CARE Ratings Limited — Q2 FY22 earnings call

Call held 1 Nov 2021

Management summary

CARE Ratings reported a stable Q2 FY22 with flattish consolidated revenue and a slight dip in standalone ratings revenue, though H1 standalone revenue showed 6% growth. Increased employee costs and IT investments impacted operating margins. The company is focused on strategic diversification into advisory and risk solutions, aiming for significant non-ratings revenue contribution by March 2025, while also working to regain market share in its core ratings business.

Highlights

  • Consolidated revenue from operations remained flattish at approximately ₹76 crores for Q2 FY22.

  • Standalone revenue from operations for the ratings business was ₹69 crores in Q2 FY22, a 2.8% decline from ₹71 crores YoY.

  • H1 FY22 standalone revenue improved by 6% YoY despite a challenging private capex environment.

  • Employee costs increased partly due to a ₹2 crore ESOP charge in Q2 FY22 and investments in IT infrastructure.

  • An interim dividend of ₹7 per share was announced for Q2 FY22.

  • Management targets non-ratings business to contribute one-third of total revenue and earnings by March 2025.

  • Q2 FY22 CP issuances amounted to ₹6.22 lakh crores, a 50% increase YoY and 60% rise QoQ.

Concerns

  • Non-cooperative ratings (INC) impacting revenue

Key financials

3 periods

Headline

  • Consolidated Revenue from Operations
    ₹76 Cr
    YoY 0%
  • Standalone Revenue from Operations (Ratings)
    ₹69 Cr
    YoY -2.8%
  • Interim Dividend
    ₹7

Q2 FY22

  • ESOP Charge
    ₹2 Cr

H1

  • Standalone Revenue Growth
    6%
    YoY +6%
  • Other Expenses
    ₹14.2 Cr
    YoY +52.7%

What they filed

Q1 FY27: revenue up 19.1%, net profit up 26.9% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue117 96 110 94 136 +16%112 +17%131 +19%112 +19%
EBITDA56 30 47 28 68 +21%40 +33%61 +30%35 +25%
Net profit47 28 43 26 57 +21%37 +32%53 +23%33 +27%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Market Share

  • Ratings Market Share Gain Market Share · next 3-4 years · High confidence at least 1% per annum
    We, I think, over last year broadly regained about 1% market share and we are trying very hard to increase the same and continue the momentum of acquiring market share by at least 1% per annum over the next 3-4 years, and hence get back to high 20s from low 20s. That is our objective and we are working towards it.

    — Ajay Mahajan, MD & CEO

Revenue Mix

  • Non-ratings Business Contribution to Revenue and Earnings Revenue Mix · by March of 2025 · High confidence one-third
    But at this moment of time, I can tell you and I will reiterate what I have been saying and communicating to investors very transparently that we will be unhappy with ourselves if we can't get to one-third of our total revenue and earnings coming from non-ratings business by March of 2025 - which is exactly let's say roughly three, three and a half years away.

    — Ajay Mahajan, MD & CEO

Market context

  • Country's GDP Growth GDP Growth · FY22 · High confidence 9.1%
    We have projected the country's GDP to grow at 9.1% in FY22.

    — Ajay Mahajan, MD & CEO

Risks & concerns

  • Non-cooperative ratings (INC) impacting revenue

    high

    50-55% of the industry's volumes are non-cooperative, and CARE does not book revenue from these issuers, directly impacting profitability.

    Management acknowledged

  • Subdued credit growth and investment appetite

    medium

    Lower economic activity and reduced investments in Q1 impacted borrowing appetite; bank credit growth to industry and services was -1.8% (Apr-Aug 2021).

    Management acknowledged

  • Persistent competitive pressures and limited pricing power

    medium

    Seven rating agencies vie for a ₹1000-1200 crore fee pool, and price pressures remain strong despite efforts to communicate fair pricing.

    Management acknowledged

  • Uncertainty from the pandemic

    medium

    Despite economic recovery, the pandemic still remains somewhat of a threat and carries uncertainty for the outlook.

    Management acknowledged

Areas of evasion (1)

  • SEBI notice regarding a competitor

Q&A highlights

2 direct
Non-ratings business revenue and earnings contribution target Direct
But at this moment of time, I can tell you and I will reiterate what I have been saying and communicating to investors very transparently that we will be unhappy with ourselves if we can't get to one-third of our total revenue and earnings coming from non-ratings business by March of 2025 - which is exactly let's say roughly three, three and a half years away.

This question directly confirms management's ambitious target for diversification and provides a clear timeline for investors to track progress.

Asked by Praful Kumar

Competitive environment and pricing power Partial
The competitive pressures in the industry regardless, I think, remain quite strong and sharp. There are seven rating agencies vying for that share of that 1000, 1100, 1200 crore of rating fee pool... I wouldn't say that they are specifically asking for us only, but they are now beginning to value the work of my rating s and business development teams... price pressures are still there Samarth, I wouldn't be in denial of that yet.

The response acknowledges persistent competitive pressures and limited pricing power, indicating that market share gains will be hard-fought and not driven by price increases.

Asked by Samarth Singh

Non-cooperative ratings (INC) impact on revenue and profitability Direct
As you rightly pointed out, since the issuer goes into the non-cooperation category, it does impact the revenue and the profitability in the sense that see, we don't get the fees from them. To your pointer on whether or not we are booking the revenue from them, the plain answer is no. Because the issuer is in the non-cooperation category, we're unsure in terms of whether the revenue would flow in from that customer, irrespective of whether the regulatory driven review is undertaken by us. So we simply don't look what is not sure for us.

This clarifies that CARE Ratings does not recognize revenue from non-cooperative issuers, directly impacting reported financials and highlighting a significant industry-wide challenge.

Asked by Mahesh Jain

2 min read 6 chapters

Detailed narrative

Q2 FY22 Financial Performance Overview

CARE Ratings reported flattish consolidated revenue from operations at approximately ₹76 crores for Q2 FY22, similar to the previous year. Standalone revenue for the ratings business saw a slight decline to ₹69 crores from ₹71 crores YoY. However, H1 FY22 standalone revenue showed a positive trend, improving by 6% despite a challenging private capex environment. Operating profit margins were moderated due to elevated employee costs, including a ₹2 crore ESOP charge in Q2 FY22, and increased IT infrastructure investments.

Strategic Diversification and Growth Targets

The company is actively pursuing a transformation agenda, focusing on organic and inorganic growth. A key target is for the non-ratings business, primarily through CARE Advisory and CARE Risk Solutions, to contribute one-third of total revenue and earnings by March 2025. In the core ratings business, management aims to regain at least 1% market share per annum over the next 3-4 years, striving to return to high 20s from current low 20s.

Investments in Technology and Human Resources

CARE Ratings is making significant investments in technology, including data center migration, enhanced system security, and AI/ML deployment, which led to a ₹1.7 crore increase in IT expenses in H1 FY22. The company is also prioritizing human capital, increasing learning and development budgets, and hiring senior professionals, including a new CEO for CARE Risk Solutions, to build a 'high talent density' competitive advantage.

Credit Market Dynamics and Regulatory Focus

The credit market showed mixed signals; Q1 corporate bond issuances were down 57% YoY, and bank credit growth to industry and services was -1.8% in Apr-Aug 2021. However, Q2 bond issuances saw some stability at ₹1.77 lakh crores, and CP issuances surged 50% YoY to ₹6.22 lakh crores. Management noted regulatory focus from RBI and SEBI on developing and deepening corporate bond markets, which is expected to augur well for rating agencies, particularly for AA+ rated companies.

Challenges from Non-Cooperative Ratings

A significant challenge highlighted is the prevalence of non-cooperative ratings (INC), which affects 50-55% of the industry's volumes. CARE Ratings does not book revenue from these issuers, directly impacting its financials. Management has requested regulators to allow earlier exit from INC status, as clients not sharing information is detrimental to both rating agencies and investors.

Economic Outlook and External Factors

Management projects India's GDP to grow at 9.1% in FY22, anticipating a stronger economic bounce back that will stimulate investment sentiments and credit markets. Geopolitical disturbances and supply chain realignments are seen as an opportunity for India to play a larger role in the global economy, potentially driving capital expenditure and increased working capital demand in the coming years.

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