CARE Ratings rating – Buy: Robust final quarter for the company

CARE Ratings (CARE) beat estimates with 21% consolidated top-line growth in Q4FY21. It outperformed peers amidst marginally lower credit growth leading to 1% growth in overall FY21 sales. With 39% decline in other expenses, Ebitda grew 2x y-o-y (40% above estimates).

With the new management team in place, CARE is looking to regain market share and accelerate revenue growth, enhance technological prowess, HR and rebrand the group. CARE arrested market share loss in FY21. We expect its market share to grow led by sharpened focus, and revise multiple to 25x (22x earlier) Q1FY23e, a 32% discount to peers. In the wake of improved performance, we revise up FY22/23e EPS 10/12%. Maintain Buy with revised TP of Rs 825.

Robust performance: Q4FY21 ratings revenue jumped 19% y-o-y (31% ahead of estimate) – highest over the past three years – outperforming peers (CRISIL with domestic ratings growth of 6% y-o-y and ICRA’s ratings revenue dip of 8% y-o-y). This was amidst marginally lower credit growth of 3.4% (4% in Q4FY20) as industry credit growth picked up to 5.7% (4% in Q4FY20), while services slumped to 2% (from 9%). For FY21, revenue grew 2% y-o-y, with ratings up 1% y-o-y amidst a soft credit market (at 5.6%) and debt issuances supported with TLTROs. Going forward, management expects bond markets to be stable and wholesale credit to pick up.

Transformation underway: CARE is undergoing a transformational journey with changes across the entire CSuite–new CFO, new Ratings Officer and cultural officer. Focus on overhauling the current processes is underway.

Outlook: Gains anticipated – While the first two months of FY22 have been weak for debt markets, we anticipate CARE to recoup and gain market share under the new team. We raise target multiple to 25x Q1FY23 and revise TP to Rs 825 (Rs 655 earlier), in line with five-years’ average, a 32% discount to CRISIL’s target multiple.