1) Valuation Metrics

• Current Market Price: ₹1,116.25 per share.
• Market Capitalization: ₹3,254.53 crore.
• Total Shares Outstanding: Approximately 29.88 million shares.
• Earnings Per Share (EPS): ₹33.66.
• Free Cash Flow (FCF): ₹101.67 crore for the fiscal year ending March 2024.
• Cash and Cash Equivalents: ₹550.15 crore.
• P/E Ratio: 32.25.
• Total Debt: No significant debt with a debt-to-equity ratio of 0.
• Total Enterprise Value (EV): Approximately ₹2,704.38 crore.

2) Company History

Founded in 1993 in Mumbai, CARE Ratings Limited emerged from a need for transparency and reliability in credit assessments. Established by prominent financial institutions such as the Industrial Development Bank of India (IDBI), Canara Bank, and the State Bank of India (SBI), CARE Ratings quickly earned a reputation for credibility and accuracy. Over the years, the company has expanded its services, embraced technological advancements like AI and ML, and ventured internationally, establishing a presence in Nepal and Africa.

3) Industry Analysis

The credit rating industry plays a critical role in financial markets, assessing the creditworthiness of entities and their debt instruments. This industry benefits from stable and recurring revenue models, high profit margins, and significant barriers to entry. Demand for credit ratings is driven by regulatory requirements and the need for financial transparency. Additionally, rating agencies are leveraging advanced technologies like AI and ML to enhance their services, ensuring they stay relevant and competitive.

4) Competitors

CARE Ratings operates in a competitive landscape with key players such as CRISIL, ICRA, Fitch India, Brickwork Ratings, and SMERA Ratings. Each competitor has unique strengths:

• CRISIL: Backed by S&P Global, CRISIL is the largest credit rating agency in India, offering a comprehensive range of services.
• ICRA: Affiliated with Moody’s Corporation, ICRA leverages international best practices and technological innovations.
• Fitch India: A subsidiary of Fitch Ratings, Fitch India brings global expertise to the local market.
• Brickwork Ratings: Known for its innovative methodologies and customer-centric approach.
• SMERA Ratings: Specializes in rating MSMEs, catering to a crucial segment of the Indian economy.

CARE Ratings’ advantages include a strong domestic focus, faster decision-making processes, deep local expertise, and an extensive network across India, enabling it to provide nuanced and sector-specific insights.

5) Technical and Fundamental Analysis

Fundamental Analysis:

• Consistent Earnings Growth: CARE Ratings has shown consistent growth in earnings, with a reported EPS of ₹33.66 for the fiscal year 2023.
• High Profit Margins: The company operates with high profit margins due to low operational costs associated with its rating services.
• Stable Dividend Policy: CARE Ratings is known for its consistent dividend payouts, providing a steady income stream to investors.

Technical Analysis:

• Volatility: The stock has exhibited significant volatility over the past year, with a 52-week range between ₹690.25 and ₹1,263.95.
• Increased Trading Volume: Recent trading volumes have frequently exceeded daily averages, indicating heightened investor interest.
• Potential for Upward Movement: The stock closed at ₹1,116.25, which is 11.69% below its 52-week high, suggesting potential for upward movement.

6) Why the Stock is Undervalued?

The undervaluation of CARE Ratings’ stock is due to several temporary challenges:

• IL&FS Crisis: The 2018 IL&FS crisis led to regulatory scrutiny and a loss of investor confidence.
• Regulatory Scrutiny: Stricter regulations increased compliance costs.
• Economic Slowdown: Sluggish industrial credit growth and high NPAs in the banking sector.
• Market Competition: Intense competition can pressure pricing and margins.
• Leadership Changes: High-profile resignations and management challenges.

These challenges are temporary, and CARE Ratings has taken steps to enhance its rating processes, strengthen compliance frameworks, and stabilize its management team.

7) Why Should We Buy at the Current Price?

The current undervaluation presents a significant opportunity for investors. CARE Ratings has demonstrated resilience and adaptability, taking proactive measures to overcome temporary setbacks. The long-term outlook for the credit rating industry remains positive, driven by government initiatives to develop the bond market and improve financial transparency. As economic conditions improve, the demand for credit ratings is expected to rebound, benefiting CARE Ratings. The company’s strong market position, consistent financial performance, and attractive valuation make it a compelling investment at the current price.

8) What Price Super Investors Bought the Shares

• Mohnish Pabrai: Acquired shares at an average price of ₹1,200 per share.
• Guy Spier: Invested at an average price of ₹1,000 per share.

Both investors recognized the intrinsic value of CARE Ratings and its potential for long-term growth, making their investments during periods of temporary undervaluation.

9) Inherent Risks

• Regulatory Risks: The credit rating industry is subject to stringent regulatory oversight.
• Economic Sensitivity: The demand for credit ratings is closely tied to economic activity.
• Market Competition: Intense competition from major players.
• Reputation Risks: Any missteps in rating accuracy can severely damage reputation.
• Technological Disruption: Rapid advancement of technology and alternative credit assessment tools.

10) Final Comments

Investing in CARE Ratings Limited at the current market price offers a compelling opportunity. The company’s robust financial health, stable revenue model, high margins, and strategic initiatives position it well for future growth. Despite temporary challenges, CARE Ratings’ proactive measures and strong market fundamentals make it a standout in the credit rating industry. This makes it an ideal time to capitalize on this promising investment opportunity, with the potential for substantial returns in the long term.