Q4FY23 Review: CARE: Rating steady; focus on Non-rating

15 May 2023 , 01:49 PM

CARE’s PAT decline of 14% YoY in Q4 was due to investments in Non-rating businesses (Analytics, Risk Management solutions) and higher tax rate. On the earnings call, management stated that private capex cycle recovery may be gradual; but was optimistic on medium-term prospects. CARE wants to focus on growing Nonrating businesses (~11% of revenue in FY23). This may involve acquisitions. Analysts of IIFL Securities cut FY24/25 EPS by 4%/3% due to slower progress on monetisation of Non-rating segments. CARE now trades at ~18x 1YF PE at a significant discount to peers, but close to 1SD above its historical mean. While FY23 marked an end to CARE’s Rating market-share losses since the IL&FS crisis, a significant re-rating is contingent upon diversification of revenue mix and improvement in perceived rating quality.

Q4: 14% PAT decline on higher costs and tax, despite healthy revenue: 

CARE’s 14% rating revenue growth in FY23 (and Q4) is similar to peers, ending a period of market-share loss that started with the IL&FS crisis. Non-rating business’ contribution to revenue has been flattish at ~11% in past 2 years, while investments in the same have dented margins. Including a special dividend for the 30th year, 85% payout ratio was healthy for FY23.

Focus on expansion into Non-rating: 

Key takeaways from the earnings call: 1) Private capex cycle recovery may be gradual but medium-term outlook is positive. 2) CARE expects to benefit from the ESG rating guidelines that SEBI is working on. 3) Rating stability rate has improved in the current 5yr period vs the earlier 5yr period across rating buckets, suggesting improved rating quality. 4) Employee cost as % of revenue will remain range-bound. 5) FY23 was high on investments in Non-rating businesses, but monetisation should pick up going forward.

Cut FY24/25 EPS by 4%/3%; new TP Rs754: 

FY23 was the best year for CARE since the IL&FS crisis with 13%/30%/16% revenue/Ebitda/EPS growth. Analysts of IIFL Securites cut FY24/25 EPS by 4%/3%, largely led by higher losses in Non-rating business, which could partly offset operating leverage benefits. They expect 22% EPS growth in FY24 as effective tax rate normalises from the elevated level seen in FY23, followed by 17% EPS growth in FY25.