 "More upside for CARE, CRISIL")
The stocks of leading credit rating agencies CRISIL, Credit Analysis and Research (CARE) and ICRA have outperformed the S&P BSE Sensex over the past one year, partly near their all-time or one-year highs.
Expectation of a pick-up in the bond market and the economy are key reasons. A host of positives in the recently announced Union Budget, such as a high thrust on infrastructure projects and bonds, continuous fund raising by banks (via bonds) to meet Basel-III capitalisation requirements, along with falling interest rates, are others.
Given these triggers, more companies are likely to access bond markets, increasing the demand for ratings. This will rub off favourably on all rating agencies, which are expected to see good growth in their business.
Expectation of a pick-up in the bond market and the economy are key reasons. A host of positives in the recently announced Union Budget, such as a high thrust on infrastructure projects and bonds, continuous fund raising by banks (via bonds) to meet Basel-III capitalisation requirements, along with falling interest rates, are others.
Given these triggers, more companies are likely to access bond markets, increasing the demand for ratings. This will rub off favourably on all rating agencies, which are expected to see good growth in their business.
From an investor’s perspective, the upside for CARE is the highest, followed by CRISIL. ICRA’s stock appears to be richly valued and, hence, analysts advise that investors could consider it on dips. A look below at how each of these is placed.
CRISIL
Continued leadership position and focus on product innovation and development in the past year are some of the key strengths of CRISIL. Although it saw only flattish growth in ratings revenue (33 per cent of the total) in the December 2014 quarter, this is seen as a blip. Its management, too, remains confident of the road ahead.
Raman Uberoi, its, president, corporate affairs, says: “The increasing number of dual ratings by corporates since the past couple of years has resulted in higher ratings for some of our peers. The difference in revenue recognition among rating agencies is another factor, leading to a divergent performance by the agencies. We are not losing market share or clients in any of our businesses. We believe the second half of FY16 will be better for us for all divisions -- ratings, research and advisory.”
While a pick-up in domestic corporate investments in bonds is crucial for its ratings business, an improvement in performance of global investment banks will act as a catalyst for the research business, 60 per cent of its total revenue. While analysts are positive on the company, their average target price indicates an upside of only about four per cent from current levels, of Rs 2,031. Buying on dips could, thus, help enhance returns.
CRISIL
Continued leadership position and focus on product innovation and development in the past year are some of the key strengths of CRISIL. Although it saw only flattish growth in ratings revenue (33 per cent of the total) in the December 2014 quarter, this is seen as a blip. Its management, too, remains confident of the road ahead.
Raman Uberoi, its, president, corporate affairs, says: “The increasing number of dual ratings by corporates since the past couple of years has resulted in higher ratings for some of our peers. The difference in revenue recognition among rating agencies is another factor, leading to a divergent performance by the agencies. We are not losing market share or clients in any of our businesses. We believe the second half of FY16 will be better for us for all divisions -- ratings, research and advisory.”
While a pick-up in domestic corporate investments in bonds is crucial for its ratings business, an improvement in performance of global investment banks will act as a catalyst for the research business, 60 per cent of its total revenue. While analysts are positive on the company, their average target price indicates an upside of only about four per cent from current levels, of Rs 2,031. Buying on dips could, thus, help enhance returns.
CARE
Strong margins and cash flow, expectations of healthy expansion in return ratios and inexpensive valuations relative to peers make CARE attractive. Most analysts polled by Bloomberg remain positive on it and see an upside of 17 per cent from the current Rs 1,550.
“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 and ICRA. The company has a strong return on equity of 27 per cent for FY14 and potential to further enhance it to 47 per cent by FY17,” believes Kajal Gandhi of ICICI Securities. The analyst has a one-year target price of Rs 2,175 on CARE.
As ratings contribute almost the entire part of CARE’s revenues, it enjoys higher Ebitda (earnings before interest, taxes, depreciation and amortisation) margins than peers. And, could gain more than its peers from a rise in domestic bond issuances. However, the risk of reliance on a single business does exist.
ICRA
While most analysts remain positive on ICRA as well, the stock has run up significantly (almost 20 per cent in one month) and appears richly valued. The average target price of analysts polled by Bloomberg is Rs 3,617, down about seven per cent from the current Rs 3,880.
On the business front, strong cash flows, negligible capital expenditure in the medium term and a robust balance sheet are key strengths. The information technology and business process outsourcing services (24 per cent of total revenue) have also done well, driving the company’s non-ratings business. The ratings business (56 per cent of revenue) has put up a consistent show in recent quarters.
Strong margins and cash flow, expectations of healthy expansion in return ratios and inexpensive valuations relative to peers make CARE attractive. Most analysts polled by Bloomberg remain positive on it and see an upside of 17 per cent from the current Rs 1,550.
“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 and ICRA. The company has a strong return on equity of 27 per cent for FY14 and potential to further enhance it to 47 per cent by FY17,” believes Kajal Gandhi of ICICI Securities. The analyst has a one-year target price of Rs 2,175 on CARE.
As ratings contribute almost the entire part of CARE’s revenues, it enjoys higher Ebitda (earnings before interest, taxes, depreciation and amortisation) margins than peers. And, could gain more than its peers from a rise in domestic bond issuances. However, the risk of reliance on a single business does exist.
ICRA
While most analysts remain positive on ICRA as well, the stock has run up significantly (almost 20 per cent in one month) and appears richly valued. The average target price of analysts polled by Bloomberg is Rs 3,617, down about seven per cent from the current Rs 3,880.
On the business front, strong cash flows, negligible capital expenditure in the medium term and a robust balance sheet are key strengths. The information technology and business process outsourcing services (24 per cent of total revenue) have also done well, driving the company’s non-ratings business. The ratings business (56 per cent of revenue) has put up a consistent show in recent quarters.