CARE IPO opens today: Should you subscribe?

Domestic rating agency Credit Analysis & Research’s initial public offer opened for subscription on Friday. The face value of shares is Rs 10 and they are available in the price band of Rs 700-750 per share. Subscribers will have to invest in lot sizes of 20 shares. The IPO closes on December 11.

The public offer comprises 71.9 lakh shares translating into nearly 25 per cent of the company's post-offer equity capital. 35 per cent of shares are reserved for retail investors.

CARE competes with other rating agencies like Crisil and ICRA, which are already listed on the stock exchanges.

Profile: CARE is second largest rating agency in India. Rating services account for more than 85 per cent of revenues of the company.

Issue objectives: The proposed offer is being made by the selling shareholders and there will be no fresh issue of shares by CARE. As a result of which all the proceeds would go to the selling shareholders and not to the company. The shareholders selling their shares in the offer include IDBI Bank, Canara Bank, SBI, IL&FS, Federal Bank, IL&FS Trust (for shares held on behalf of Milestone Fund), Milestone Trusteeship (for shares held on behalf of Milestone Army Trust), ING Vysya and Tata Investment.

Peer comparison (as on March 31, 2012): CARE trades at 17.3-18.5 its price earnings multiple. Crisil and ICRA traded at 33-times and 26-times respectively. CARE Earnings per Share (EPS) stood at Rs 40.44 at the end of last fiscal. Crisil reports Rs 31 in EPS while ICRA's EPS stood at Rs 54. CARE's operating expenses are significantly lower while margins are higher. CARE's profit before tax margins are the highest in the industry. It aspires to go outside India.

Valuation: According to investment bank, Espirito Santo, the company has shown consistent growth in revenue and PAT in the last five years. PAT grew at a CAGR of 34 per cent between 2008-2012 to Rs 116 crore. As the investment cycle turns and interest rates decline, there might be increased issuance of debt by companies. Also, the government is taking steps to develop the corporate bond market in India, which could be a significant growth driver for the company. At Rs.750, which is the top of the price band, the implied valuation of the company is 18.5x FY12A earnings, which we think is reasonable when compared with its listed peers.

What analysts say:

1) Ashok Kumar, MD, Lotus Knowlwealth: Of the three IPOs (CARE, PC Jewellers, Bharti Infratel), CARE is the front runner. There is a pull factor in its business and visibility in earnings. The company has done well in a difficult environment. They have tapped the overseas market and are differentiating themselves.

The company is uni-dimensional with 85 per cent revenue coming from ratings business unlike Crisil, which has a differentiated model. Banks may get permission to start their internal rating in a couple of years, which will hit revenues and margins.

Verdict: At current price, there is money to be made. It is a good investment with one year horizon, but with the current business model, the company may find the going tough.

2) Mehraboon Irani, Nirmal Bang Securities: The domestic brokerage has advised investors to subscribe the issue. Mr Irani told NDTV that it is a decent IPO with a good business, but Crisil and ICRA are preferred picks in the ratings space.


Disclaimer: Investors are advised to make their own assessment before acting on the information.

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