CARE IPO [Subscribe to this issue] - HBJ Capital

• 1. CARE Ratings Ltd- A Quality Stock at Affordable Price

2. CARE Ratings IPO Investment SnapshotBusiness Quality :- Sector : Rating Services.Industry Rank : No-2 after CRISIL.Valuation Grade :- Neither Cheap Not CostlyIssue Details :-Recommendation :- Subscribe to the IssueOffer Price Band Rs. 700 Rs.750Maximum Portfolio Allocation :- 5 %Issue Opens on :7th Dec,2012Investment Phases & Buying Strategy1st Phase (Now) of Accumulation :- 75%Issue Closes on :11th Dec,20122nd Phase (After Listing ) :- 25% Issue Size : 0.72 Cr SharesIn Case, if we are able to accumulate the Stock Min Lot Size : 6 Sharesat Lower Prices after listing.Price Band: 700- 750Key IPO Advice :Post Issue Market Capitalization : 1999 2141 CrIts difficult to predict, it there would be any ListingGains. But our Research clearly shows that CARE Issue Lead Managers : Kotak, BOAML, Edelweiss,Ratings is a High Quality company with structural ICICI Securities, IDBI Capital , SBI Capital MarketsGrowth opportunities led by a Good ManagementListing : NSE,BSETeam. Considering the Long term potential of the Stock,we advise our Clients to subscribe to this Issue. Face Value Rs. 10 Specialists in discovering Multibagger stocks 3. Key Highlights Value Creating BusinessRatings as an Industry is consolidated and less capital Intensive leading to StrongValue creation for Share-holders. Incremental Returns tend to be strong and Competent possibility of new Players is low.Management Strong Positioning Management has shown exception CARE is well positioned with aability in Executing their plans. With dominant No:2 Positioning in Indiana stable management combined Ratings market with a large Share ofwith a Good Culture, we expect theCAREIPO Grading, large Corporate Debt Company to continue performing etc. Companys backing of PSUwell going forward.Ratings banks also adds to its advantage.Structural GrowthRobust Financials Opportunities CARE has a strong Low cost Research Ratings Industry has a lot of growth team which can be seem from its abovedrivers led by Increasing Financialaverage Margins. Company also has a Products, Deepening Debt markets, Credit very strong Balance Sheet which enablesGrowth, Specialized Ratings, Research it to grow inorganically. All FinancialAnalytics, Risk Management solutions, Parameters are robust. Global Expansion etc. Specialists in discovering Multibagger stocks 4. Debt & Corporate Bond Growth OpportunityVolume of Debt (Rs in crs) FY09FY10 FY11 FY12Bank Facilities (Basel II) 388948 354657 519862 678821Fixed Deposits10003052 12420Commercial Paper 904351489838880152522Debentures/ Bonds110683 146008 196973 195518Others 00 00Total591066 652700 806878 926861No of assignments793184 950743 10938941174901Ticket size (Rs in crs)374 361369155Rating income 93 136165188 Ratings Income are directly linked to the Credit Growth in the country. With Indian economy expected to expand its Credit consistently at over 15% for the next several decades, the opportunity for CARE to grow is very huge. Indian Corporate bond markets are still not mature with very little Retail participation. But deepening and strengthening this market is one of the key priority of Government. With this, the Growth opportunity for Ratings companies in India is large. Specialists in discovering Multibagger stocks 5. Durable Moats CARE is the second biggest rating agency in India on terms of turnover after CRISIL. The company offers awide range of rating and grading services across Industries namely manufacturing , services , banks andinfrastructure. Ratings business in itself has a lot of In-Built moats in the form of Client Relationships, BrandName, Research team etc. The products from the CARE stable include SME ratings, MSE ratings, Edugrade, Real Estate, Market linkeddebenture valuation and IPO grading. A strong and growing analyst team with strong research capabilities. CAREs moats comes from its Strong Client relationships combined with low cost Research team based ourof its Ahemdabad centre. This can be seen from the above average Growth Rates and EBODTA performanceof CARE Ratings. CARE promoters mainly include strong PSU banks. This in itself gives a lot of scope for the company to holdon to its position in the Indian debt markets. While it doesnt have the Global parentage of other two ratingsagencies, it does have the support of Strong Financial Institutions. Specialists in discovering Multibagger stocks 6. Strong Growth CARE has strong and robust financial performance with revenues growing at a CAGR of about 38% duringFY08-FY12 apart from having the highest margins in the industry. Companys foray into international market through Joint venture with local credit rating agency todiversify revenue stream . CARE has a credible track record of rating services with strong clientele base ofabout 4644 clients. CARE also has demonstrated Strong Execution capabilities in all new Business Segments. It has almost 49%Market Share in IPO Grading. This clearly shows the Managements ability to look for Growth areas andcapture them leveraging their Strengths. CARE Ratings has very low share of SME Ratings and there is tremendous scope for Growth in this Area.Also with its Research, Consulting segments contributing negligible amount of revenues, they have thepotential to grow strong over the next decade. Specialists in discovering Multibagger stocks 7. Healthy Financials FY 12 ROE % Company has strong ROE of about 42% inFY12 slightly lower than Crisil which was slightlyhigher at 44%. However, the ROE is higher thanthe Industry Average of about 33%. During Fy12 the company recorded a PBT of74% which is way ahead of its peers as well PBT Marginsas the industry. CARE reported a PAT margins of 53% in FY12which was ahead of its peers Crisil and ICRAwhich reported PAT margins of 35% and 26%respectively. CARE has consistently reported strong returnratios ahead of its peers and industry due to PAT Marginsvery low contribution from SME segment andalso due to higher revenues from high marginrating services. CARE has a very strong Balance sheet with nildebt and good Investment reserves. Specialists in discovering Multibagger stocks 8. Income StatementFinancial Parameters (INR Cr) FY 09FY 10 FY 11 FY 12Operating Income 94136 166 189 Robust Economic growth has enabled the company toOther Income 6 166 28achieve 5 year revenue CAGRTotal Income 100 152 172 217 of 38% from FY08-FY12.Employee Benefit Expenses15.321.630.841.1 Predominant contributionOther Expenses 5.9 6.8 9.9 12.7from ratings business is likely toDepreciation 0.8 1.4 2.2 1.9 continue in the medium term which is likely to help theImpairment of Fixed Assets 0.2 0 0 0 company maintain robustOperating Expense22.229.842.955.6EBITDA margins.Profit After Tax (PAT) 52.485.787.9115.7 Company has a very strong ROE and this is expected toDiluted EPS18.40 30.030.840.5 sustain going forward due to the nature of the business.Dividend per Share 4 5 6.5 10 Company continues to grow itsBook Value 171.6 224.3 309.2 132.0 EPS very strongly as there will be very little Dilution in future.Return on Equity (%) 48493534Return on Assets(%)40.242.630.330.3 Specialists in discovering Multibagger stocks 9. Attractive ValuationsPeer Performance in FY12 CARE Crisil*ICRARevenues(In Rs.Cr) 189807 207.5EBITDA(In Rs.Cr)135.3262.5 62.5PBT(In Rs.Cr) 161.6275.4 79.2PAT(In Rs.Cr) 115.7206.5 53.9Networth(In Rs.Cr)376.8413.3301.6EBITDA Margins (%)71.6 32.530.1EBIT Margins(%) 70.6 28.827.9PAT Margins(%)53 3326ROE (%) 42 4421EPS 41 2851Book Value 132 59 302PE18.5 36.927.5P/BV 5.4 17.3 4.6*Data for CY11 . It is clear that CARE is available at attractive Valuations compared to its two listed Peers ICRA and CRISIL. Its Quotes at more than 25% discount to its Peers. While CRISIL is a market leader with a Strong Global Parent, ICRA is below CARE in terms of its revenue size, EBIDTA, Market Share etc. This wide Valuation gap would probably converge with good Listing gains from CARE IPO. Or else even a correction in the Share Prices of Peer companies will help in Valuations converging. We believe the Quality of the business is much superior to ICRA and just a tad below CRISIL and hence the huge discount in its Valuation will be bridged. Specialists in discovering Multibagger stocks 10. Concerns & Reasoning1.) Business Concentration:CARE ratings primary business consists of providing rating services for debt instruments and bank loansand facilities in the Indian market. During the Year FY12, the company derived around 86% of its revenuesfrom rating services which exposes the company s revenues to concentration from a single segment.However, the company is increasing its product portfolio and diversifying into other geographies tomitigate the risk.2.) Impact of lower GDP growth :Rating business is highly correlated with credit growth in the economy. Any deterioration in the macroenvironment such as GDP growth , Credit growth , Interest rates and global macro environment willimpact the debt market which will in turn result in lower demand for rating services thereby impactingthe companys revenues and profitability.3.) Banks migration to IRB approach:The IRB approach will allow the banks subject to RBI approval use their own internal estimates for someor all of the credit risk components in determining the capital requirement for a given credit exposure. Ifthe banks whose clients avail credit rating services under Basel II framework migrate to the internalrating based approach for credit risk it could adversely impact the companys business. But companysability to work on Large consortium funding will limit the downside. Specialists in discovering Multibagger stocks 11. ConclusionWhile Real Valuations may not be cheap, we believe the companys above average Quality will ensurethat the company continues to quote at Premium Valuations. Companies with Strong Financials, GrowthOpportunities, Good Management and Share Friendly business model are very rare. Hence, we believe thatInvestors must clearly subscribe to this IPO.Quality companies in Indian Stock market continues to be pretty low and if Investors are able to build astrong Portfolio of Good Businesses, they returns generated out of it will be much greater than any otherPeer Asset class. This Ratings company will continue to hold dominating position in the Indian financialmarkets and thus piggybacking on Indias Growth story.As Warren Buffets Golden quote says, Its better to buy Great Businesses at Good Prices rather thanGood Businesses at Great Prices. We believe CARE Ratings is one such Great business which Investorscan accumulate not just during its IPO but also after listing. While there are a few Headwinds, we believethe company will be able to overcome those challenges and generate Good returns for Share-Holders. Specialists in discovering Multibagger stocks 12. Sit back and Relax while your Money works Hard for you! Get Your Owncustomized portfolio based on your Needs !Click on the image below to know more about our PersonalizedWealth Management service for HNI Clients, For additional Details, Call us - +91-9886736791 13. THANK YOU Specialists in discovering Multibagger stocks