CARE: Bonanza for existing shareholders, says V S Fernando

The Offer
Nine existing shareholders of CARE namely IDBI Bank , Canara Bank , SBI , IL&FS , Federal Bank , Tata Investment , ING Vysya , ILFS Trust and Milestone Trusteeship offer for sale a part of their holdings aggregating to 71,99,700 shares which constitute 25.2% of the company’s equity capital of Rs 28.55 cr. Not more than 35,99,850 shares are earmarked for QIBs. Not less than 10,79,955 shares are meant for Non-Institutional category and not less than 2,519,895 shares are reserved for Retail investors. The offer is being made through book building route with a price band of Rs 700 to Rs 750. Investors should apply for a minimum of 20 shares and multiples thereof.

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Issue ObjectThe objects of the IPO are to carry out the sale of 7,199,700 equity shares by the selling shareholders and to achieve the benefits of listing the shares on the Stock Exchanges. The company will not receive any proceeds from the offer, and all proceeds shall go to the selling shareholders.

OFFER AT A GLANCE
Name	Credit Analysis and Research Ltd
Offer for Sale Quantity	71.99 lakh shares of Rs 10 each
% on Total Equity	25.2%
Offer Price	Between Rs700 and Rs750
Offer Amount	Between Rs504 cr and Rs540 cr
Application Quantity	20 & Multiples of 20
Offer Opens	December 7, 2012
Bid/Offer Closes	December 11, 2012
Lead Managers	Kotak, DSP Merrill, Edelweiss,
	ICICI Sec., IDBI Cap., SBI Cap.
Registrars	Karvy Computershare

BackgroundIn India, the first credit rating agency, Credit Rating and Information Services of India Limited (CRISIL), was set up in 1987. A second rating agency, ICRA (then known as Investment Information and Credit Rating Agency of India Limited) was established in 1991 and a third agency, Credit Analysis & Research Ltd (CARE), was established in 1993. Duff and Phelps Credit Rating India which started its operations in 1996 was renamed Fitch Ratings India in 2001 and renamed again to India Ratings and Research in 2012. Brickworks Ratings India (Brickworks) began its rating business in 2008. SME Rating Agency of India (SMERA) also began its rating business in 2008.

In the initial stages the rating agencies faced several challenges as the corporate debt market in India was nascent. In 1992 credit rating became mandatory for the issuance of debt instruments with maturity of 18 months and above. Subsequently, the RBI guidelines made rating mandatory for issuance of commercial paper. RBI also made rating of public deposit schemes mandatory for NBFCs. Since then credit rating has made rapid strides in terms of the number and value of instruments.

At end of fiscal 2012 CARE was reportedly the second largest rating company in India in terms of rating revenue.  Besides offering a wide range of rating and grading services across a diverse range of instruments and industries, CARE also provides general and customized industry research reports. Since incorporation in April 1993, the company claims to have completed 19,058 rating assignments and have rated Rs. 44,03,603 cr of debt and had rating relationships with 4,644 clients as of September 30, 2012.

Parentage

CARE does not have a perceivable promoter. It is being run as a professionally managed company with a Board of Directors comprising a majority of independent directors. It has about 30 shareholders who include domestic banks and financial institutions, such as IDBI Bank (25.79%), Canara Bank (22.81%), SBI (9.61%) and IL&FS (8.99%). The shareholding of the above four will be reduced from 67.2% to around 45% post-offer.

Track & ProspectsCARE’s business has grown consistently since incorporation and the company has paid dividends from its first full year of operations. As regards recent performance, the company’s standalone revenue increased from Rs. 55 cr in fiscal 2008 to Rs. 217 cr in 2012 at a CAGR of 41%. Profit after tax has increased from Rs. 26.68 cr to Rs. 115.70 cr at a CAGR of 44% during this period. Earnings per share for the last fiscal worked out to over Rs 40 of which Rs 10 was distributed as dividend. Until FY11 the company had paid a maximum dividend of Rs 6.50 (65%).

Demand for rating services is driven by overall capital mobilization in the economy particularly from the debt markets (corporate bonds and commercial paper or other market linked short term instruments). Since rating service industry prospects largely depend on economic growth, given the current scenario, CARE may find it difficult to maintain its recent revenue growth and profit margin.

ValuationFrom a valuation perspective, CARE’s offer at the lower end of the price band (700) itself discounts its FY12 EPS and Book Value 17.3 times and 5.3 times respectively. As compared to CRISIL and ICRA, CARE may perhaps look cheap. Nonetheless, the rating companies’ current discounting is too steep to sustain when market turns ease. At the current dividend base, the lower price band would fetch a yield of less than 1.5%.
How CARE compares with Peers & Market on trailing 12-month standalone basis.

SCRIP	NOS.	M-CAP	P/E	P/BV	P/FV	P/R	YLD	PRICE
(Unit)		(Rs Cr)	(X)				(%)	(Rs)
CRISIL	1	7,064	36.2	14.0	1006.8	9.7	2.0	1007
ICRA	1	1,432	24.5	4.7	143.2	9.9	1.2	1432
Rating Composite	2	8,496	33.6	10.5	499.2	9.7
Market Composite	3032	6,750,157	16.0	2.2	30.9	1.3
CARE	Hi-Band	2,141	18.5	5.7	75.0	9.9	1.3	750
	Lo-Band	1,999	17.3	5.3	70.0	9.2	1.4	700

Existing Investor-experienceNineteen years ago the existing shareholders invested at par. The company made two bonus issues 18:100 in March 2010 and 2:1 in September 2011. The bonus issues reduced the investment cost to less than Rs 3! In January 2006 the company itself bought back the shares from one of the shareholders at a price of Rs 52.

For the selling shareholders who have already earned fabulous dividend returns the current offer of sale is indeed a great bonanza. But, will the investors in the present IPO get such returns in the years to come? Well, if future return is likely to be as attractive as the past, if not more, why should the existing major shareholders dilute their stake?