CARE Ratings Limited — Q3 FY22 earnings call

Call held 2 Feb 2022

Management summary

CARE Ratings reported a slight increase in total income for Q3 FY22, reaching ₹55.45 crores, but PBT and PAT saw a modest decline to ₹19.85 crores and ₹14.90 crores respectively, reflecting margin pressure. The company highlighted a 6% operating revenue growth for the first nine months of FY22, or 7.1% when adjusted for prior COVID provisions. Management expressed optimism about the Indian economy's prospects, driven by the Union Budget's focus on infrastructure and CapEx, while detailing strategic initiatives around brand transformation, technology, and diversification through its subsidiaries, despite challenges in the IT segment.

Highlights

  • Total income increased to ₹55.45 crores from ₹54.83 crores QoQ, a 1.13% growth.

  • Expenses rose 5.4% QoQ to ₹35.6 crores from ₹33.78 crores.

  • Profit Before Tax (PBT) decreased to ₹19.85 crores from ₹21.05 crores, with 31% margins.

  • Profit After Tax (PAT) was ₹14.90 crores, achieving a 27% margin.

  • 9-month operating revenue growth was 6%, or 7.1% adjusted for COVID provisions.

  • Advisory business revenue grew 55% to ₹5.7 crores in 9 months from ₹3.68 crores.

  • Africa subsidiary revenue increased 53% to ₹5 crores in 9 months from ₹3.29 crores.

  • IT technology subsidiary revenue declined 16% in 9 months due to talent exodus and market inaccessibility.

Key financials

  1. Total Income ₹55.45 Cr +1.1%QoQ
  2. Expenses ₹35.6 Cr +5.4%QoQ
  3. PBT ₹19.85 Cr -5.7%QoQ
  4. PAT ₹14.9 Cr
  5. PBT Margin 31%
  6. PAT Margin 27%

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.

Segment breakdown

  • Advisory Business (9 months FY22)
    ₹5.7 Cr Revenue55% Growth
  • Africa Subsidiary (9 months FY22)
    ₹5 Cr Revenue53% Growth
  • Nepal Business (9 months FY22)
    7.2% Growth
  • IT Technology Subsidiary (9 months FY22)
    -16% Revenue Growth

Guidance & targets

Capex

  • Infrastructure Sector CapEx Allocation Capex · next decade · High confidence 10 trillion
    A higher-than-expected allocation of 10 trillion to CapEx in the infrastructure sector is likely to crowd in private sector investments as well.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

  • Wasteland Development Outlay Capex · High confidence 3 trillion
    wasteland development with an outlay of 3 trillion will help build "Bharat" the rural economy so to say and lead to transmission of life there.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

  • Digitization Capex Capex · next year · High confidence 7.5 trillion
    All this obviously will consume a large dose of capital expenditure to be precise 7.5 trillion of capex next year.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

  • FY23 Budget Capital Expenditure Increase Capex · FY23 · High confidence 5%
    The size of FY '23 budget has been raised by 5% capital expenditure for FY23 is at an all-time high, 24% over the revised estimate of FY '22.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

  • Total CapEx Push Capex · FY23 · High confidence over 12 lakh crores
    the push to CapEx will be over 12 lakh crores in FY23, which is a good 10% increase over FY22.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

Government Scheme

  • ECLGS Scheme Allocation Government Scheme · another year · High confidence 5 trillion rupees
    The extension of ECLGS scheme by another year, with an increase in allocation to 5 trillion rupees is an excellent step to support the MSME sector...

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

Profitability

  • Margins Profitability · Medium confidence improve
    And our margins will definitely improve as our revenues improve.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

Business Strategy

  • Investment in Own Businesses Business Strategy · High confidence continue to invest
    instead, we'll continue to invest in our own businesses, our risk solutions, our advisory and consulting business internationalize some of that, and make more investments there.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

Subsidiary Performance

  • IT Technology Subsidiary Revenue Subsidiary Performance · not-so-distant future · Low confidence make that up
    we hope to make that up hopefully in the not-so-distant future.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

Market context

  • India's Economic Growth Economy · FY23 · High confidence 9.2%
    The Indian economy, as announced by the finance minister yesterday, is projected to grow at 9.2% in FY23, the highest among all large economies.

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

  • CapEx as Percentage of GDP Capex · High confidence 2.5%
    Notably, CapEx as a percentage of GDP at 2.5% is the highest in 24 year (since FY '99).

    — Ajay Mahajan - Managing Director & CEO, CARE Ratings Ltd.

Risks & concerns

  • Pandemic-triggered episodic disruptions and new COVID-19 variants.

    medium

    The new variant of COVID-19 and resultant intermittent restrictions have been a drag on activity, underscoring fragile recovery and persistent economic uncertainty.

    Management acknowledged

  • Competitive market in the ratings business.

    medium

    The industry is very competitive, posing challenges in retaining past accounts and gaining market share.

    Management acknowledged

  • Impact of corporate deleveraging and shift to shorter-term borrowings on the surveillance basket.

    medium

    Corporate deleveraging, non-cooperation from some issuers, and a shift to shorter-term borrowings reduce the benefit to the surveillance basket.

    Management acknowledged

  • Exodus of tech talent impacting the IT technology subsidiary.

    medium

    The IT technology subsidiary had a difficult Q2 due to talent exodus and inaccessible markets, leading to a 16% revenue decline in 9 months.

    Management acknowledged

  • High valuations in secondary equity markets affecting inorganic growth opportunities.

    low

    Management believes opportunities for inorganic growth at the 'right value' may not arise in the immediate future due to very perky equity valuations.

    Management acknowledged

Areas of evasion (2)

  • Buyback timeline
  • Specific competitor growth comparison

Q&A highlights

1 direct, 1 evasive
Rating business growth compared to competitors and market share. Partial
In the nine months, speaking of the operating revenue growth, we are broadly in-line with our competitors. That said, we obviously continue to strive to do better.

Addresses investor concern about competitive performance and market positioning, though without specific comparative data to fully satisfy the query.

Asked by Kunal Shah - Carnelian Capital

Shareholder buyback and management's commitment to it. Evasive
There are very strong regulatory issues around this, so very hard to give you a timeline or an answer that throws any clarity on the question you asked with regard to timing, etc. But... is the Board actively considering it at this moment of time? No is the right answer.

Reveals a significant disconnect between shareholder expectations for capital allocation and the current stage of internal discussion/Board consideration, with no clear timeline or commitment.

Asked by Mudit Minocha - M3 Investments

Technology investments and leveraging analytics/machine learning compared to competitors. Direct
Any project that we embark on in technology takes a little bit of time... But we are firmly on the path to building a very tech-led business.

Addresses a perceived gap in technology adoption compared to competitors, providing context on implementation challenges and strategic commitment to technology as a core pillar.

Asked by Aakash Mittal – Accenture

3 min read 7 chapters

Detailed narrative

Q3 FY22 Financial Performance Overview

CARE Ratings reported a modest increase in total income to ₹55.45 crores for Q3 FY22, up from ₹54.83 crores in the preceding quarter, representing a 1.13% sequential growth. However, Profit Before Tax (PBT) declined to ₹19.85 crores from ₹21.05 crores, with PBT margins at 31%, and Profit After Tax (PAT) stood at ₹14.90 crores, yielding a 27% margin. Expenses for the quarter increased by 5.4% to ₹35.6 crores, primarily driven by employee costs and other operational expenses.

Economic Outlook and Union Budget Impact

Management expressed strong optimism regarding India's economic prospects, citing the finance minister's projection of 9.2% growth in FY23. The Union Budget was lauded as 'forward-looking,' with a significant focus on infrastructure, green development, and all-inclusive welfare. Key allocations include ₹10 trillion for CapEx in infrastructure, ₹3 trillion for wasteland development, and an extension of the ECLGS scheme to ₹5 trillion, all expected to crowd in private sector investments and support the MSME sector.

Credit Market Dynamics

Corporate bond issuances in Q3 FY22 totaled ₹1.45 lakh crores, marking a 19% sequential decline and a 15% year-on-year decrease. In contrast, commercial paper issuances were robust, reaching ₹6.5 lakh crores, up 4% QoQ and nearly 50% YoY. Bank credit offtake showed improvement, with incremental growth of 6.7% as of December 2021, compared to 3.2% in 2020, though this was primarily driven by the retail segment, with industrial and services credit remaining in contractionary territory.

Strategic Pillars and Brand Transformation (CareEdge)

CARE Ratings is undergoing a transformative journey, structured around four pillars: Group approach, Technology, Talent, and Re-branding. The company recently rebranded as 'CareEdge' to reflect its vision of becoming a 'financial powerhouse' and 'Knowledge Purveyor.' Efforts include strengthening analytical rigor, diversifying revenue streams, and enhancing outreach through various knowledge-sharing forums and digital content, including webinars and social media.

Subsidiary Performance and Diversification

The company's diversification strategy through its subsidiaries showed mixed results for the first nine months of FY22. The Africa subsidiary demonstrated strong growth, with revenues increasing 53% to ₹5 crores from ₹3.29 crores. The Advisory business also performed well, growing 55% to ₹5.7 crores from ₹3.68 crores. The Nepal business saw a 7.24% revenue increase. However, the IT technology-focused subsidiary experienced a 16% revenue decline, attributed to an exodus of tech talent and market inaccessibility.

Technology and Digital Transformation Focus

Management emphasized technology as a key enabler for its transition, with ongoing efforts to upgrade systems and establish innovative solutions. While acknowledging some delays in technology projects due to talent efflux, the company reiterated its firm commitment to building a 'tech-led business.' Technology is seen as crucial for improving productivity, enhancing product quality, and deploying third-party products in risk solutions and advisory services.

Shareholder Concerns: Growth and Buyback

Analysts raised concerns about CARE Ratings' growth trajectory compared to competitors and the lack of progress on a share buyback. Management stated that 9-month operating revenue growth was 'broadly in-line' with peers (6% or 7.1% adjusted). Regarding a buyback, management acknowledged it as an important internal deliberation but indicated that the Board is not formally considering it at this moment due to 'strong regulatory issues,' leading to investor frustration.

This is an AI-generated summary of a publicly available earnings call transcript.
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