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.