Competition, slowdown hurt rating revenues of CRISIL, CARE

Rising competition, sluggish credit growth and economic slowdown gave rating agencies CRISIL, Credit Analysis and Research (CARE) and ICRA single-digit revenue growth in the March 2017 quarter (Q4). 

Industry leader CRISIL and second player CARE saw a much lower growth in rating revenues as compared to the third-largest player in the sector – ICRA. The rating revenues of ICRA grew nine per cent year-on-year, whereas CRISIL'S and CARE's grew four per cent and about two per cent, respectively, in Q4. 

CARE derives almost all of its revenues from the rating business. But the segment forms three-fourths of ICRA’s revenues and 28 per cent of CRISIL’S revenues. Strong growth in its research division (about 66 per cent of revenues) as well as the advisory business boosted the overall revenue growth at CRISIL.

The company’s management said they were confident of retaining their market share in the ratings business.

Rajesh Mokashi, managing director & chief executive officer at CARE, told investors in a call on Wednesday, “Competitive intensity in the ratings industry is definitely higher than what it was three years back. But this impact is felt even more due to the slowing down in macroeconomy, bank credit offtake and higher bad loans. Smaller players such as SMERA have not made much impact. CARE and CRISIL have maintained their positions.” For now, CARE is stepping up spends behind brand building, which is also partly to celebrate its 25th year of operations.

Illustration: Binay Sinha
CRISIL management told investors that a cut in government subsidy towards small and medium enterprise (SME) ratings has led to uncertainty around the prospects of this segment. Sluggish credit growth is another factor pulling down the ratings business due to lower demand for bank loan ratings, said analysts.

Higher costs (amid slowing sales growth) and unfavourable rupee movement impacted CRISIL’s Ebitda margin in the quarter. It lags CARE and ICRA on this front, who not only enjoy much higher margins but also witnessed an improvement in this metric in the quarter. The difference in margins among these players, however, is also due to the revenue mix. For ICRA, the fall in revenues as well as a surge in margins is also due to the sale of its low-margin IT business. Mokashi said even though CARE’s margins might tone down a bit from the current levels, the numbers would continue to be ahead of peers’ margins.

Overall, the ratings revenue growth has been rather lumpy for these companies, even as they may stand to gain in the long term from a pick-up in banking credit growth and the macroeconomy.

From the stock valuation perspective, the Street continues to assign a hefty discount to CARE, given its less diversified revenue model as compared to that of CRISIL and ICRA. The CARE scrip trades at 28 times FY18 estimated earnings, while CRISIL and ICRA trade at 47 and 35 times their one-year forward estimated earnings, respectively. To an extent, the difference in valuations, especially CRISIL's higher metric, looks justified given its more diversified revenue stream, significantly larger size and lower free-float (non-promoter holding). The diverse revenue has also helped it deliver relatively stronger top line growth in the March quarter.

In the very near term, news flow around Sebi’s investigation of the ratings given by CRISIL and CARE to Amtek Auto might have some impact on their stocks.

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