Limited.Of the total 8 issues handled by them, 3 are trading at a discount after 30 days while 5 are trading at a premium.
4. ICICI Securities Limited. Of the total 11 issues handled by them, 10 are trading at a discount after 30 days while just 1 is trading at a premium.
5. IDBI Capital Market Services Limited. Of the total 7 issues handled by them, 4 are trading at a discount after 30 days while 3 are trading at a premium.
6. SBI Capital Markets Limited. Of the total 9 issues handled by them, 7 are trading at a discount after 30 days while 2 are trading at a premium.

The track record of the merchant bankers as a whole leaves a lot to be desired. However the comfort of the investors is the track record of CARE and its comparative valuations to CRISIL and ICRA.

Comparisons

There is direct comparison with two other listed entities, CRISIL and ICRA. CRISIL for the last balance sheet for the year ended December 2011, reported consolidated net revenues of Rs 8,271.88 million and net profit of Rs 2,064.15 million corresponding to an EPS of Rs 28.98. The PE based on the closing price of Rs 1,023 of 6th December is 35.30. The other quoted company is ICRA which reported consolidated net revenues of Rs 2,074.62 million for the year ended March 2012. Its EPS was Rs 54.01. The PE based on the closing price of 6th December of Rs 1,383.90 was 25.62.

Valuations

CARE is offering share through it’s for sale in a price band of Rs 700-750. Based on year ended March 2012 results, the EPS is Rs 40.52. The PE based on the lower price band of Rs 700 is 17.27 while on the upper price band of Rs 750 is 18.51. The share offers scope for appreciation and is well placed when compared to its peers CRISIL and ICRA.

Concerns

The business model of CARE is that the rating agency charges its fees from the corporate and the ratings are free to the user like the banks and financial institutions. There are always concerns raised about this model but there are adequate safeguards in the system to prevent any abuse of the same. Secondly time and again one hears that banks would start rating their customers themselves. Though the possibility of something like this ever happening cannot be totally ruled out it is a more cumbersome process than the existing one. This is so because the same customer/client uses multiple banks and financial institutions and in the new system each one would have to rate the client leading to increased costs and cumbersome process.

New SEBI allotment norms

SEBI has introduced a set of new allotment norms for retail investors. In short the new rule simply states that the minimum lot which has been revised from the earlier Rs 6000-7500 to Rs 12000-15000, would have to be allotted to each applicant before allotting surplus shares if any to investors who have applied for higher number of shares. In the case of CARE the minimum lot is 20 shares and the total number of shares in the retail category is 25,19,895 shares which means that as long as there are 1,25,995 application in the retail category for 20 shares each, the retail portion would be fully subscribed and every applicant would be given 20 shares. Looking at the response to the issue it is certain that there would be more than 1.26 lac applications and the allotment of minimum 20 shares per applicant would also be made by lottery. It therefore makes no sense to apply for anything more than the minimum lot of 20 shares in this category.

It is also an irony that SEBI is talking of socialism in the Capital Markets. One hopes this system is replaced by the one which existed earlier. In the case of CARE I would not be surprised if there are more than 4 lakh applications in total.

Conclusion

There is plenty of scope in the business of ratings. The age old system of the company paying a percentage of the size of the loan for which it wants a rating would continue. In times of stress in the economy, new business becomes tough but banks require better control on loans and hence insist on more updates and corporates require to be tuned to capitalise on lower interest rates through better and improved ratings. CARE is one of six rating companies in the country currently but is well placed and enjoys a decent standing. It is held in good esteem and its parentage continues to be a source of strength and a good position globally because it is not backed by any international agency.

SEBI Disclaimer : – I intend to apply for the issue.