Credit Analysis & Research (CARE) 1310

Transcription

1 Result Update Rating matrix Rating : Buy Target : 17 Target Period : 12 months Potential Upside : 3% What s changed? Target Changed from 2 to 17 EPS FY16E Changed from 46.1 to 45.9 EPS FY17E Changed from 58.8 to 56.9 Rating Unchanged Quarterly performance Q2FY16 Q2FY15 YoY (%) Q1FY16 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT (27.8) Key financials (%) FY14 FY15 FY16E FY17E Revenue EBITDA Net Profit EPS Valuation summary FY14 FY15 FY16E FY17E P/E Target P/E Mcap to sales Dividend yield Price/BV RoE Stock data Particulars Market Capitalization 3816 crore Total Debt NIL Cash & Cash Equivalents ( Crore) 338 crore EBITDA Margin Q2FY16 (%) week H/L ( ) 188 /15 Equity capital 29. Face value 1 DII Holding (%) 46.4 FII Holding (%) 3.2 Price performance Return % 1M 3M 6M 12M CARE Crisil ICRA Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com November 3, 215 Credit Analysis & Research (CARE) 131 Near term growth visibility remains muted Reported rating revenues were at 77.7 crore vs crore expected. Traction was lower at 5% YoY compared to higher traction seen in Q1FY16. On a QoQ basis, traction was higher at 62% owing to large part of surveillance fee income being booked in Q2 Lower-than-expected revenue traction can be attributed to lower traction in the bank loan rating segment owing to subdued banking system credit growth. Further, stagnation in SME rating revenues continued due to MSME ministry lowering budgetary allocation for subsidising rating fees of SMEs Other income was muted at 2.2 crore due to lower investible surplus and also most investments in FMPs are for a tenure of three years, income on which will be booked on maturity EBITDA came in at 55.7 crore while the EBIDTA margin was at 71.3%. PAT was at 37.9 crore (down 28% YoY) vs crore estimated. It declared interim dividend of 6 per share Second largest rating company CARE, the second largest rating company by market share, is a pure play on the rating business with ~99% ( 257 crore) of its FY15 core revenue generated from the rating segment. The highlight of CARE s business is its best-in-class EBITDA margin of 6%+ & PAT margin of 5%+. The business model is asset light with not much capex ( 1-15 crore) while it generates strong operating cash flow. Post its listing, the dividend payout ratio improved from 3% (FY12) to 63% (FY14), which can grow to 72% by FY17E. PAT traction has moderated with bank credit growth slowdown impacting rating revenues. An upturn in capex cycle and development of bond market is required for healthy revenue traction. We have factored in PAT CAGR of 8% (vs. 11% earlier) in FY15-17E to 165 crore. Exhibiting capability to grow relatively faster since 28 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 FY9. It clocked 5% revenue CAGR in FY8-11 vs. 3% by peers. CARE is strong in the bank loan rating (BLR) and bond market while it has an insignificant presence in the SME space as of now. We expect it to maintain its rating revenue market share of ~29% ahead. EBIDTA margin among best in rating industry CARE earns best margin among rating agencies with 63% EBITDA margin and 55% PAT margin in FY15. These strong margins can be attributed to i) relatively lower employee cost ii) high proportion of large ticket bank loans & bonds (high margin) and iii) offices being largely owned saving on lease cost. While EBIDTA margin improved from 69.4% in Q2FY15 to 71.3% in Q2FY16, PAT margin was down from >5% levels to 48.4% due to lower income from investments. Margins are expected to moderate with rising focus on low margin SME business and rise in staff costs. Revenue, PAT traction lowered; maintain BUY but revise TP lower CARE emerged as a strong player in rating business with strong margins and improving market share with best brand recall after Crisil. The company has strong RoE of 39% for FY15, which is expected to be maintained by FY17E. We have lowered our EPS estimates over FY16 & FY17E by ~3% as we cut our rating revenues estimates and factored in lower other income. However, we are structurally positive on the rating business in next three to five years. We maintain target multiple of 3x FY17E EPS but reduce TP to 17 and maintain BUY. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q2FY16 Q2FY16E Q2FY15 Q1FY16 YoY (%) QoQ (%) Comments On a QoQ basis revenue traction looks strong as seasonally Q2 quarter has Net Sales higher surveillance income. Expenditure Employee Expenses Employee expenses were lower QoQ as the company reduced staff to ~58 from 627. Most of the reduction was in the SME space. As % of revenue Other Expenses As % of revenue Total Expenses As % of revenue EBITDA EBITDA Margin bps 2141 bps EBITDA margin came in higher-than-expected, due to lower than expected expenses. Other Income Other income declined 9% from 22.7 crore in Q2FY15 to 2.2 crore in Q2FY16 mainly because of the rollover of sizeable investments in fixed maturity plans (FMPs). The income from these FMPs will be booked in the year of maturity Depreciation + interest exp PBT Taxes Tax was higher-than-expected PAT PAT was lower than estimated largely owing to reduced revenue and lower other income PAT Margin bps 1236 bps Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Net Sales EBITDA EBITDA Margin % bps bps PAT EPS Assumptions Current Earlier FY14 FY15E FY16E FY17E FY16E FY17E Revenue growth (%) Staff expenses to revenue (%) Total expenses to revenue (%) EBITDA growth (%) EBITDA margin (%) Tax rate (%) PAT growth (%) PAT margin (%) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Gaining market share Almost entire revenue of CARE is derived from the rating business unlike Crisil and Icra that derive 37% and 58%, respectively, from the rating business. Within the rating business, CARE is mainly active in the bank loan rating (BLR) segment (6% of fresh debt volume rated, 63% of the fresh assignments and ~52% of rating revenues in FY15) followed by corporate debt rating (CDR). It is still at a very nascent stage in SME rating. Going ahead, we expect the BLR and bond market segment to drive overall rating revenue growth. SME segment expected to be muted in FY16E owing to reduction in budgetary allocation towards subsidising rating fees of SME s to 26 crore from 85 crore earlier. CARE is mainly active in the BLR segment. It derives 6% In terms of rating revenues, the company remained the third largest rating of fresh debt volume rated, 63% of the fresh assignments agency for most years since its incorporation. However, implementation and ~52% of rating revenues from the BLR segment of Basel II guidelines in FY8 helped in increasing rating volumes for rating agencies, in general, and proved to be a game changer for CARE, in particular. In the past six years, CARE has outpaced the industry in terms of rating revenue CAGR. It witnessed a CAGR of 28% over FY8-14 vs. 22% for all three rating companied combined. Exhibit 1: CARE consistently second largest rating agency by revenue since FY9 ( crore) CARE has grown at 35% CAGR while Crisil and Icra have grown at 3% CAGR and 23% CAGR, respectively, over FY CARE climbs to second spot in terms of revenue market share FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY Crisil CARE Icra Exhibit 2: CARE has been gaining market share; expect it to maintain its second slot 12. (%) FY9 FY1 FY11 FY12 FY13 FY14 FY15 Crisil (Ratings business) Icra CARE ICICI Securities Ltd Retail Equity Research Page 3

4 Quarterly revenue performance Exhibit 3: Rating revenue traction reduced in Q2FY16; expect 13% CAGR over FY15-17E ( Crore) FY9 FY1 FY11 FY12 FY13 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 FY16E FY17E (%) Rating revenues Growth (RHS) During Q2FY16, volume in BLR was up 6%YoY to 124 crore while the same in debt market instruments stood at 97 crore, up 31.1% YoY. Overall volume of debt rated was up 13.7% YoY to 241 crore n Q2FY16. However, the same traction was reflected in rating revenue which stood at 78.2 crore, up 5% YoY. The non linearity in the traction of volume rated and rating revenues is due to fee cap on certain clients which are charged at particular fixed rate irrespective of increase in volumes. Going ahead, with the expected improvement in GDP growth and likely decline in interest rates, we believe the volume traction in both BLR as well as CDR segment should be better than that witnessed in the past two or three years Among rating agencies, CARE has managed to earn superior EBITDA margins of ~63% and PAT margin of 5%+ CARE s SME segment is low compared to peers (comprising ~5.5% of revenue). Though the company was focused on improving the SME rating revenue proportion by increasing the locations and hiring employees, we believe the segment s contribution would decline, going ahead. This is due to a reduction in budgetary allocation towards subsidising rating fees of SMEs to 26 crore from 85 crore earlier by the MSME ministry. Going ahead, expect revenue traction of 13% CAGR over FY15-17E As stated above, the company has grown its rating revenues at 26% CAGR to 257 crore over FY8-15. However, growth has moderated considerably in the past three years at 13% CAGR during FY12-15 in line with the slowdown in the economy and credit growth. Overall, rating revenues of CARE are estimated to grow at 13% CAGR to 33 crore over FY15-17E. The focus would be on expanding the CDR segment whose proportion in terms of volumes of debt rated and rating revenue would increase. However, the BLR segment would continue to remain the key segment for at least the next few years. This is owing to expected improvement in GDP growth and likely decline in interest rates that may lead to improved volume traction than witnessed in the past two or three years in both BLR and CDR segments. PAT margins to moderate but to continue to stay best in class. Limited competition in the rating industry and pricing power enable rating agencies to earn healthy margins. Even among rating agencies, CARE has managed to earn superior EBITDA margins of ~63% and PAT margin of 5%+. Going ahead, we are factoring in a dip in PAT margin from 54.6% in FY15 to 5% by FY17E. This is due to the lower other income expected in FY17E. ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 4: Although dipping margin look lucrative 9 (%) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E EBITDA margin PAT margin EBITDA growth to remain healthy In the past four years, owing to a substantial decline in EBITDA margin from 76% in FY11 to 63% by FY15, the EBITDA traction fell to 6% over FY Going ahead, we expect it to grow at 16% CAGR to 217 crore over FY15-17E largely reflecting an improvement in the topline growth. Going ahead, we expect EBITDA to grow at 16% CAGR to 217 crore in FY15-17E. For Q2FY16, the calculated EBIDTA margin improved from 69.4% to 71.3% YoY. Exhibit 5: EBITDA growth to be healthy ( crore) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E (%) EBITDA EBITDA growth (RHS) SME segment may be additional leg up in long run but to remain subdued near term SME remains the growth area but is a low ticket size and low margin business. However, it is mainly the volume business for CRAs. At present, merely ~1,, SMEs among 3 crore SMEs has been rated in India. Hence, the current penetration is very low at ~.3%. In the SME rating space, Crisil is the leader. It rated ~12,857 SME instruments in FY14 compared to 147 by CARE and 1563 by Icra. An SME rating does not contribute much to the overall revenues of CARE at present. It has begun investing in manpower but is yet to enter the SME market at full throttle. Earlier in Q3FY15, the management reiterated about its focus on strengthening the SME rating segment. The company is present in 8 locations across the country and had plans to reach to 15 locations in ICICI Securities Ltd Retail Equity Research Page 5

6 the next two or three years with revenue from SME rating segment to rise to ~2% of total revenue over next few years from 7-8% currently. However, Q4FY15 proved to be dampener from the SME segment side owing to a reduction in MSME ministry s allocation towards subsidising rating fees by SME as explained earlier. Hence, we believe in the medium term the contribution from the SME segment may remain muted. Even H1FY16 continued the same trend of lower SME business. Enjoys healthy operating cash flows CARE generates strong operating cash flow of > 1 crore+ while on an average its capex is merely 4-5 crore each year Owing to the nature of its business, the capex requirement in the rating business is very low. In the past three years, CARE has incurred a capex of ~ 16 crore. To enhance revenue, the major expenses incurred, if required, are for increasing the employee strength (the cost of which is managed well by CARE compared to its peers) rather than for any major capex. Hence, CARE enjoys healthy operating cash flows. As on FY15, on a gross block of 69 crore, CARE garnered revenues of 257 crore and PAT of 14 crore. Potential for return ratios to scale up higher With limited capital requirement, the incremental profit growth is expected to further enhance return ratios. As discussed earlier, the dividend payout ratio is also expected to improve to ~73-74% by FY17E, aiding the improvement in return ratios. We expect CARE to report a RoE of 34% in FY16E and 39.5% in FY17E. The company has a cash and investment pile of > 3 crore, which may be utilised for acquisition, buyback or returned to shareholder in the form of dividend. The optimum utilisation of this investment pile is key to generate return ratios and shareholder returns from a long term perspective. Exhibit 6: Return ratios to improve, going ahead We estimate the return ratios to be maintained at healthy levels (%) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoE RoCE CARE earns decent return ratios with RoCE of 44% and RoE of 39% as on FY15, which are higher than Icra and lower than Crisil. From a long-term perspective, CARE has huge potential to improve its return ratios significantly as and when growth improves. Currently, the credit growth in the economy is sluggish and in line with modest GDP growth. As the economy revives, the credit and debt market volume levels would pick up, the impact of which would be reflected in improving sales and profit traction of CARE. As the business is asset light in nature, the major chunk of higher profits is expected to flow to shareholders in the form of dividend, thereby improving the return ratios significantly. ICICI Securities Ltd Retail Equity Research Page 6

7 Valuation CARE has emerged as a strong player in the rating business with strong margins and improving market share with best brand recall after Crisil. Currently, CARE is trading at ~35% discount to the consolidated business of Crisil and Icra. The company has strong RoE of 39% for FY15. We have lowered our EPS estimates as we cut the rating revenues and factor in lower other income. However, we are structurally positive on the rating business over the next three to five years. We maintain the target multiple of around 3x FY17E EPS but reduce the target price to 17 as we reduce our FY17E EPS by ~3%. Maintain BUY. CARE s major shareholders are Indian banks and financial institutions with no foreign partner compared to its other listed peers. Any interest on part of a strategic investor in the company would be an upside risk to our call. Exhibit 7: DuPont analysis; RoE expected to improve (%) FY13 FY14 FY15 FY16E FY17E PAT/Sales Sales/Asset Asset/Equity ROE Prospects for the rating business remain benign and CARE has proved its ability to gain market share in the rating segment along with maintaining best-in-class margins. Hence, we remain bullish on the stock from a long term perspective. ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot 2,5 Target price: 17 2, 1,5 1, 5 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Source: Bloomberg, Company, ICICIdirect.com Research Key Events Date Event FY5 Signs MoU with NSIC as approach rating agency for SSIs FY6 Launches new products such as rating of SMEs, SSIs, mutual funds, issuer rating and IPO grading FY7 Develops grading methodolgy for infra projects, ultra mega power projects FY8 Executes MoUs with 19 banks to provide rating facilities under Basel II framework FY1 Establishes CARE Knowledge Centre at Ahmedabad. Commences providing technical assistance to rating agency in Ecuador FY11 Acquires license to operate in Maldives. Launches new products including equigrade, ESCO grading, etc. FY12 Acquires 75.1% stake in Kalypto Technologies FY12 Acquires indirect recognition as an external credit assessment institution from Hong Kong Monetary Authority FY13 Comes out with IPO at 75 with objective to provide exit to existing investors FY15 Pays dividend of 71 in H1FY15 ( 65 per share special dividend in Q2FY15) Source: Bloomberg, Company, ICICIdirect.com Research Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Life Insurance Corporation of India 3-Jun Canara Bank Ltd 2-Oct Franklin Templeton Asset Management (India) Pvt. Ltd. 3-Jun Franklin Advisers, Inc. 31-Jul IDBI Bank Ltd 3-Jun State Bank of India 3-Jun Reliance Capital Asset Management Ltd. 3-Sep Bajaj Group of Industries 3-Jun Norges Bank Investment Management (NBIM) 3-Jun Russell Investments 3-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter..... FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares HDFC Standard Life Insurance Company Limited 8.33m.38m BNP Paribas Investment Partners Asia Ltd m -.49m Franklin Templeton Asset Management (India) Pvt. Ltd. 7.98m.36m Goldman Sachs Asset Management (Singapore) Pte. Ltd m -.2m Macquarie Funds Management Hong Kong Ltd. 7.5m.3m IDBI Bank Ltd -2.63m -.19m State Bank of India 3.24m.15m Driehaus Capital Management, LLC -2.5m -.14m Morgan Stanley Investment Management Inc. (US) 1.83m.1m Mellon Capital Management Corporation -.81m -.5m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore ( Crore) FY14 FY15 FY16E FY17E Net Sales Growth (%) Other Income Total Revenue Raw Material Expenses.... Employee Expenses Marketing Expenses.... Other operating expenses Total Operating Expenditure EBITDA Growth (%) Interest PBDT Depreciation PBT Total Tax PAT Growth (%) EPS Cash Flow statement ( Crore) FY14 FY15 FY16E FY17E Profit after Tax Add: Depreciation Cash Flow before WC changes Net Increase in Current Assets Net Increase in Current Liabilities Net Cash Flow from Operating Activities (Purchase)/Sale of liquid investments (Purchase)/Sale of Fixed Assets Net Cash flow from Investing Activities Proceeds from issues of Equity Shares One time adj. in P&L Appropriation Adj. in General Reserves Dividend and Dividend Tax Paid Interest Paid Net Cash flow from Financing Activities Net Cash flow Opening Cash / Cash Equivalent Closing Cash / Cash Equivalent Balance sheet Crore ( Crore) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Deferred Tax Liability Source of Funds Assets Total Gross Block Less: Accumulated Depreciation Net Block Total Fixed Assets Liquid Investments Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Application of funds Key Ratios FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV Operating profit per share Cash Per Share Operating Ratios (%) EBITDA Margin PAT Margin Return Ratios (%) RoE RoCE Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Sales / Equity Market Cap / Sales Price to Book Value Solvency Ratios (x) Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Banking & Financial Services) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Bank of India (BANIND) Sell 8, Bank of Baroda (BANBAR) Hold 35, Punjab National Bank (PUNBAN) Hold 23, State Bank of India (STABAN) Buy 178, Indian Bank (INDIBA) Buy 5, Axis Bank (UTIBAN) Buy 114, City Union Bank (CITUNI) 9 15 Buy 5, Development Credit Bank (DCB) Sell 2, Federal Bank (FEDBAN) 55 6 Hold 9, HDFC Bank (HDFBAN) 1,86 1,22 Buy 271, Indusind Bank (INDBA) 918 1,5 Buy 53, Jammu & Kashmir Bank (JAMKAS) Hold 4, Kotak Mahindra Bank (KOTMAH) Hold 125, South Indian Bank (SOUIN) Hold 2, Yes Bank (YESBAN) Buy 32, NBFCs LIC Housing Finance (LICHF) Buy 24, Reliance Capital (RELCAP) Buy 1, HDFC (HDFC) 1,222 1,41 Buy 192, PTC India Financial Services (PTCIND) Buy 2, CARE (CARE) 1,319 1,7 Buy 3, Bajaj Finserv (BAFINS) 1,985 2,155 Buy 31, Bajaj Finance (BAJAF) 5,25 6, Buy 75, ICICI Securities Ltd Retail Equity Research Page 1

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA, and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH99. ICICI Securities Limited (ICICI Securities) is full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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