Care Ratings - Undemanding Valuation, Assured Revenue Growth: HDFC Securities Initiates Coverage

HDFC Securities Retail Research

Care Ratings Ltd. is the second largest credit rating agency in India after Crisil. Regulatory bodies like Reserve Bank of India, Securities and Exchange Board of India and other bodies like The National Company Law Tribunal  have mandated ratings for new products/borrowers, bringing in new sources of income for credit rating agencies.

The Covid-19 pandemic had disrupted businesses and the rated volumes plummeted. However now the economy is back on the revival path. Businesses have announced significant capex plans and the Government has also announced ~25% increase in its capex for 2022-23.

The requirement for credit rating is likely to grow along with the economy. Measures such as the production linked incentive scheme and increased ease of doing business are expected to boost capital expenditure in the next five years. Given that bank credit is expected to double in the next five years, the long-term proposition of credit rating agencies seems intact.

The current valuation of the stock is not demanding given that the business and relationships takes time to scale up, revenue growth is assured (though its pace may change) and margins are high in a low capex intensity business.

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