Intensified competition hurts ratings revenues of Crisil, CARE

Market leaders' ratings business grew slower than Icra, which posted a 9% y-o-y growth

Revenues of leading rating agencies – Crisil, Credit Analysis and Research (CARE) and Icra- posted single digit growth in March quarter (Q4) due to intensified competition from new as well as small agencies. Icra, third largest player in the industry, posted a better growth of 9 per cent on year-on-year basis as compared to market leaders Crisil and CARE, whose ratings revenues stood at 4 per cent and 2 per cent respectively. 

Decline in growth was also attributed to the continued slowdown in macro-economy and a sluggish credit growth.

While CARE derives most of its revenues from its ratings business, three-fourth of Icra’s revenues accrue from this segment. 

As far as Crisil is concerned, a majority of its revenues comes from its research division with ratings business accounting for only 28 per cent of the total revenues earned by the company. Strong growth in its research division, accounting for about 66 per cent of the company's revenues, as well as the advisory business boosted overall growth at Crisil.

Company managements are, however, confident of retaining their market share in the ratings business. “Competitive intensity in the ratings industry is definitely higher than what it was 3 years back. But this impact is felt even more due to a slow down in macro-economy, bank credit offtake and higher bad loans. Smaller players such as SMERA have not made much impact. CARE and Crisil have maintained their positions,” said Rajesh Mokashi, MD & CEO, CARE during an interaction with the compnay's investros on Wednesday.  

At present, CARE is stepping up its spends in brand-building processes, which is also partly to celebrate the company's 25th year of operations. Crisil management, however, told investors that 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 ratings business due to lower demand for bank loan ratings, believe analysts.

Higher costs amid slowing sales growth and unfavourable rupee movement impacted Crisil’s EBITDA margin in the fourth quarter. In fact, it lags behind CARE and Icra on this front, who not only enjoy much higher margins but also witnessed an improvement in this metric in the quarter. Mokashi believes that even though CARE’s margins might tone down a bit from current levels, they will continue to be ahead of peers’ margins.

Overall, ratings revenue growth has been rather lumpy for these companies, even as they stand to gain from the gradual improvement in credit growth and macro-economy in the long term. 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. Thus, 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. For now, the risk-reward is more favourable for CARE and Icra given Crisil’s rich valuations. From a near-term perspective, newsflow around market regulator Securities and Exchange Board of India's (Sebi’s) investigation of the ratings given by Crisil and Care to Amtek Auto might have some impact on their stocks.