Stocks of leading credit rating agencies CRISIL, Credit Analysis and Research (CARE) and ICRA have outperformed the S&P BSE Sensex over the past one year.
Expectations of pick up in bond market is one reason the rally will continue for these stocks. A host of positives in the recently announced Union Budget such as high thrust on infrastructure projects and infra bonds, continuous fund raising by banks (via bonds) to meet Basel III capitalisation requirements alongwith falling interest rates are others. Given these triggers, more corporates are likely to access bond markets increasing the demand for bond ratings. This in turn will rub off favorably for all rating agencies. In this backdrop, strong run of CRISIL and CARE is likely to continue going forward as well, believe analysts. ICRA scrip though appears to be richly valued currently and can be considered on dips, believe analysts.
CRISIL and CARE are trading 8% and 10% below their 52-week highs while the ICRA scrip is trading 5% down.
Continued leadership position and focus on product innovation and development in the past year are some of the key strengths of CRISIL. Analysts thus remain positive on the company. Notably, even though CRISIL witnessed flattish growth in ratings revenues (33% of total revenues) in the December 2014 quarter, the management remains confident.
Raman Uberoi, Business Head, CRISIL Ratings, Large Corporates & President, Corporate Affairs, says, "Increasing number of dual ratings by corporates since the past couple of years has resulted in higher ratings for some of our peers. The difference in revenue recognition amongst rating agencies is another factor leading to a divergent performance by the agencies. We are not losing market share or clients in any of our businesses. We believe second half of FY16 will be better for us for all divisions- ratings, research and advisory."
While pick up in domestic corporate investments in bonds is key for its ratings business, improvement in performance of global investment banks will act as a catalyst for CRISIL’s research business (60% of total revenues). While analysts are positive on the company, their average target price indicates downside of about 8% from current levels.
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Strong margins and cash flow, expectations of healthy expansion in return ratios and inexpensive valuations relative to peers are some of the strengths of CARE. Most analysts polled by Bloomberg remain positive on the company and expect upside of 16% from current levels.
"CARE has emerged as a strong player in the rating business with strong margins and improving market share with best brand recall after CRISIL. It is trading at a discount to the consolidated business of CRISIL, Icra. The company has strong RoE of 27% for FY14 and potential to further enhance it to 47% by FY17", believes Kajal Gandhi of ICICI Securities. She has a one year target price of Rs 2,175 on the company. Given that ratings contribute almost entire part of CARE’s revenues, it enjoys higher EBITDA margins than peers and could gain more than its peers from increasing domestic bond issuances.
While most analysts remain positive on ICRA as well, the stock has run up significantly and appears richly valued as of now. Average target price of analysts polled by Bloomberg stands at Rs 2,974 , indicating about 24% downside from current levels. Strong cashflows, negligible capex in the medium term alongwith strong balance sheet are key strengths of the company. Strong show by IT and BPO services (24% of total revenues) have driven non-ratings business while ratings business (56.1% of revenues) too has put up consistent show in recent quarters.