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The Indian Rating Agency Cleanup Has Begun and this Cheap Stock Could be the Best Bet

Jul 2, 2019

Tanushree Banerjee, Editor, The 5 Minute Wrapup

It was September 2018 when the IL&FS fiasco broke out. Its rating agency, ICRA, came in the negative spotlight.

Nine months later, its MD&CEO Naresh Takkar, has been sent on 'forced leave', based on concerns raised by the capital markets regulator.

ICRA's Disclosure to BSE on July 1, 2019

This is not the first time that rating agencies have been in the spotlight for wrong reasons. They have been often accused for failing to red flag financial catastrophes in the rated companies.

The fact that a AAA rating is hardly a guarantee of financial health is something we have been writing about since 2009. Not just in India, but globally, the big rating agencies have been too powerful. Most of them escaped untouched ever after the massive US subprime crisis of 2008.

And in India, be it in the case of Amtek Auto or Kingfisher Airlines, rating agencies have time and again been caught on the wrong foot. More recently, in the case of Zee and DHFL too, the rating agencies were caught napping.

Even then, investors continued to remain in awe of the rating companies. The stocks fetched steep valuations.

One, because the two largest rating agencies in India are subsidiaries of global giants S&P and Moody's.

Two, because they corner a massive chunk of the rating market share.

Three, because the cash rich companies have immense potential to pay out or multiply shareholder wealth.

High Cash Levels in the Books of Rating Agencies

High Cash Levels in the Books of Rating Agencies

Also, India's debt market remains at a nascent stage. So, the rating agencies have immense potential to grow as the market matures.

Therefore, there is no denying that the business of rating agencies is not withering away anytime soon.

The only risk is stricter regulation and accountability. Both of which could be benign for the long term.

With the recent SEBI diktat, India has become the first country to regulate credit rating agencies. Some further improvements are certainly required to erase the conflict of interest between the rater and its clients.

In the meanwhile, the rating companies are certain to face growth constraints.

The stocks of rating agencies are not completely immune to such crisis.

The last time this big rating agency was as cheap and out-of-favour as it is today, the stock had corrected by 40% in six months.

But then, it went on to move up 400% in the next three years.

Of course, it cannot be a one way up upside.

The cleanup in India's financial sector is far from over. And like the auditors, the rating agencies will continue to remain a part of the cleanup.

But once done, a few of these companies could lead India's financial sector revival. They could be the catalysts of what I call the Rebirth of India. And go on to create massive wealth.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor and Research Analyst, The 5 Minute WrapUp

PS: Dear reader, Tanushree believes this is the right time to buy the best 7 stocks in the market before they run up. Read more about these 7 stocks here...

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