CARE Ratings Limited — Q4 FY23 earnings call

Call held 12 May 2023

Management summary

CARE Ratings reported a strong Q4 and FY23, with standalone revenue growing 13% to Rs. 248.8 crores and net profit increasing 23% to Rs. 103.8 crores. The core ratings business, particularly the bank loan segment, drove this growth, with incremental debt rated increasing 78% to Rs. 3.8 lakh crores. While non-rating subsidiaries like CARE Risk Solutions faced losses due to product development investments, management expressed confidence in their long-term potential and strategic roadmap, focusing on quality-led growth, knowledge dissemination, and talent retention.

Highlights

  • Standalone FY23 Revenue from operations: Rs. 248.8 crores, up 13% YoY.

  • Standalone FY23 Net Profit: Rs. 103.8 crores, up 23% YoY.

  • Standalone Operating Profit Margin: approximately 46% for FY23.

  • Q4 FY23 Income from operations: Rs. 68 crores, up from Rs. 60 crores in Q4 FY22.

  • Consolidated FY23 Revenue from operations: Rs. 279 crores, up 13% YoY.

  • Consolidated FY23 Net Profit: Rs. 85.5 crores, up 11% YoY.

  • Incremental Debt Rated (FY23): Rs. 3.8 lakh crores, an increase of 78% YoY (from Rs. 2.2 lakh crores in FY22).

  • FY23 Attrition Level: around 28%.

Key financials

  1. Standalone Revenue ₹248.8 Cr +13%YoY
  2. Standalone Net Profit ₹103.8 Cr +23%YoY
  3. Standalone Operating Profit Margin 46%
  4. Consolidated Revenue ₹279 Cr +13%YoY
  5. Consolidated Net Profit ₹85.5 Cr +11%YoY
  6. Incremental Debt Rated ₹3.80L Cr +78%YoY

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

  • CARE Advisory Research and Training (CART)
    — Profitability
  • CARE Risk Solutions
    — Profitability
  • CARE Ratings Africa Private Limited
    50 corporates Rating Assignments
  • CARE Ratings Nepal Limited
    100 assignments Rating Assignments

Guidance & targets

Tax Rate

  • Effective Tax Rate Tax Rate · FY24 · High confidence 25-27%
    It would be nearly to current tax rate that is between 25% to 27%.

    — Jinesh Shah

Employee Cost

  • Employee Cost as % of Operating Revenue Employee Cost · future · Medium confidence range bound
    our employees cost as a percentage of the operating revenue, that shall remain range bound, so in certain quarters, if we feel that certain skill sets are indeed required to be on-boarded, by all means we shall be going for that.

    — Mehul Pandya

Non-Rating Business

  • Traction and Profitability Non-Rating Business · future · Low confidence longer time to get to a stage where they are giving us a lot of traction
    this businesses will take slightly longer time to get to a stage where they are giving us a lot of traction.

    — Mehul Pandya

Rating Business

  • Growth Rate Rating Business · next 3-5 years · Low confidence too much of a forecasting prematurely in terms of giving any specific number
    I think it will be too much of a forecasting prematurely in terms of giving any specific number, whether it will be double-digit or single-digit in this regard.

    — Mehul Pandya

  • Realization Rating Business · year-on-year · Medium confidence positive traction
    We are quite focused in terms of a better realization as well, so that is one area where we consistently focus upon on a year-on-year basis to track our progress and I am happy to report that it is showing positive traction on that.

    — Mehul Pandya

Impairment

  • Further Impairment Impairment · coming quarters · High confidence nothing substantial
    We do not anticipate anything substantial in this regard because, as I said that the efforts which are going in terms of turning around this company, they are in the right direction.

    — Mehul Pandya

Risks & concerns

  • Global economic challenges (geopolitical conflict, inflation, monetary tightening, global financial sector turmoil)

    medium

    The world economy faced challenges from geopolitical conflict, high commodity prices, inflation, and tightening monetary policy, amplified by recent turmoil in the global financial sector.

    Management acknowledged

  • Challenges in growing non-rating businesses and achieving profitability

    medium

    Non-rating businesses are challenging to grow, with CARE Risk Solutions incurring major losses due to product development investments, and these businesses will take longer to gain traction.

    Management acknowledged

  • Uneven consumption demand and rural demand recovery

    low

    Consumption demand has been uneven due to lack of rural demand recovery, with weather-related uncertainties posing some downside risks despite expected aid from moderating inflation and Rabi harvest.

    Management acknowledged

  • Software industry turmoil impacting resource availability for product development

    low

    The software industry experienced turmoil in resource availability, which impacted product development timelines, though management stated this has been 'arrested' recently.

    Management acknowledged

Q&A highlights

2 direct
Non-rating business losses and timeline to break-even Partial
I think when we are talking of the non-rating businesses, I would say the major loss which has been there is on the Risk Management Solutions Subsidiary. As far as the Consulting Subsidiary is concerned, CART which is concerned it has largely been closer to break-even during FY23... this businesses will take slightly longer time to get to a stage where they are giving us a lot of traction.

This question directly addresses the profitability and future viability of the company's diversification strategy, which is currently impacting consolidated earnings.

Asked by Keshav Garg

Impairment loss in Q4 FY23 standalone statement Direct
This pertains to our assessment of our investment in our subsidiary, which is the tech subsidiary CARE Risks Solutions. So in this regard, as a matter of good governance... we felt that as a prudent measure, we should be taking this impairment in Q4 and that is something that we have done.

Addresses a specific negative financial event in the quarter, providing context and management's outlook on its recurrence.

Asked by Hitesh Agarwal

Rating stability and comparison to industry average Direct
our Rating stability is improving over the period... we are better off than the industry average in terms of Rating stability... in the current year, we had only one such instance wherein the investment grade entity went into default. The similar numbers in the prior periods were in double digits and even last year it was a number of about 5, so we have been very sharply improving our performance in this respect.

This metric is crucial for a rating agency's credibility and market position, and management provided specific data points to demonstrate improvement and competitive advantage.

Asked by Vikram Kotak

3 min read 7 chapters

Detailed narrative

Q4 FY23 & FY23 Financial Performance Overview

Standalone revenue from operations for FY23 grew 13% to Rs. 248.8 crores, up from Rs. 219.3 crores in the previous year. Net profit increased by 23% to Rs. 103.8 crores, with a stable operating profit margin of around 46%. On a quarterly basis, Q4 FY23 income from operations rose to Rs. 68 crores from Rs. 60 crores in Q4 FY22. Consolidated revenue for FY23 also saw a 13% growth, reaching Rs. 279 crores, with consolidated net profit at Rs. 85.5 crores, an 11% increase.

Indian Economic Landscape & Business Impact

The Indian economy demonstrated resilience amidst global headwinds, with an estimated 7% growth in FY23. Key indicators like GST collections and PMI showed healthy performance, though consumption demand remained uneven. Gross Bank Credit grew 15% in FY23, primarily driven by retail (20.6%) and services (19.8%), while industrial credit grew a subdued 5.7%. Corporate bond issuances increased 32% to Rs. 8.5 lakh crores, contrasting with a 32% decline in CP issuances to Rs. 13.7 lakh crores.

Core Ratings Business: Growth Drivers & Market Position

The 14% growth in ratings revenue for FY23 was largely attributed to the robust performance of the initial ratings business, particularly the bank loan segment, which saw significant traction due to higher working capital requirements and bank credit being a preferred funding route. Incremental debt rated in FY23 increased by 78% to Rs. 3.8 lakh crores, up from Rs. 2.2 lakh crores in FY22. Management emphasized sustaining this momentum through quality-led growth, knowledge dissemination, and focused outreach.

Non-Ratings Subsidiaries: Strategic Investments & Performance

CARE Advisory Research and Training (CART) operated close to break-even in FY23, achieving a cash flow positive outcome. CARE Risk Solutions, however, incurred major losses due to significant investments in product development, including upgrading existing products and venturing into new business lines like data analytics. Management acknowledged that these businesses require longer timelines to achieve substantial traction and profitability, but expressed confidence in their strategic direction and ongoing product development efforts.

ESG Offerings & Regulatory Developments

Under CART, CareEdge has developed a tech-enabled ESG platform, 'SIRIUS', completing ESG assessments for over 900 listed Indian companies. The company has also been empaneled as an ESG rating provider for AMCs. Management noted the clear regulatory intent for ESG reporting (BRSR) and anticipates final guidelines soon, which is expected to create significant opportunities for their comprehensive consultancy and rating services in this domain.

Human Capital & Organizational Development

CareEdge reported a significant reduction in attrition levels for FY23, reaching around 28%, attributed to consistent efforts in implementing market-related benchmark pay and employee-friendly initiatives. The company is actively engaging with younger talent to understand their needs and is focusing heavily on HR, including multiple training and incentive programs, to ensure it remains a top workplace. Employee costs are expected to remain range-bound as a percentage of operating revenue.

International Operations Expansion

CareEdge's international subsidiaries demonstrated growth. CARE Ratings Africa Private Limited continued its impressive performance, assigning ratings to over 50 corporates in Mauritius. CARE Ratings Nepal Limited also reported growth, executing 100 new rating assignments during FY23. CARE Risk Solutions has also expanded its customer base to include marquee clients in Canada and UAE, indicating a broader global market foray for its analytical offerings.

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