This industry will grow a lot as big demand is creating for the credit rating companies in this segment.
In our stock market journey somewhere we can see that someone got upgraded their rating on so and so company. and that rating will impact the stock positive or negative based on that rating. i think you understood that we are going to analyse the rating services/Agencies industry in detail, what are the revenue sources and the growth drivers of this industry and for the credit rating companies.
Industry Analysis (Credit Rating Companies) :
Now a days every where we are hearing the word Capex across the industries such as chemicals, textiles, pharma and many more, as the demand is increasing gradually, they are expanding their capacities.
So majority of the companies will raise the funds from external sources as there is two routes to raise the funds, one is Equity and another is Debt route. between these two routes the debt route is the cheapest as their interest rates are low. so majority of the companies will try to raise the funds from debt route.
So evey company will raise the funds through the debt route. here is the two questions.
1. So what is the benefit to this segment ?
2. Is that much easier to raise the funds through the debt debt route ?
Here is the answer, the debt route is not that much easy because the company which has a good credit rating that company will raise the funds easily and cheaply.
We think evey one understood this point. the credit rating will be issued by these rating agencies. answers are done for the above two questions. Let us assume that if any industry is growing big, there will be benefit for the both companies which are in listed and unlisted space and both has to expand their capacities. for that they need better credit rating, for that the companies needs to be approach rating agencies. This total scenario will brief us that there will be immense growth in future to these stocks.
How these companies make money / Revenue sources :
The rating agencies in will follow two types of business models, one is Issuer pay model and another is subscription model. in issuer pay model, the company which is going for capex, will approach the rating agency and will request for rating.
Then the rating agencies will rate the company and make the research report publicly available, so that investors like you and me will be able to read the rating analysis. in this model the company will pay the charges to the rating agency for releasing the research report. this charges will be flat if the issue size is big else it will be like 0.1 to 0.2%, if issue size is small. In subscription model the investor will request the analysis on particular company or the industry that he wants to know and he will pay the fee as the research report will be private.
The main revenue sources of these companies are rating charges and the surveilance charges. as all we know rating charges are for the rating given to the particular company and the surveillance charges are for keep updating the rating of the company as all we can see that so and so rating company has been upgraded the some company’s rating.
Growth Drivers :
Over the last three years there is no external capex, actually which requires the ratings from the agencies. that’s why the grow was slow down in these companies also we can find that there is flat or negative sales growth because of this slowdown in the economy. now it’s the time and huge demand is being created as lot of companies trying to expand their capacities.
RBI introduced the IBC in india which will be the game changer to these rating agencies. because globally wherever they introduced IBC, there is immense growth in bong market size. if bond market size increases, then there will be good growth for the rating agencies.
Even expecting the same in Indian bond market as already RBI introduced Insolvency & Bankruptcy Code in India.
There is big entry barrier for other credit rating companies to enter into this segment. because the company which wants enter into this business, they must follow stringent rules and code of conduct. that’s why there is only 7 companies are existing in India. among the seven only three are ruling the market and luckily those three are in listed space.
1. CRISIL Ltd
CRISIL Ltd is India’s leading rating agency that was formed in 2005 by S&P, by acquiring the leading stake from the initial founders ICICI Bank, LIC, SBI etc. this company offers 3 major services. they are research services, rating services and advisory services. this company has the variety of the products in their portfolio such as Indices, MF ranking, ULIP ranking, AIF benchmarking, ESG scores and many more.
Also this company has the strong presence across the world including the leading countries like UK, US and China. if you look at the revenue mix this company earning 60% of revenues from research services, 32% of the revenues from offering rating services and 8% of revenues from advisory services.
This company carries a great brand value across the world. this company has a forward looking management and this company has around 18 subsidiaries across the world. Along with the S&P, LIC, GIC, Rakesh Jhunjhunwala & Family are the key share holders in this company.
2. CARE Ratings Ltd
CARE Ratings is India’s second largest credit rating company y and it’s the professionally managed company, and it has the two subsidiaries. this company offers rating, advisory & analytics and risk solutions services. they are earning 87% of the revenues from only rating services so we can clearly understand that the rating services are their key business.
LIC and CRISIL are the key share holders among the others. after IL & FS issue, as this company has given good rating before the company’s collapse, almost they’ve been lost their brand value. But after that company has changed management and doing key transformations in this company. and also good sign that they brought Chief Rating Officer, Sandeep Gupta from CRISIL to bring the brand value back.
3. ICRA Ratings
ICRA Ratings india’s 3rd largest rating agency and their promoter is Moody’s, this company also got affected from IL & FS issue but it is comparatively lesser than CARE Ratings as their promoter is Moody’s which is global leader in the sector, that’s why this company carrying that much value. Moody’s also trying to bring lot of changes in the company as like as they follow globally. along with Moody’s, Aditya Birla and LIC are the key share holders.
Challenges :
Economy Slowdown : Economy Slowdown is the major challenge as already we have discussed in the industry analysis part. if economy is getting slow down then there is no capex, if capex will not happens then there is no need of ratings. so it will impact profitability of the companies.
Wrong Ratings : Fraud Rating is another big issue, as already we have been seen it in CARE and ICRA, how thet got affected from IL & FS issue. if any such things will be happen with any of these three companies that would be the big disadvantage and you should take exit call.
Policy Changes Risk : If RBI brings up any policy or regulatory changes against these companies, that is also a big disadvantage for these companies and should take an exit call.
Conclusion :
The above discussed three credit rating companies are fundamentally and financially strong companies. three are the good companies to hold. coming to the Care ratings, the company is in transformation stage, if they will get succeeded in bringing back their brand value, this stock will deliver better returns but notice there is little risk involved. also the same with ICRA ratings, but as their promoter is Moody’s they are carrying some brand value compare to the Care ratings. finally CRISIL is the finest company with no black mark. you can select among these companies as per your risk appetite after your brief analysis.
Disclaimer : The above all recommendations are from the individuals, working for ICICI Securities. please do your own research before investing else take an advice from your financial advisor.