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CARE: Other income volatility dents profits - Views on News from Equitymaster
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CARE: Other income volatility dents profits
Sep 9, 2015

CARE Ratings announced the results for first quarter of financial year 2015-2016 (1QFY16). The topline increased by 13% YoY while bottomline fell by 34% YoY in 1QFY16. Here is our analysis of the results.

Performance summary
  • Revenues grew by 13.1% in 1QFY16 on the back of 13% YoY growth in rating revenue.
  • Operating margins went up from 47.1% to 49.9% over the past year primarily due to rise in rating volumes and control on costs.
  • Sharp fall of almost 80% in other income, however, led the bottomline to fall by 34% YoY.

Financial snapshot
(Rs m) 1QFY15 1QFY16 Change
Total income 427 483 13.1%
Expenditure 226 242 7.1%
Operating profit (EBDITA) 201 241 19.9%
Operating profit margin (%) 47.1% 49.9%  
Other income 148 30 -79.8%
Interest - -  
Depreciation 14 11 -21.4%
Profit before tax 335 260 -22.4%
Tax 69 85 23.2%
Profit after tax/(loss) 266 175 -34.2%
Net profit margin (%) 62.3% 36.2%  
No. of shares (m)#   18.0  
Diluted earnings per share (Rs)   45.1  
P/E ratio (x) *   26.1  
*Based on trailing 12 month earnings

What has driven performance in 1QFY16?
  • CARE witnessed 10.9% growth in volume of debt ratings and added 708 clients in the first quarter of FY16.

  • Other income fell by a sharp 80% YoY with fall in the fixed maturity plans (FMPs) and these being rolled over.

  • The total number of active rating clients at the end of June 2015 was 10,332.

What to expect?

At the current price of Rs 1176, the stock of CARE Ratings is trading at about 26 times trailing 12 month earnings. The stock looks reasonably attractive on a PEG basis, in relation to the Sensex PEG. This is why after the correction on 24th August, we recommended investors to invest only around 25% of the sum that they intended to put into this stock and invest the remaining once the stock suffers further correction of some sort.

CARE has cash and liquid investments forming almost 37% of its balance sheet at the end of FY15. Besides the company's operating and net margins have averaged at 75.7% and 54.7% over the past 8 years. And it is not that the company is not paying out the excess cash to shareholders. Besides an average dividend payout ratio of over 45% in three years, in FY15, the company paid a special dividend of Rs 65 per share taking the total payout in FY15 to 157.7%. And such generous payouts by way of dividends and buy backs will be the norm for cash utilization, as per the management.

While other income volatility does remain a risk, other income as a proportion of total operating income has not exceeded 16% over the past 8 years.

Also, if and when the company's cash gets better utilized, through organic or inorganic growth, we expect the return ratios (RoE and RoCE) to improve substantially from the current levels (32.7%, 36.6% respectively). Investors who have already put in 25% of the sum intended to be put in the stock should not buy more at current levels. As and when the stock moves closer to the best buy levels we will certainly update you on the same.

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