CARE (Credit Analysis and
Research), another niche player in the ratings space, has been another favorite
of mine for a long time now, right from its IPO days when it was launched @540
in Dec ’12, slightly more than a year back. It had also listed at a huge
premium @900 then. You can read my initial post about it here.
As I had mentioned then, one
of the attractive points about CARE is its lack of a strong foreign investor,
in spite of having a good institutional shareholding from Indian banks and
financial institutions. Moody’s has bought into ICRA and S&P has a big
holding in CRISIL (53%). I had also stated that it may only be a matter of time
when it catches the eye of international rating-related firms (Fitch for one,
Bloomberg which is not strictly into rating but in related areas, for another)
for investment, given its strong fundamentals. It looks like that time has now
come. CARE is the most profitable ratings agency in India in terms of margins.
It clocked a 48% profit margin for 9 months ending December 2013 more than
double of ICRA's at 23% in the same period. Rival Crisil, the largest in India,
posted 28% margins for 9 months ending September 2013.
IDBI Bank holds a 16.69%
stake in the ratings firm, while Canara Bank owns 13.25% and SBI 6.31%. While IL&FS Financial Services own 5.9%, a
3.4% block is owned by IL&FS Trust.
All these banks have crossed
their one-year lock-in period (after the company's IPO in Dec ‘12) on December
23, 2013. They are now free to sell their ownership at their discretion. And they
have decided to sell their stake jointly to monetize their investment so that they
get a better price and better leverage. These banks, burdened by stressed
assets on their books, want to complete the divestment by March 31st
and reflect the sale on their financials. Depending on the final offers, even
IL&FS may join in and offload its shares.
A clutch of high street PE funds,
General Atlantic Partners, Actis, Baring Private Equity Partners Asia and Apax
Partners have been sounded out and have shown a keen interest in buying into
CARE. The price negotiations too are expected to firm up shortly. According to market sources, some of the
lenders are looking at a price of around Rs 900/share as control premium. This
would mean a 7-8% mark up on the current market price of Rs 845/share. It must
however be remembered that CARE was quoting at around 725 when this process
started. At that price, the premium amounted to about 25%.
Though it has run up since the announcement of change in promoter, considering the
pedigree that CARE will acquire post this process, it will surely prove
rewarding to shareholders who log on to it now. Just to illustrate my point,
CRISIL was quoting around 50-55 10 years ago in Feb. ’04. And in the last 10
years it has multiplied 20 times to nearly 1100 now. And in this journey, it
has attracted the attention of not only astute investors such as RJ, but also
international ratings firm S&P which has a more than 50% stake in it
currently. There is no reason why CARE should not go the same way from here on
considering its fundamentals and likely promoters.
In line with my thinking on the attractiveness of Indian rating agencies, Moody's, the global ratings agency, on Thu. (20-Feb) has made a conditional offer to increase ownership in ICRA from the current 28.5% to just over 50%. And this comes at a whopping premium of 26% to ICRA's closing price on Fri. (21-Feb.). Of course, this is conditional on Moody's being able to garner the necessary number of shares. Just goes on show the expectations these global biggies have from their Indian counterparts. And considering that the Indian economy has already hit rock-bottom and can only go up from here, time being the only variable, local rating agencies can surely look for better times ahead after the rough last few years. And this is exactly what these foreign agencies plan to ride on.
ReplyDeleteSo while ICRA and CRISIL have seen their foreign parents give them a thumbs up, can CARE be left out? I think not. It should only be a matter of time; if not in the current divestment, then sometime sooner rather than later when some of those left out of CRISIL and ICRA make a beeline for CARE.