Credit Analysis & Research (CARE) - ICICI Securities Fundamental Top Picks for 2015

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Credit Analysis & Research (CARE) Target Price: | 2175 (53% upside)
• CARE, the second largest company by market share, is a pure play on the
rating business with ~99% (| 230 crore) of its FY14 core revenue
generated from the rating segment. The highlight of CARE’s business is
its best-in class EBITDA margin of 60%+ and PAT margin of 50%+. The
business model is asset light in nature with not much capex (| 10-15
crore) while it generates strong operating cash flow. Post its listing, the
dividend payout ratio has improved from 30% (FY12) to 63% (FY14). We
expect this to grow to ~73% by FY17E. Considering the improving
economic outlook with the expected upturn in the investment cycle,
peaking of interest rates and gradual & structural development of the
bond market we have factored in 18% PAT CAGR in FY14-17E to | 210
crore vs. 12% CAGR seen in FY11-14
• In 1993, CARE was the third credit rating agency (CRA) to be incorporated
in India. However, it gained significant ground to become second largest
CRA by revenue post FY09. It clocked 50% revenue CAGR in FY08-11 vs.
30% by peers. CARE is strong in bank loan rating (BLR) & bond market
while it does not have a significant presence in SME space as of now. We
expect it to maintain its revenue market share of ~28%, going ahead
• CARE’s strong margins can be attributed to i) relatively lower employee
cost ii) high proportion of large ticket bank loans & bonds (high margin
business) and iii) offices being largely owned saving on lease cost. Going
ahead, margins are expected to decline from 64% in FY14 to 62% by
FY17E owing to a rising focus on the low margin SME business and
mainly due to expected rise in staff costs
• CARE has emerged as a strong player in the rating business with strong
margins and improving market share with best brand recall after Crisil. It
is trading at a discount to the consolidated business of Crisil & Icra. If we
just consider Crisil’s core rating business, CARE, trading at 20x FY17E
EPS, is at a steep discount to Crisil’s ~60x multiple. The company has
strong RoE of 27% for FY14 and potential to further enhance it to 46% by
FY17E. We value CARE at 30x FY17E EPS (~50% discount to Crisil’s core
rating business multiple) and arrive at a target price of | 2175