Well poised to leverage rating business forte

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1 Initiating Coverage Rating Matrix Rating : Buy Target : 2175 Target Period : 18 months Potential Upside : 47% YoY Growth FY14 FY15E FY16E FY17E Revenue EBITDA Net Profit EPS Current & target multiple FY14 FY15E FY16E FY17E P/E Target P/E Mcap to sales Dividend yield Price/BV Stock Data Particulars Bloomberg/Reuters Code CARE IN / CREI.NS Sensex 26,959. Average Volumes 17,792. Market Capitalisation 4, week H/L 159 /415 Equity Capital 29. Face Value 1 DII Holding 49.7 FII Holding 25.7 Comparative return matrix Return % 1M 3M 6M 12M CARE Crisil (5.) (5.2) Icra Price chart 1, 8, 6, 4, 2, Jan-13 Apr-13 Jun-13 Sep-13 Dec-13 CARE (R.H.S) Research Analyst Kajal Gandhi kajal.gandhi@icicisecurites.com Vasant Lohiya vasant.lohiya@icicisecurites.com Sheetal Ashar sheetal.ashar@icicisecurites.com Mar-14 Jun-14 Sep-14 Nifty (L.H.S) Dec-14 2, 1,5 1, 5 December 16, 214 Credit Analysis & Research Ltd (CARE) 148 Well poised to leverage rating business forte Credit Analysis & Research (CARE), the second largest company by market share, is a pure play on the rating business with ~99% ( 23 crore) of its FY14 core revenue generated from rating segment. The highlight of CARE s business is its best-in class EBITDA margin of 6%+ and PAT margin of 5%+. The business model is asset light in nature with not much capex ( 1-15 crore) while it generates strong operating cash flow. Post its listing, the dividend payout ratio has improved from 3% (FY12) to 63% (FY14), which we expect to grow to ~73% by FY17E. It paid special dividend of 65 in H1FY15 already. Considering the improving economic outlook with the expected upturn in the investment cycle, peaking of interest rates and gradual and structural development of the bond market we have factored in 18% PAT CAGR in FY14-17E to 21 crore vs. 12% CAGR seen in FY We initiate coverage with a BUY rating and a target price of 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 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 rating revenue market share of ~28%, going ahead. EBIDTA margin among the best in rating industry CARE earns the best margin among rating agencies with 64% EBITDA margin and 56% PAT margin in FY14. These 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. Optimum utilisation of cash - key to enhance RoE, shareholder returns CARE has been maintaining > 4 crore of cash equivalents in its b/s that is 1% of its Mcap. Efficient utilisation for propositions like acquisition, higher dividend or buyback of shares, will be positive for shareholders. As profit traction & return ratios improve, scope for further re-rating exists CARE has emerged as a strong player in the rating business with strong margins & 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 2x FY17E EPS, is at a steep discount to Crisil s ~6x multiple. The company has strong RoE of 27% for FY14 & potential to further enhance it to 46% by FY17E. We value CARE at 3x FY17E EPS (~5% discount to Crisil s core rating business multiple) and arrive at TP of We initiate coverage with BUY rating. Exhibit 1: Key Financials (Year-end March) FY13 FY14 FY15E FY16E FY17E Revenue EBITDA Net Profit EPS ( ) PE (x) Dividend Payout ratio ROCE RONW

2 Shareholding pattern (Q2FY15) Shareholding Pattern Holdings Promoters - Institutional investors 75.4 Others 24.6 Source: BSE, ICICIdirect.com Research Institutional holding trend Exhibit 2: Company Evolution Q2FY14 Q3FY14 Q4FY14 Q1FY14 Q2FY14 FII DII Source: BSE, ICICIdirect.com Research Company background Incorporated in 1993, CARE is a full service rating company that offers a wide range of rating and grading services across sectors. The company has been promoted by major banks and financial institutions in India. The three largest shareholders are IDBI Bank (16.6%), Canara Bank (12%) and SBI (5.2%). The company has 13 offices in India in Mumbai, New Delhi, Kolkata, Chennai, Hyderabad, Bengaluru, Ahmedabad, Jaipur, Pune and international operation in Male in the Republic of Maldives. CARE has been the third largest rating agency since its incorporation but has gained market share to reach the second position by revenues since FY9. The research division (still not a significant contributor) was established in June 26 and added five new sector reports viz. gems & jewellery, shipbuilding, retail, construction and coal. Since then, the company has widened its canvas to cover 116 sectors, publishes economic reports, etc. In FY11, CARE acquired a license to operate credit rating operations in Maldives. It launched new products including EquiGrade, Esco grading & financial strength grading of shipyards, real estate project star ratings, etc. In FY12, CARE acquired a 75% stake in Kalypto Risk Technologies Pvt Ltd for ~ 9 crore. It is engaged in the business of providing risk management software solutions and offers products with exclusive focus on banking & financial services domain and addressing areas of enterprise risk management. It garnered revenues of 6.1 crore and PAT of.97 crore in FY14. In FY14, CARE invested in Arch rating (2% stake), an international rating agency, to form a JV between five international rating agencies including CARE, CPR- Portugal, SR Rating- Brazil, MARC- Malaysia and GCR of South Africa. The JV has been promoted as an alternative to the current big three agencies (S&P, Moody & Fitch that control 9%+ market). The management has indicated that investment made by CARE is not too significant. CARE Incorporated Launched 'CARE Loan rating' for rating of term loan Founding member of ACRAA Launched new products such as rating of SMEs, SSIs, mutual funds, issuer rating and IPO grading Executed MoUs with 19 banks to provide rating facilities under Basel II framework Acquired license to operate in Maldives. Launched new products including equigrade, ESCO grading, etc. Came out with an IPO at 75 with the objective to provide exit to existing investors Expansion of rating operations to toll roads, electricity boards, municipal coporations and structured instruments Started rating debt mutual funds Signed MoU with NSIC as an approach rating agency for SSIs Developed grading methodolgy for infra projects, ultra mega power projects Established CARE Knowledge Centre at Ahmedabad. Commenced providing technical assistance to rating agency in Ecuador Acquisition of 75.1% stake in Kalypto Technologies Source: Capitaline, Moneycontrol, Company, ICICIdirect.com Research CARE came out with an IPO issue of 54 crore (25.22% stake) in December 212 at 75. The object of the issue was to provide an exit to existing investors. No fresh funds were raised in the IPO. Sebi mandates a one year lock-in period post IPO for shareholders who sold their part stake in the IPO. Now, since a year has been completed, the major shareholders intend to sell their balance stake. If there is a change in ownership from these PSU institutions to a strategic investor, it will be positive for the stock. Page 2

3 Exhibit 3: Major shareholders as on Q2FY15 Name of major Shareholders Shareholding percentage in CARE IDBI Bank 16.6 Canara Bank 12. State Bank of India 5.2 Franklin Templeton Investment Funds 4.3 Bajaj Holdings And Investment Ltd 3.5 Serum Institute Of India Ltd 2.4 The Wellington Trust 1.9 Russell Investments Ltd 1.8 GMO Emerging Domestic Opportunities Fund 1.8 Federal Bank 1.8 Exhibit 4: Key management personnel Name & Designation Experience & Qualifications D R Dogra (Managing Director) Rajesh Mokashi (Deputy Managing Director) T.N. Arun Kumar (Chief General Manager, Ratings) Milind Gadkari(Chief General Manager,Ratings) Revati Kasture(Chief General Manager, Research) Madan Sabnavis(General Manager, Chief Economist) Over 36 years of experience in financial sector & credit administration Certified Associate of Indian Institute of Bankers Holds master s degree in agriculture and in business administration Over 29 years of experience in finance, commerce and credit risk sectors Before joining CARE, worked for Otis Elevator Company India, DSP Financial Consultants & Kotak Mahindra Finance Holds Master of Management Studies degree Qualified Chartered Financial Analyst 25 years of experience in financial services PGDM; CFA; FRM 18 years of experience in credit rating, training of new recruits Master s degree in management sciences; CFA 15 years of experience in credit analysis and research services C.A.; Cost Accountant 27 years of experience in development banking, commercial banking, engineering & commodity markets Masters degree in ecnomics Exhibit 5: CARE s product profile CARE Ratings Care Ratings Ratings Grading Research Corporate Financial Sector Public Finance MSME Infrastructure IPO Covering 49 sectors Debt loan Banks Sub-sovereign NSIC - SSI Ratings Power Shipyard Customised research Bank loan NBFC entities SME Ratings Roads Educational Insti CARE industry risk Issuer Housing finance Ports Maritime traniing insti metrics (15 sectors) Corporate Insurance IDF Construction companies Economic research reports governance Mutual funds Real estate star Valuation of market Securitisation Equigrade Linked debentures (MLD) programmes SME fundamental Renewable energy companies/project Page 3

4 Industry Overview Revenue structure, size and market share dynamics of rating industry The rating industry in India is characterised by an oligopoly. It mainly comprises three major listed rating agencies viz. Crisil, CARE & Icra, which account for 86% revenue market share of total rating industry revenues. Others include India Rating (promoted by Fitch), Brickworks and SMERA. Crisil, CARE & Icra, accounts for 86% of industry s rating revenue market share. Total consolidated revenue size for three large players is at 1719 crore as on FY14 with rating income forming 47% at 85 crore and research income forming 37% at 641 crore. Crisil enjoys 67% market share among the three in consolidated revenues. Exhibit 6: Revenue break-up of top three rating agencies (FY14) Revenue for CARE is almost entirely derived from the core ratings business, Crisil s revenue is skewed more towards research. Icra has started diversifying but the ratings segment still drives majority of its income. Revenues ( 1719 crore) Rating ( 85 crore) Research ( 641 crore) Other income ( 94 crore) Others ( 177 crore) Crisil ( 414 crore) Icra ( 164 crore) CARE ( 227 crore) Crisil ( 39 crore) Icra ( 19 crore) CARE ( 36 crore) Crisil - advisory ( 56 crore) Icra ( 121 crore) Rating revenue from India ( 284 crore) Crisil( 641 crore), Revenue = Rating + Research + Advisory + other Income The other three rating companies like India Ratings, SMERA and Brickworks generated rating revenues of 74 crore, 27 crore and 33.6 crore, respectively, as on FY14. In the past five years, the total revenue and rating revenue of the top 3 rating agencies have grown at a CAGR of 17% to 1719 crore and 85 crore, respectively, as on FY14. As can be seen in the exhibit below, owing to a weakening economy and the consequent decline in credit levels, the rating revenue declined at a CAGR of 11% over FY Page 4

5 Exhibit 7: In past three years, traction in total revenue declines mainly due to FY9 FY1 FY11 FY12 FY13 FY14 Total Revenue Growth, Total Revenue = Rating revenue + Research + Advisory + Other income Exhibit 8:.declining growth in rating income FY9 FY1 FY11 FY12 FY13 FY14 Rating revenue Growth Exhibit 9: Rating revenue of individual rating agencies CARE has outpaced industry by clocking rating revenue CAGR of 28% in the past six years vs. 21% in case of Crisil and 18% in case of Icra. Strong CAGR of 24% in BLR volumes during FY8-11 enabled CARE to improve its traction and market share as witnessed in the exhibit below. Exhibit 1: Market share in ratings revenue over the years FY9 FY1 FY11 FY12 FY13 FY FY9 FY1 FY11 FY12 FY13 FY14 Crisil (Ratings business) Icra CARE Crisil (Ratings business) Icra CARE Exhibit 11: Market share if all six rating players included Exhibit 12: Market share excluding S&P business of Crisil Brickwork, 34, 4% India ratings, 74, 8% SMERA, 27, 3% Brickwork, 34, SMERA, 27, 3% 4% India ratings, 74, 9% Crisil, 284, 36% Icra, 164, 17% Crisil, 414, 44% Icra, 164, 2% CARE, 227, 24% CARE, 227, 28% Source: Capitaline, ICICIdirect.com Research Source: Capitaline, ICICIdirect.com Research Crisil with 414 crore rating revenues (including 13 crore from S&P) in FY14 is the market leader and has consistently contributed to more than half of the industry s revenues. For the second place, CARE and Icra have Page 5

6 Rating growth has moderated in recent years as revenue of the rating industry is linked to a certain extent to the bank loans disbursed. Total credit growth has steadily dipped from 24% CAGR during FY8-11 to 14% in FY14 while growth in the industry segment has declined sharply from 4% CAGR during FY8-11 to 13% in FY14 been neck and neck over the years. However, CARE has notched up second place by a notable margin in the recent past. In FY9, both CARE and Icra were almost at par with ~25% market share each. However, this gap has widened as CARE managed to grow at higher levels than Icra. We expect rating revenue traction for the industry to be better than 11% CAGR witnessed during FY Further, the market share should remain steady in this form. However, new players like India Ratings (Fitch) have been growing in visibility and acceptability. This may impact the incremental business of listed players. Exhibit 13: Absolute rating revenue trend over long period 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 place in terms of revenue market share FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY Crisil CARE Icra Source: Capitaline, ICICIdirect.com Research Research business A couple of rating agencies have diversified from their rating business into the research division. Crisil is the major player in this segment, which has grown mainly by global acquisitions like Irevna, which drive its research revenues. Its clients are investment banks, hedge funds, etc. It currently derives ~58% ( 641 crore) of its total revenues from the research business. Similarly, Icra also derives ~4% of its revenue from the research, consultancy and advisory business. The rest of the rating agencies are mainly reliant on their rating business. Exhibit 14: Crisil s revenue from research activities CY7 CY8 CY9 CY1 CY11 CY12 CY13 Research Revenue Page 6

7 Strong EBITDA margins in rating business As stated earlier, the rating business is largely divided into three product segments, viz. rating corporate debt, bank loans & SME loans. The margins earned are highest for rating corporate debt, followed by bank loans while SME rating earns the least margin. The ticket size of SME loan is small and more man hours are required to do the same business, that is, of high ticket corporate debt rating. Hence, margins are lower in the SME business. CARE earns highest EBITDA margin in the rating business at 63.9% vs. 45.6% for Icra and 39.6% for Crisil Being an oligopoly market, there is not much price-sensitive competition among rating agencies. Further, efficiency on the cost side is a kicker to margin. Being a service industry, employee cost is the major expense incurred by rating agencies, which constitutes ~44% of revenues. The EBITDA margin in the rating business of the top 3 CRAs has largely remained stable around 48-5% in the last two or three years. CARE earns the highest EBITDA margin of 63.9% vs. 45.6% for Icra and 39.6% for Crisil. Exhibit 15: Rating EBITDA margin of top 3 CRAs on overall basis FY11 FY12 FY13 FY Rating Revenue EBITDA EBITDA margin Some dip in margin was inevitable post FY9 as growth of bank loan rating (relatively low margin) was higher than corporate debt rating. Since 28, the Basel II accord stipulated lower risk weights for bank loans that are rated. Hence, there was huge demand for rating existing bank loans, which led to a sharp pick-up in the pace of bank loan rating. Exhibit 16: CARE consistently maintaining higher rating EBITDA margin share FY11 FY12 FY13 FY14 Crisil (Ratings business) Icra CARE Page 7

8 Exhibit 17: EBITDA earned by individual rating agencies over the years Exhibit 18: EBITDA share of individual rating agency FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 Crisil (Ratings business) ICRA CARE Crisil (Ratings business) ICRA CARE We believe that for the industry, as a whole, EBITDA margins may witness slight pressure, going ahead, owing to enhanced staff related costs and rising focus on the low margin SME segment. Rating business enjoys superior return ratios. The return ratios (RoE) earned by rating agencies are in the range of 2-5%, which is quite attractive. Hence, they ought to command some premium over markets. Superior quality of rating business can be gauged from the fact that all rating agencies earn better return ratios than aggregate Sensex companies. We believe that, going ahead, RoEs of the industry, as a whole, should improve from current levels, owing to better revenue traction than witnessed earlier and a higher dividend payout ratio. Exhibit 19: RoE profile of rating agencies and aggregate Sensex companies FY8 FY9 FY1 FY11 FY12 FY13 FY14 Crisil CARE Icra Sensex Source: Capitaline, ICICIdirect.com Research Page 8

9 Opportunity size - Scope for revenue growth wide enough in long term India is significantly under-penetrated in all segments including bank loan, bond market and SME ratings. i) Bank loan rating - Until FY7-8, rating revenues of CRAs were mainly derived from the corporate debt rating (CDR) segment. However, post implementation of Basel II guidelines in 28, a new revenue segment named bank loan rating (BLR) was opened up for CRAs. This segment led to strong traction of 34% CAGR in rating revenues of CRAs during FY8-11. As on FY14, the BLR segment comprises >5% of CARE s rating revenue, ~25% for Icra and ~11% for Crisil. For all top 3 CRAs together, the BLR segment is ~4% of rating revenues. Post implementation of Basel II guidelines in 28, a new revenue segment named bank loan rating (BLR) was opened up for CRAs. Basel II guidelines required banks to adopt a standardised approach for credit risk. Under the standardised approach, the RBI recognised certain rating agencies as eligible CRAs while Indian banks are required to use such eligible CRAs to assess their credit risk to determine compliance with capital adequacy requirements. As per this guideline, banks can benefit from maintaining less capital for loans rated A and above as can be seen in the exhibit below. Thus, the extra capital saved could be utilised for further lending, which helps in improving return ratios. Exhibit 2: Basel II provides benefit for bank loans that are rated Basel I Basel II Capital required Capital release on Rating Risk weight Capital required Risk weight for rated exposure Rated exposures Unrated exposures Rated exposure AAA 1% 9.% 2.% 1.8% 9.% 7.2% AA 1% 9.% 3.% 2.7% 9.% 6.3% A 1% 9.% 5.% 4.5% 9.% 4.5% BBB 1% 9.% 1.% 9.% 9.%.% Source: RBI, ICICIdirect.com Research Such implementation of Basel II standards by the RBI resulted in large scale demand for credit ratings across sectors and geographies, which was previously limited to a small group of clients. There was huge demand for rating existing bank loans along with new bank loans during FY9-12, which has driven the overall rating revenue growth during this period. However, as per our interaction with bankers and the management, this market for mid to large companies has largely got penetrated now. Hence, a further driver for BLR revenues would come from incremental credit growth. India is a significantly under-penetrated market as the credit to GDP ratio of India is low at ~5% compared to 8-15% for other emerging and developed countries. Hence, industry credit has huge scope to grow in the long term, thereby supporting the rating revenue growth. India is a significantly under-penetrated market as the credit to GDP ratio of India is low at ~5% compared to 8-15% for other emerging and developed countries. In recent times, credit growth has been modest and in sync with a moderating economy wherein GDP growth has steadily declined from 8.6% in FY1 to 4.9% in FY14. Industry & services sector credit in overall credit size of 6 lakh crore as on FY14 is around 38.6 lakh crore. For ratings, this is the main segment of bank loan rating. We expect credit growth of ~12% for FY15E and improvement to 15% traction by FY16E. The industry loans segment is expected to track overall credit growth. Therefore, the opportunity of rating can also be seen growing to an industry loan book addressable size of 49.7 lakh crore by FY16E or incremental opportunity size of ~ 11 lakh crore by FY16E. Page 9

10 Exhibit 21: Bank loan growth has moderated in recent past; to pick up in CY FY1 FY11 FY12 FY13 FY14 FY15E FY16E Total Credit Total credit growth (RHS) Industry & Services segment Industry segment Growth (RHS) Source: RBI, ICICIdirect.com Research ii) SME loan rating - As per SME chamber of commerce, there are ~3 crore SMEs in India. So far, only ~1 lakh SME units have been rated, which implies a large scope left for penetration by CRAs. For each SME unit, rating agencies charge in the range of 3-4 as initial fee. No surveillance business is done in the SME segment. Further, the government under the National Small Industries Corporation (NSIC) scheme provides subsidies to the SME unit on fee payments for getting a CRA to rate them. This subsidy is up to 75% of the fee charged, depending on the turnover of the SME unit as described in the below exhibit. Exhibit 22: NSIC scheme Turnover Fees to be reimbursed by NSIC Up to 5 lakh 75% of the fee charged by the rating agency subject to a ceiling of 25,/- Above 5 lakh to 2 crore 75% of the fee charged by the rating agency subject to a ceiling of 3,/- Above 2 crore 75% of the fee charged by the rating agency subject to a ceiling of 4,/- Credit rating facilitates SME units in procuring quicker and cheaper bank finance. Given the low level of penetration, there is a large scope for rating agencies in the SME space and will be their focus, going ahead. Credit rating facilitates SME units in procuring quicker and cheaper bank finance. Given the low level of penetration, there is a large scope for rating agencies in the SME space and will be their focus, going ahead A back-of-the-envelope calculation indicates a large revenue opportunity for CRAs in the SME rating space in the long run. Assuming that rating agencies are able to capture just 5% of total SME units i.e. 15 lakh units in the long term, it would translate into revenue opportunity size of 525 crore (15,, * 35). Currently, Crisil is the market leader in the SME rating space having rated ~13, SME units in FY14 vs. ~15-2 rated by Icra and CARE individually. Page 1

11 iii) Indian bond market G-sec crowding out, corporate bond market yet to evolve India s total outstanding debt market as on FY13 stood at 62 crore, which is 66% of the GDP. As can be seen in the below exhibit, government securities (G-Secs) account for more than half of the total debt outstanding. The pace of fresh G-sec and T-bills issuance continues to be large, crowding out the entire bond space. Corporate bonds, CPs and CDs that are the main markets for CRAs account for 29% of the total debt outstanding. Exhibit 23: Debt market of India as on FY13 Outstanding % of total outstanding As % of GDP Government Securities 3,244, Corporate bonds 1,29, State development loans (SDLs) 889, Commercial Paper (CP) 19, Certificate of Deposit (CDs) 389, T-Bills 299, Total Source: Crisil year book; Company, ICICIdirect.com Research Compared to other emerging markets, India s primary market for corporate bonds is significantly underpenetrated at 3.9% of GDP In terms of fresh issuance each year, the corporate bond segment has witnessed 7.6x increase since FY4. As on FY13, fresh corporate bond issuance (private and public placement) stood at crore, which was 3.9% of the GDP. However, compared to other emerging markets, India s primary market for corporate bonds is significantly under-penetrated as can be seen in the exhibit below. Exhibit 24: Total corporate bond annual issuance over the years FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY Fresh corporate bonds issuance Growth YoY Source: Crisil Year book, ICICIdirect.com Research Exhibit 25: Indian corporate bond market significantly under penetrated Exhibit 26:..compared to other countries FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 Corporate bonds issuance as % of GDP Korea Japan Hong Kong Malaysia Singapore Thailand China India Source: Company, Crisil Year Book, ICICIdirect.com Research Page 11

12 Corporate bond market evolution long due to deepen credit availability As we said above, India is very deeply under-penetrated in terms of the corporate bond market. The development of a corporate bond market is long awaited and has the potential to grow exponentially. The opportunity has not yet been wholly captured. The corporate bond market has grown at 25.3% CAGR over FY4-13 to 3,68,83 crore. The noteworthy part is its strong growth in recent years at 35.3% CAGR over FY11-13, which may be the initial indication of a corporate bond market developing in India The corporate bond market has grown at 25.3% CAGR over FY4-13 to 3,68,83 crore. The noteworthy part is its strong growth in recent years at 35.3% CAGR over FY11-13, which may be the initial indication of a corporate bond market developing in India. However, the growth has taken a knock in FY14 wherein issuance dropped to crore as the RBI tightened liquidity and the rate cycle turned north against expectation. This led to a rise in wholesale borrowing cost, which made bond issuance unattractive. There was a shift in fund raising via the bond and commercial paper segment to bank credit. Various steps have been taken in the recent past by the RBI, Sebi and the government, which have resulted in the development of the corporate bond market in India. However, as we said earlier, India still has a long way to go in the corporate bond space. A strong, vibrant and healthy corporate bond market is a prerequisite for a well developed economy, especially in case of India that requires ~US$1 trillion of infrastructure investment in the next five or six years. This quantum cannot be fulfilled by the banking system alone as it has to meet Basel III capital requirements. Further, with the government, regulators and all stakeholders believing in the necessity of a strong corporate bond market, we believe, going ahead, the bond market would witness a healthy rise and be structurally positive for CRAs. Refer, Annexure II for Recent steps which led to development of corporate bond market and Major factors and steps ahead that may turn out to be key triggers for development of corporate bond markets and Some other highlights of India s corporate bond market. Page 12

13 CARE is mainly active in the BLR segment. It derives 63% of fresh debt volume rated, 78% of the fresh assignments & 56% of rating revenues from BLR segment. Investment Rationale Exhibit 27: CARE consistently second largest rating agency by revenue since FY9 Gaining market share Almost the 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 BLR segment (63% of fresh debt volume rated, 78% of the fresh assignments & 56% of rating revenues) followed by CDR. It is still at a very nascent stage in SME rating. However, we expect bond market & SME rating to drive overall rating revenue growth as both are significantly under-penetrated markets in India. In terms of rating revenues, the company remained the third largest rating agency for most of the years since its incorporation. However, implementation 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 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 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY Crisil CARE Icra The sharp rise in bank loan ratings (BLR) during FY9 catapulted CARE to the second position in terms of rating revenue market share. The company s market share rose to 25.4% in FY9 from 21% in FY8. As against this, Crisil and Icra s rating revenue market share dipped to 5.8% and 23.8% in FY9 from 53.9% and 25%, respectively, in FY8. CARE has since then been able to maintain its second position. Page 13