Thursday, February 20, 2014

CAREful investment

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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.

Regaining lost glory

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MCX, being the niche player it is, and operating in a space where there are no listed peers, has been a favorite of mine for some time now. I had mentioned it as a contrarian bet in Oct '13 when it had plunged to levels around 400. You can read about it here.
It had run into rough weather a few months ago and had dipped to abysmal levels. But mind you, this had nothing to do with its own performance, but that of its promoter company Financial Technologies (FT). Both of these shares had crashed to a fraction of what they were quoting few days back from when the NSEL scam broke out. Much water has flown under the bridge since then. Though the investigations have pointed fingers at FT and its headhoncho Jignesh Shah, there has been some sanity restored with the tainted members in MCX board being given the marching orders. MCX thus sports a clean board now with a decent standing. And FT and Jignesh Shah have been declared ‘not fit-and-proper’ to run MCX, which has since been challenged in court and the decision awaited. Whatever be the fate of FT and Jignesh Shah, it can certainly be said that for all practical purposes, MCX is now starting with a clean slate.

With all that has happened in the last few months, it would have indeed been surprising if it had been business-as-usual (BAU) at MCX. MCX reported a substantial decline in earnings for a second consecutive quarter. For the 3 months to December 2013, both topline and net earnings dipped as trading volumes fell by nearly 65% against the year-ago period. The dismal performance has been attributed to the application of commodity transaction tax (CTT) and the Rs. 5,600-crore scam at the group entity NSEL, which impacted the sentiments.
With the regulator FMC ordering MCX to throw out FT and Jignesh Shah as promoters, and their respective stakes to be reduced to not more than 2%, all that is set to change now. The stage is also set for a new promoter to take its reins. So it would be fair to expect that with all the clean-up having happened, MCX will now regain the premium it commanded not too far ago.

And people who reposed faith in MCX over the last few months and bought into it at 400-430 levels (or even lower at its 52-wk low of 238 in Aug ‘13) would have been laughing all the way to the bank. Since hitting those levels about 6 months ago, with all these developments happening, it has splendidly bounced back to levels of 550 currently, an absolute return of more than 25% in close to 6 months. And with its murky past behind it, a new management in place, and a new promoter likely to come in, it wouldn’t be too much to expect MCX to go some distance yet. So those who did not board it earlier still have a chance to do so now. And this opportunity may not last too long since the market is likely to discount the new-found potential as soon as the new promoter comes in.