CARE Ratings Ltd:Annual Report 2023-24 Analysis

Care Ratings Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

Care Ratings Ltd. was established in 1993 by leading banks and financial institutions in India. It was initially promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), and Canara Bank. The primary objective was to provide independent and objective credit ratings.

Headquarters Location:

The company is headquartered in Mumbai, India.

Company Vision and Mission:

• Vision: To be the most respected and sought-after rating agency, empowering informed investment decisions.
• Mission: To provide credible, timely, and transparent credit ratings, contributing to the growth and stability of the Indian financial markets.

Key Milestones in Their Growth Journey:

• 1993: Incorporated as Credit Analysis and Research Ltd.
• 2007: Initial Public Offering (IPO) and listing on stock exchanges.
• 2017: Renamed as CARE Ratings Limited.
• Over the years: Expansion of service portfolio, including risk management, advisory services, and research.

Stock Exchange Listing Details and Market Capitalization:

Care Ratings is listed on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Market capitalization fluctuates but is generally available on financial websites.

Recent Financial Performance Highlights:

Care Ratings’ financial performance is available in their annual reports and quarterly results announcements published on their website and stock exchange filings. These reports detail key metrics like revenue, profit, expenses, and debt.

Management Team and Leadership Structure:

Care Ratings is led by a Board of Directors and a team of experienced professionals. The leadership structure generally includes a Managing Director & CEO, along with heads of various departments like credit rating, research, business development, and finance. Details of the current management team can be found on the company’s official website.

Any Notable Awards or Recognitions:

Care Ratings has received recognition and awards for its performance, transparency, and contribution to the financial markets. Details on awards can be found on their website and media coverage.

Their Products #

Complete Product Portfolio with Categories:

• Credit Ratings: Rating of debt instruments like bonds, commercial paper, bank loans, and structured obligations.
• Gradings: Grading of Initial Public Offers (IPOs), Real Estate Projects, and other specific instruments.
• Risk Management: Assessing and mitigating financial risks for businesses.
• Advisory Services: Providing consultancy on financial structures, debt restructuring, and other financial matters.
• Research: Macroeconomic and sector-specific research reports.

Flagship or Signature Product Lines:

Credit ratings are the core and most recognized product line.

Quality Certifications and Standards:

Care Ratings adheres to stringent regulatory standards set by the Securities and Exchange Board of India (SEBI) and other relevant bodies.

Primary Customers #

Target Industries and Sectors:

Care Ratings serves a broad range of industries including:

• Manufacturing
• Infrastructure
• Financial Services
• Real Estate
• Power
• Textiles

Geographic Markets (Domestic vs. International):

Care Ratings primarily operates within the Indian domestic market.

Major Client Segments:

• Corporates
• Banks
• Financial Institutions
• Government Entities
• Small and Medium Enterprises (SMEs)

Major Competitors #

Direct Competitors in India:

• CRISIL
• ICRA
• India Ratings and Research (Ind-Ra)

Competitive Advantages and Disadvantages:

• Advantages: Long-standing presence in the Indian market, strong brand recognition, and extensive industry knowledge.
• Disadvantages: Face intense competition from other established and global rating agencies, potential conflicts of interest concerns inherent in the rating business.

How They Differentiate from Competitors:

Differentiation strategies include:

• Focus on specific industry sectors or market segments.
• Providing value-added services like risk management and advisory services.
• Emphasizing transparency and independence in the rating process.

Future Outlook #

Expansion Plans or Growth Strategy:

Expansion strategies include:

• Enhancing technological capabilities.
• Expanding product portfolio to cater to new market segments.
• Strengthening research and analytics capabilities.

Sustainability Initiatives or ESG Commitments:

Care Ratings incorporates Environmental, Social, and Governance (ESG) factors into its rating methodologies.

CARE Ratings Limited (CareEdge) Performance Overview: A 3-Year Analysis #

3-Year Trend Analysis of Key Financial Metrics (Consolidated) #

Key Observations #

• Consistent Revenue and Profit Growth: CareEdge has demonstrated strong and consistent growth in both revenue and profit over the three-year period, indicating successful business operations and market positioning.
• Expense Management: Total expenditure has increased, primarily due to employee costs.
• Profitability: Both Operating Profit Margin and PAT Margin remain healthy.
• Return on Equity: Improvements in Return on Net Worth show increasing efficiency in using shareholder funds.
• Industry Comparison: Direct comparison is not provided in terms of data. The company reports growth in Rating Revenue of ~14%.

Business Segment Performance #

• Ratings: This remains the core business, contributing 94.52% of the total turnover in FY24. Revenue from ratings grew by ~14% in FY24 (standalone), driven by initial ratings. The segment focused on:
  • Operational efficiency and process controls.
  • Strong performance metrics (low default rates).
  • Enhanced outreach (webinars, publications).
  • Automation and digitization.
• Subsidiaries:
  • CARE Ratings (Africa) Private Limited (CRAF): 32% revenue increase in FY24, expanding into Southern African Development Community countries.
  • CARE Ratings Nepal Limited (CRNL): Sustained growth, expanded service offerings, and increased active ratings despite challenges in the Nepalese banking sector.
  • CARE Analytics and Advisory Private Limited (formerly CARE Risk Solutions):
    • Analytics: Restructured as a FinTech entity, focusing on the NBFC sector, and exploring expansion into Nepal and Bangladesh. Reported good operating revenue growth in FY24.
    • Advisory: Expanded product offerings, increased customer base, and expects continued growth driven by economic growth and infrastructure spending.
  • CARE ESG Ratings Limited (formerly CARE Advisory Research and Training Limited): Received approval from SEBI to function as a Category I ESG Ratings Provider, ready to commence ESG rating activities.
  • CareEdge Global IFSC Limited: Newly incorporated to carry out Global Scale Ratings of Securities, Sovereign Ratings, etc.

Major Strategic Initiatives and Their Progress #

• Four Strategic Pillars:
  • Group Approach: Restructuring to enhance synergy across subsidiaries (e.g., integrating CARE Advisory Research & Training Ltd. into CARE Risk Solutions).
  • Technology: Significant investments in automation and enhancement of rating processes. Implementation of a comprehensive CRM software. Pilot projects integrating AI technologies.
  • Talent: Focus on attracting, retaining, and training employees. Implementation of a Mid-Year Appraisal (MYA) system, Employee Engagement Survey (EES), and leadership training programs.
  • Branding: Celebrated 30th anniversary with “CareEdge Conversations” events. Increased outreach through webinars, opinion pieces, and knowledge partnerships.
• Specific business strategies: Reorganised Business Development into a Sector-Specific Approach.
• Expansion of services in africa and ESG.
  • Launched Sovereign Ratings methodology.

Risk Landscape Changes #

• Geopolitical Uncertainties: The company acknowledges lingering geopolitical uncertainties as a risk.
• External Demand: Slowing external demand is recognized as a challenge.
• Weather-Related Irregularities: These impact food inflation and rural demand.
• Operational Risks: Addressed through continuous training, rigorous SOPs, a comprehensive Code of Conduct, and IT security policies.
• Business Risk: Addressed by a Group approach, including diversifying our business ventures, separating them from the ratings business.
• Market Intelligence Risk: Strengthen market intelligence systems to accurately anticipate and identify the deteriorating ability of companies to meet their debt obligations
• Regulatory Changes: SEBI and RBI guidelines have impacted disclosure requirements and rating processes. The company is committed to remaining compliant.
• Competition: The credit rating industry is competitive. CareEdge is focusing on deepening relationships with existing clients and targeting high-growth sectors.

ESG Initiatives and Metrics #

• Environmental:
  • Monitoring fuel, electricity, and data usage.
  • Reduction in total GHG emissions compared to the previous year.
• Social:
  • Multiple CSR programs implemented through partner NGOs (focus on healthcare, education, community development).
  • Reduction in employee attrition rate.
  • Employee engagement initiatives (surveys, training).
• Governance:
  • Majority of the Board of Directors are independent Directors.
  • Constituted various board committees, Risk Management and Compliance.
  • Established a vigil mechanism (Whistle Blower Policy).

Specific Metrics #

• CSR spending: ₹2.28 crores in FY24.
• Employee attrition rate: 23.5% in FY24 (down from 28% in FY23).
• Employee Engagement Score: 3.71 out of 5.
• Waste generation and disposal: The company mentions the use of sensor taps and LED fixtures to reduce water and energy consumption.

Management Outlook #

• Positive Outlook: The management is optimistic about FY25, expecting continued healthy economic performance, improved rural demand, and growth in private capex.
• Strategic Focus:
  • Improving rating operations and leveraging technology.
  • Transparent and effective stakeholder engagement.
  • Proactive HR initiatives.
  • Leadership development.
• Growth Trajectory: Management is dedicated to repositioning the Company on a sustained growth trajectory.
• Challenges: The Company has identified risks related to weather, geopolitical conflicts, commodity prices, and the need for improvement in consumption and private investment.

Comparative Analysis #

The provided document does not include comprehensive data for direct comparison with industry averages for many financial metrics. Growth data in the ratings business has been benchmarked against overall credit growth. CARE Edge has experienced robust growth and profitability. The increase in market share in Securitization domain indicates a strong comparative advantage.

Detailed Analysis #

Financial Position Analysis of CARE Ratings Limited #

Balance Sheet Analysis: 3-Year Comparative Overview #

(Rs. in Lakh)

Significant Changes in Major Line Items (YoY > 10%) #

• Current Liabilities: Increased by 76.8% from Rs. 5,440.07 lakh to Rs. 9,620.77 lakh.

Working Capital Trends #

(Rs. in Lakh)

Key Observations:

• Working Capital Increased.
• Current Liabilities Increase: Primarily from increase in other current financial liabilities and contract liabilities.

Asset Quality Metrics #

Key observation: The allowance for credit losses to gross receivables ratio is significant, indicating increased risk of default among customers.

Debt Structure and Maturity Profile #

(Rs. in Lakh)

The Group does not have any external borrowings, only lease liabilities.

Off-Balance Sheet Items #

• Contingent Liabilities: Claims against the Company not acknowledged as debts. The “likelihood of outflow of resources in relation to such litigations is remote.”

Summary #

Key points of CARE Ratings Limited’s financial position:

• Substantial growth in total assets.
• Low debt, consisting of only lease liabilities.
• Significant increase in current liabilities, contributing to a marginal increase in working capital.
• Material allowance for credit losses, indicating a need for close monitoring of receivables.

Operating Performance Analysis of CARE Ratings Limited (FY24) #

Revenue Breakdown #

Segment Breakdown (FY24) #

• Ratings: 94.52% of total turnover. This segment includes credit ratings for debt, bank loans, issuers, securitization, and expected loss.
• Non-Ratings (Analytics & Advisory, ESG Rating, Global): 10% of revenue in FY24, up from 6% in FY23.

Segment Growth #

• Overall Rating Revenue: Increased by 14% from ₹248.84 crore (FY23) to ₹283.07 crore (FY24). Driven primarily by growth in initial rating revenue.
• Consolidated Revenue (Including Subsidiaries): Increased 18.89%.
• Securitization Domain: Volume Growth of 59%.

Subsidiary Growth #

• CARE Ratings (Africa) Private Limited (CRAF): Revenue grew by 32% in FY24.
• CARE Ratings Nepal Limited (CRNL): Showed consistent revenue growth in FY24.
• CareEdge Analytics: Reported “good growth” in operating revenue in FY24.
• CareEdge Advisory: Expanded product offerings and added clients.

Geographic Breakdown (FY24) #

• Within India: Contributed the most to revenue (exact figures mentioned only for standalone operations).
• Outside India: Operations through subsidiaries in Mauritius, Nepal, and South Africa, with growing contributions.

Cost Structure Analysis (Standalone FY24) #

• Employee Costs: ₹120.93 crore, increased by 20.27% year-on-year.
• Other expenses: Includes expenses of ₹3.55 Cr related to Customer Relationship Management (CRM) implementation.
• Depreciation, Amortization & Impairment: Decreased by 19.03%.

Key Trends #

• The 14% increase in total expenditure was primarily due to a 20% increase in manpower costs, reflecting investment in talent.

Margin Analysis #

Standalone #

• Operating Profit Margin: 45.06% (FY24) vs. 46.42% (FY23)
• PAT Margin: 36.19% (FY24) vs. 36.30% (FY23)

Consolidated #

• Operating Profit Margin: 33.81% (FY24) vs. 37.65% (FY23)
• PAT Margin: 27.11% (FY24) vs. 26.96% (FY23)

Trend #

• Consolidated operating profit margin has decreased, while PAT margin saw a small increase, which can be attributed to a higher proportionate growth in other income on a consolidated basis, potentially from subsidiaries.

EPS Analysis #

Standalone #

• Basic EPS:
  • FY24: ₹36.25
  • FY23: ₹31.50
• Diluted EPS:
  • FY24: ₹36.14
  • FY23: ₹31.50

Consolidated #

• Basic EPS:
  • FY24: ₹34.38
  • FY23: ₹28.64
• Diluted EPS:
  • FY24: ₹34.27
  • FY23: ₹28.64

Cash Management Analysis of CareEdge #

Cash Flow and Liquidity Analysis #

Detailed OCF, ICF, FCF Components #

The consolidated statement of cash flows provides the following components:

(Rs in Lakh)

Key Observations: #

• Strong Operating Cash Flow: CareEdge consistently generates strong operating cash flow, driven by its core rating business. The significant increase in OCF for FY24 is due to higher profit and positive contributions from working capital management.
• Significant Investing Activities: The large outflows in investing activities are primarily driven by the purchases/redemptions of investments.
• Financing Activities - Dividends and Buyback: The company distributes a significant portion of its earnings to shareholders through dividends.

Working Capital Management Efficiency #

• Trade Receivables Ageing: The aging schedule shows that most receivables are current (less than 6 months) and there are low disputed balances.
• Contract Assets & Liabilities: The document indicates the presence of contract assets and liabilities.
  • Increase in other current liabilities due to increase in Contract Liabilities from 1886.39 to 2832.68.
  • Decrease in Trade Receivables and increase in Revenue from operations which indicates improved collection efficiency.

Dividend and Share Buyback Trends #

• Dividends: The company has a history of paying dividends.
  • FY24: Interim dividend of Rs 7 per share and a proposed final dividend of Rs 11 per share.
  • FY23: Interim of Rs 10 and final dividend of Rs 15.
• Share Buyback: There is no Share buyback in FY24.

Debt Service Coverage #

CareEdge is a “Debt Free Company.” Therefore, traditional debt service coverage ratios are not applicable. There are lease liabilities, but the interest and principal payments on these are relatively small compared to the operating cash flow.

Liquidity Position and Cash Conversion Cycle #

• Liquidity Position: CareEdge appears to have a very strong liquidity position. The company holds significant cash and cash equivalents, as well as liquid mutual funds. The current ratio (current assets/current liabilities) improved from 7.71 in FY23 to 6.55 in FY24, which is very high.

Free Cash Flow Yield Trends #

Approximation of Free Cash Flow (FCF) using available information:

• FY24: OCF (9,573.15) - Capex (244.51) = FCF ~ 9328.64
• FY23: OCF (7,080.78) - Capex (1422.59) = FCF ~ 5,658.19

Financial Analysis: Key Performance Indicators (FY22-FY24) #

Profitability Ratios (3-Year Trends) #

Liquidity Metrics #

Efficiency Ratios #

Leverage Metrics #

Key Observations #

• The Company showed good revenue growth in FY24.
• Profitability is strong, but operating margins have seen a small decrease from previous year.
• The Company is highly liquid.
• The Company doesn’t have any borrowings.

Important Considerations #

• Industry Averages: Without industry data, it’s impossible to say whether these ratios are “good” or “bad” in a relative sense. Credit rating agencies might have different financial profiles than other types of businesses.
• Qualitative Factors: This analysis is purely quantitative. A full financial assessment would require looking at qualitative factors (management quality, regulatory environment, competitive landscape, etc.).
• Subsidiaries: Subsidiaries performances varied.

CareEdge Financial Analysis 2024: Key Insights #

Revenue and Profitability #

• Total Income (FY24): ₹378.37 crore
• Growth Rate (vs. FY23): 19.39%
• Revenue from Operations (FY24): ₹341.52 crore
• Growth Rate (vs FY23): 18.89%
• Profit Before Tax (PBT) (FY24): ₹146.62 crore
• Growth Rate (vs. FY23): 16.61%
• Profit After Tax (PAT) (FY24): ₹102.56 crore
• Growth rate (vs FY23): 20.02%
• Rating Revenue Growth (Standalone): 14%
• Operating Profit Margin (FY24): 33.81% (vs. 37.65% in FY23)
• PAT Margin (FY24): 27.11% (vs. 26.96% in FY23)
• Return on Net Worth (FY24): 14.15% (vs. 12.43% in FY23)

Market Share and Competitive Position #

• Position: Second largest credit rating agency in India.
• Securitization Domain: 59% volume growth in FY24.
• Subsidiaries: CRAF (Africa) revenue increased by 32%.
• CareEdge Analytics: Delivers sophisticated analytics solutions to banks globally.

Key Products/Services Performance #

• Core Rating Services: Over 5,500 rating assignments in FY24, including bank loan, debt, issuer, and securitization ratings.
• Subsidiary Performance:
  • CARE Ratings (Africa) Private Limited (CRAF): 32% revenue increase, expanding within the Southern African Development Community (SADC).
  • CARE Ratings Nepal Limited (CRNL): Sustained growth and increased active ratings.
  • CareEdge Analytics: Restructured as a FinTech entity, focusing on the NBFC sector, reporting good operating revenue growth, and planning expansion into AI/ML.
  • CareEdge Advisory: Product range expansion and customer base increase, consulting, research, and sustainability segments and expects continued future economic growth.
  • CARE ESG Ratings Limited: Approved as a Category I ESG Ratings Provider.
  • CareEdge Global IFSC Limited: Will offer Global Scale Ratings of Securities, Sovereign Ratings, sub-Sovereign Ratings, Research, and Valuation.

Geographic Distribution and Market Penetration #

• Domestic (India): 10 branch offices across 7 states.
• International:
  • Mauritius: CARE Ratings (Africa) Private Limited (CRAF) operating since 2015.
  • Nepal: CARE Ratings Nepal Limited (CRNL) operates as a subsidiary.
  • South Africa: Established CARE Ratings South Africa (Pty) Ltd. in October 2023 (license pending).
• Future Expansion: Targeting Southern African Development Community (SADC) countries, Nepal, and Bangladesh.

Operational Efficiency Metrics #

• Streamlining Operations: Focused on superior process controls and efficient execution.
• Low Default Rates: Highlighted as a key performance metric.
• Technology Integration: Investments in CRM software, AI, and ML to automate and enhance rating processes.
• Debtors Turnover (Consolidated): Improved from 2.39 times in FY23 to 2.95 times in FY24.

Growth Initiatives and Challenges #

• Growth Initiatives:
  • Group Approach for synergy across subsidiaries.
  • Investments in AI, ML, and platform modernization.
  • Talent acquisition, retention, and training.
  • Increased outreach through events, publications, and media partnerships.
  • International expansion (Africa and new markets).
  • Entry into the ESG rating market.
  • Launched a Sovereign Ratings methodology.
  • Sector Specific Approach- reorganizing business development to focus on specific sectors to enhance business opportunities.
• Challenges:
  • Geopolitical uncertainties.
  • Weak external demand.
  • Weather-related irregularities.
  • Slow private capex.
  • Regulatory changes (including ESG reporting).
  • Operational risks- Includes talent retention and training.

Risk Assessment: CARE Ratings Limited (FY24) #

This report analyzes the key risks faced by CARE Ratings Limited, categorized as strategic, operational, financial, compliance/regulatory, and emerging risks. Each category is assessed for severity, likelihood, trend, mitigation strategies, control effectiveness, and potential financial impact.

1. Strategic Risks #

• Definition: Risks affecting the organization’s business model, long-term objectives, and market position.
• Identified Risks:
  • Competition: Intense competition impacts market share and pricing power.
  • Dependence on the Indian Debt Market: Reliance on the health and growth of the Indian debt market.
  • Diversification:
    • Failure to achieve synergy or expected revenue in non-ratings business.
    • Delay or failure in getting overseas market licenses.
• Severity: High
• Likelihood: Medium to High
• Trend: Increasing
• Mitigation Strategies:
  • Geographic Expansion: Expanding into new markets (Africa) and diversifying services (ESG ratings, risk solutions, sovereign ratings).
  • Technology Adoption: Investing in AI and ML to improve rating accuracy and efficiency.
  • Branding and Outreach: Knowledge partnerships, flagship events (“CareEdge Conversations”), and publications.
  • Business reorganization: Ratings business focus on sector-specific approach.
• Control Effectiveness: Moderate
• Potential Financial Impact: Significant
• Quantitative Risk Metrics:
  • Rating revenue increased by 14% during FY24.
  • Non-rating revenue increased from 6% to 10% during FY24.
  • CRAF revenue grew by 32% during the year.
  • Volume Growth of 59% in Securitization domain.
  • Successfully executed over 5,500 rating assignments.

2. Operational Risks #

• Definition: Risks related to internal processes, systems, people, and external events.
• Identified Risks:
  • Talent Retention: High employee attrition (23.5% in FY24).
  • Technology Disruptions: Vulnerability to cyber threats, system failures, and data breaches.
  • Data Accuracy and Availability: Challenges with “Issuer Not Cooperating” (INC) ratings.
  • Process Efficiency: Need for streamlining and automating rating processes.
  • Disaster Recovery: The report indicated successful execution of the disaster recovery plan.
• Severity: Medium to High
• Likelihood: Medium
• Trend: Mixed
• Mitigation Strategies:
  • HR Initiatives: Mid-year appraisals, employee engagement surveys, leadership training, and a long-term incentive plan (LTIP).
  • Technology Investments: Implementing a comprehensive CRM, disaster recovery plan, web application firewall (WAF), Privileged Access Management (PAM), and migrating to cloud-based solutions.
  • Process Automation: Using ML models to read financial data and improve efficiency.
  • Internal Controls: Implementing enterprise risk management framework, internal audits, and compliance monitoring.
• Control Effectiveness: Improving
• Potential Financial Impact: Moderate to High
• Quantitative Risk Metrics:
  • Employee attrition rate 23.5% for FY24, compared to 28% in FY23.
  • Successfully executed Disaster Recovery (DR) for business-critical applications.
  • Successful execution of unplanned disaster recovery plan.

3. Financial Risks #

• Definition: Risks related to the company’s financial stability, investments, and access to capital.
• Identified Risks:
  • Investment Risk: Exposure to market fluctuations through investments.
  • Debtor Turnover: Potential difficulty in collecting receivables.
  • Interest Rate Risk: Investment portfolio may be affected by changes in interest rates.
• Severity: Moderate
• Likelihood: Medium
• Trend: Stable
• Mitigation Strategies:
  • Conservative Investment Policy: Focusing on preserving shareholder assets and balancing risk with returns.
• Control Effectiveness: Good
• Potential Financial Impact: Moderate
• Quantitative Risk Metrics:
  • Debtors Turnover (in times): 5.46 (FY24), 5.64 (FY23)
  • Current Ratio (in times): 2.31 (FY24), 2.79 (FY23)
  • Operating Profit Margin (%): 33.81% (FY24), 37.65% (FY23)
  • PAT Margin (%): 27.11% (FY24), 26.96% (FY23)
  • Return on Net worth (%): 14.15% (FY24), 12.43% (FY23)

4. Compliance/Regulatory Risks #

• Definition: Risks arising from changes in or non-compliance with laws and regulations.
• Identified Risks:
  • Regulatory Changes: Changes in regulations by SEBI and RBI.
  • Non-Compliance: Potential penalties and legal actions for non-compliance with SEBI regulations.
  • Legal Risk: Ongoing litigation related to ratings assigned to a client.
• Severity: High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies:
  • Compliance Function: Dedicated compliance, legal, and secretarial team.
  • Internal Controls: Implementation of software to map the rating process, track timelines, and monitor compliance.
  • Strategic Reorganization: Integrating certain entities to comply with emerging ESG reporting requirements.
  • Engagement with Regulators: Active participation in industry bodies like AIRA and IBA.
• Control Effectiveness: Moderate to Good
• Potential Financial Impact: High
• Quantitative Risk Metrics:
  • SEBI imposed a penalty of Rs 1 crore.

5. Emerging Risks #

• Definition: Risks that are newly developing or changing.
• Identified Risks:
  • Geopolitical Risks: Impact of geopolitical uncertainties on the Indian economy.
  • Climate-Related Risks: Growing importance of ESG ratings.
• Severity: Potentially High
• Likelihood: Medium
• Trend: Increasing
• Mitigation Strategies: Limited specific mentions.
• Control Effectiveness: Uncertain
• Potential Financial Impact: Uncertain, but potentially significant.
• Quantitative Risk Metrics:
  • CARE ESG Ratings Limited received approval from SEBI on May 2, 2024, to function as a Category I ESG Ratings Provider.

Overall Risk Profile Summary #

CARE Ratings Limited faces a complex risk landscape. Strategic and regulatory risks are arguably the most significant. The company demonstrates a commitment to mitigating these risks. Operational and financial risks are present but appear to be more actively managed. Emerging risks, particularly geopolitical and climate-related, require increased attention. The Year on year attrition rate has been reduced by about 5%. Positive trends in revenue, profitability, and subsidiary performance provide some buffer against these risks.

Strategic and Management Analysis of CareEdge #

Long-Term Strategic Goals and Progress #

CareEdge operates under a multi-year transformation guided by four strategic pillars: Group Approach, Technology, Talent, and Branding.

• Group Approach: Create synergies across subsidiaries to enhance service delivery and unlock value. Integration of CARE Advisory Research & Training Ltd. into CARE Risk Solutions Private Ltd., now known as CARE Analytics and Advisory Private Ltd.
• Technology: Significant investments to automate and enhance rating processes. Includes AI and ML integration, CRM implementation, and partnerships to build a cutting-edge rating platform.
• Talent: Focus on attracting, retaining, and training employees. Initiatives include leadership training, employee engagement surveys, and a Long-Term Incentive Plan (LTIP).
• Branding: Commemorated the 30th anniversary with high-profile “Conversations” events, published special reports, and actively participated in knowledge-sharing forums to improve thought leadership and outreach, leveraging partnerships with leading media.
• Geographical expansion: Successfully expanded into Mauritius and Nepal, with plans underway to expand into the SADC.
• Diversification: Diversification into non-rating businesses (Advisory, Analytics, and ESG Ratings) to reduce reliance on the core rating business. Targeted increase in market share in the securitization domain.
• Sovereign Ratings: Launched a sovereign ratings methodology.

Progress: Foundations laid in FY23 have started to bear fruit in FY24. Revenue growth, improved market share in certain segments, and successful restructuring are highlighted.

Competitive Advantages and Market Positioning #

CareEdge is described as the “second-largest credit rating agency in India.”

Competitive Advantages:

• Knowledge & Expertise: 30 years of experience, strong analytical capabilities, and thought leadership in the financial services sector.
• Technology Adoption: Efforts to automate and digitize processes.
• Diversified Service Offerings: Expanding into non-rating businesses (Advisory, Risk Solutions, ESG).
• Global Footprint: Expansion into African markets (Mauritius, South Africa) and Nepal.
• Strong Brand: Investments in outreach and media presence.
• Low Default Rates: Emphasis on demonstrating strong performance with low default rates.

Innovation Initiatives and R&D Effectiveness #

Focus on innovation through technology adoption:

• Automation: Implementation of CRM software, Machine Learning (ML) models for data extraction, and a partnership to develop a new AI-powered rating platform.
• Digitization: Website enhancements, automation of rating processes (rating letters, press releases, evaluation forms).
• AI Integration: Pilot projects to integrate AI technologies into rating processes.
• Data-Driven Approach: Use of data and technology to streamline operations.
• Effectiveness: Improving efficiency, reducing turnaround times, and enhancing decision-making.

M&A Strategy and Execution #

• Restructuring Focus: Internal restructuring: CARE Advisory Research & Training Ltd. merged into CARE Risk Solutions Private Ltd., renamed CARE Analytics and Advisory Private Ltd. This aimed at compliance with emerging ESG reporting and positioning the company for sustainable finance.
• New Subsidiary: CareEdge Global IFSC Limited was incorporated as a wholly-owned subsidiary on April 29, 2024, to do ratings work out of the International Financial Services Centre (IFSC) at GIFT City.

Management’s Track Record in Execution #

• Key Achievements: Exceeding performance targets, successful restructuring, technology implementation, talent management, and brand building.
• Financial Performance: Consolidated revenue and profit growth (₹378.37 crores total income, ₹102.56 crores profit after tax on a consolidated basis).
• Regulatory Matters: The company had a few regulatory/legal issues that are still in-progress.

Capital Allocation Strategy #

• Dividend Payments: Paid an interim dividend and proposed a final dividend.
• Investments: Directed towards Technology, Subsidiaries (restructuring and expansion), and Human Resources (talent acquisition and training).
• Conservative Investment Policy: Focused on preserving shareholder assets.

Organizational Changes and Their Impact #

• Business Development Reorganization: Shifted from a geographic structure to a sector-specific approach, leading to a 59% volume growth in the securitization domain.
• Subsidiary Restructuring: CARE Advisory Research & Training Ltd. merged into CARE Risk Solutions Private Ltd., now known as CARE Analytics and Advisory Private Ltd.
• Human Resources Initiatives:
  • Mid-Year Appraisal (MYA) system.
  • Employee Engagement Survey (EES).
  • Leadership Training on Stakeholder Engagements (WISE).
  • Learning Intervention (BLEND) for business development.
  • Utilization of the ‘9 Box - Performance vs. Potential Grid’ for talent identification.
  • Long-Term Incentive Plan (LTIP).
• Impact: Increased business opportunities, improved operational efficiency, and enhanced employee engagement.

ESG Framework Analysis #

Environmental Metrics and Targets #

• Energy Consumption: Reduced energy consumption through LED lighting. Commitment to monitor fuel, electricity, and data usage with a reported reduction in total GHG emissions.
• Water Withdrawal: Data provided on water withdrawal by source, but mostly marked “NA.” Total water consumption and intensity per rupee of turnover disclosed.
• Air Emissions: Limited air emissions beyond GHG due to limited DG set usage.
• Greenhouse Gas (GHG) Emissions:
  • Scope 1 & 2 Emissions: Quantified in metric tonnes of CO2 equivalent with a noted decrease.
  • Scope 3 Emissions: Identifying boundaries for Scope 3 emission reporting and monitoring.
• Waste Management: Reports on safe waste disposal, but limited quantitative data. E-waste disposal affected by ongoing litigations.
• Extended Producer Responsibility (EPR): Deemed not applicable.
• Recycled Materials: Not applicable.
• Renewable energy: Aims to identify areas of improvement, reduce impact, and increase operational efficiency.

Targets: #

• Identify the boundary for Scope 3 emissions and monitor them.
• Monitor direct & indirect emission sources to analyze trends regularly.
• Continuous efforts to reduce GHG emissions.

Social Responsibility Programs #

• CSR Initiatives: Investments in healthcare, education, community development, mid-day meals, and nutritional food.
• Employee Well-being: Includes health insurance, accident insurance, maternity/paternity benefits, and day-care facilities (where applicable). Coverage percentages detailed.
• Training and Development: Significant investment in employee training, including leadership programs (WISE), skills development (BLEND), and performance evaluations.
• Diversity and Inclusion: Employee Engagement Survey (EES) conducted, identifying areas for improvement. An equal opportunity policy exists.
• Stakeholder Engagement: Identifies key stakeholder groups and details engagement frequency and purpose.
• Specific CSR projects: Financial support to various health, education, and livelihood projects.

Governance Structure and Effectiveness #

• Board Composition: Mix of Executive, Non-Executive, and Independent Directors (majority independent). Details provided on board members, committee memberships, and meeting attendance.
• Board Committees:
  • Audit Committee
  • Nomination and Remuneration Committee
  • Stakeholders Relationship Committee
  • Corporate Social Responsibility and Sustainability Committee
  • Risk Management Committee
  • Rating Sub-Committee
  • Strategy and Investment Committee
  • Technology Committee Composition and terms of reference given for each committee.
• Board Evaluation: Annual performance evaluation of the Board, its Committees, and individual Directors conducted.
• Code of Conduct: Code of Conduct exists for Directors and Senior Management, and compliance is affirmed.
• Whistle-Blower Mechanism: Vigil Mechanism/Whistle-Blower Policy is in place; no employee was denied access to the Audit Committee.
• Risk Management: Risk Management Committee and framework established to identify, evaluate, and mitigate risks.
• Independence of Director: Criteria for Independence align with the Act and SEBI guidelines.
• Ethics, Transparency, and Accountability: Guiding principles, including a Code of Conduct.

Sustainability Investments and ROI #

• ROI is primarily framed in terms of:
  • Improved operational efficiency: Reduced energy consumption, streamlined processes.
  • Enhanced brand reputation: Knowledge partnerships, media presence, and thought leadership.
  • Talent attraction and retention: HR initiatives and positive work environment.
  • Risk mitigation: Compliance with regulations and proactive risk management.
  • Long-term business sustainability: Focus on ESG factors.

ESG Ratings and Peer Comparison #

• Establishing “CARE ESG Ratings Limited” as a subsidiary and received Category 1 license.
• CARE ESG Ratings mentioned as a separate business division.

Regulatory Compliance and Future Preparations #

• Compliance: Complies with relevant regulations, including the Companies Act, 2013, SEBI Listing Regulations, and Secretarial Standards.
• SEBI Regulations: Active engagement with SEBI on various aspects.
• RBI Regulations: Recognition by the Reserve Bank of India under Basel-III Capital Adequacy Framework.
• Future Preparations:
  • Restructuring and expanding services in ESG ratings.
  • Improving rating operations and leveraging technology.
  • Transparent stakeholder engagement.
  • Proactive HR initiatives and leadership development.
  • Expansion into new geographies.
  • Focus on Sovereign credit rating through the subsidiary at IFSC Gift City.

Forward Outlook #

Management Guidance and Assumptions #

• Overall Economic Outlook: The management expects the Indian economy to remain resilient, projecting a GDP growth of around 7% in FY25. This is based on expectations of continued momentum in high-frequency indicators, improved rural demand (due to normal monsoons), and a pick-up in private capex.
• Inflation: CPI inflation is projected to moderate to 4.8% in FY25 from 5.4% in FY24, aided by government interventions and normal monsoons. However, upside risks from commodity prices and geopolitical tensions are acknowledged.
• Strategic Focus: Management is committed to spearheading innovation and driving growth. Key areas include:
  • Improving rating operations and leveraging technology for accuracy, reliability, and market responsiveness.
  • Transparent and effective stakeholder engagement.
  • Proactive HR initiatives to attract, retain, and develop top talent.
  • Leadership development.
  • Group Approach
• Subsidiaries: The management anticipates continued strong growth in its subsidiaries, particularly in the consulting, research, and sustainability segments of CARE Analytics and Advisory. Expansion into African markets is a priority.
• Technology: They state they are continuously strenghtening their core rating processes, and will be leveraging more and more technology.

Market Growth Forecasts #

• Indian Economy: GDP growth is projected at around 7% in FY25.
• Corporate Bond Issuances: Reached Rs 10.2 lakh crore in FY24, a 19% year-on-year increase.
• Bank Credit: Grew by 16.3% year-on-year in FY24.
• Global Merchandise Trade: Prospects are expected to improve gradually, potentially benefiting India’s merchandise exports.

Planned Strategic Initiatives #

• Improving Rating Operations: Strengthening core rating processes for accuracy, reliability, and market responsiveness.
• Leveraging Technology: Expanding the use of technology across core functions and support areas to streamline operations and enhance decision-making. Specifically using Machine Learning for improved efficiency in operations.
• Stakeholder Engagement: Commitment to open, clear, and effective communication with all stakeholders.
• HR Initiatives: Attracting and retaining top talent through innovative HR strategies, focusing on a dynamic workplace culture.
• Leadership Development: Investing in skills development and fostering a culture of empowerment and innovation.
• Business Development Reorganization: The business development team was restructured from a geographic to a sector-specific approach to enhance focus and unlock value.
• Expansion into Securitization: A targeted approach to expand market share in the securitization domain.
• ESG Ratings: CARE ESG Ratings Limited received approval from SEBI to function as a Category I ESG Ratings Provider.
• International Expansion: Focus on expanding into new markets in Africa (South Africa) and strengthening presence in Mauritius. Strategic partnerships (e.g., MoU with APRM) are part of this strategy.
• Sovereign Ratings: Launch of a Sovereign Ratings methodology, making CareEdge the first Indian credit rating agency to venture into this space. Offering Sovereign Credit Ratings & Global Scale Rating of Debt Securities through its subsidiary in IFSC Gift City.

Capital Expenditure Plans #

• The report mentions the government’s emphasis on capex-led growth and expectations for improvement in private capex as capacity utilization in the manufacturing sector rises.
• Significant efforts to automate and enhance the ratings processes, including the implementation of CRM.

Efficiency Improvement Targets #

• The strategic focus on technology integration (AI and ML in rating processes), automation, and streamlining operations strongly implies a commitment to improving efficiency.
• Streamlining operations with superior process controls, demonstrating strong performance metrics with low default rates, and enhancing outreach.
• Successfully executed over 5,500 rating assignments and improving compliance management.

Potential Challenges and Opportunities #

• Challenges:
  • Geopolitical uncertainties.
  • Elevated food inflation and volatile commodity prices.
  • Weak external demand.
  • Weather-related uncertainties (impact on agriculture and rural demand).
  • Competition within the credit rating industry.
  • Regulatory changes and compliance requirements.
  • Operational risks (people, process, fraud, technology).
  • Market intelligence risk (early warning signals of company defaults).
• Opportunities:
  • Resilient Indian economy with strong growth potential.
  • Government’s focus on infrastructure development and digital innovation.
  • Improving prospects for private capex.
  • Expansion into new markets (Africa) and services (ESG ratings, sovereign ratings).
  • Leveraging technology to enhance operations and decision-making.
  • Growth of advisory and analytic businesses.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• Opinion: The auditors, B S R & Co. LLP, have issued an unqualified opinion on the standalone and consolidated financial statements. This means they believe the statements present a true and fair view of the Company’s financial position, performance, and cash flows in accordance with Indian Accounting Standards (Ind AS).
• Qualifications/Emphasis of Matter: There are observations concerning the internal controls specifically related to audit trail capabilities of the software system:
  • An accounting software, used to handle General Ledger from 1 April 2023 to 31 Dec 2023, had audit trail feature not enabled.
  • Independent auditors’ report not available for third party softwares used for general ledger and payroll. *An access management tool, that records audit trail for software used for revenue related records, was implemented from June 6, 2023.

Key Accounting Policies #

• Revenue Recognition: Revenue is recognized upon transfer of control of services to customers, measured at the transaction price. The Company uses judgment to determine when performance obligations are satisfied (either at a point in time or over time). For over time revenue it uses input method. Revenue for certain categories of clients are recognized when there is reasonable certainty of collection.
• Leases: The Company applies a single recognition and measurement approach for all leases, except short-term and low-value leases. Right-of-use assets and lease liabilities are recognized.
• Impairment of Assets: The Company assesses at each reporting date whether there is an indication that an asset may be impaired, both for financial and non financial assets, using various methods including evaluation of default risk and expected credit loss models.
• Employee Benefits: Defined benefit plans (gratuity) and other long-term benefits (leave encashment) are valued actuarially.

Internal Control Effectiveness #

• Auditor’s Report (Annexure B): The auditors state that the Company has, in all material respects, adequate internal financial controls over financial reporting, and that these controls were operating effectively as of March 31, 2024.
• Material Weakness: There were audit trail issues in some accounting softwares as reported in the auditor’s opinion.
• Management Discussion and Analysis: CareEdge emphasizes its commitment to robust internal controls, including a framework for safeguarding assets, ensuring accurate financial reporting, and preventing fraud. Regular internal audits and reporting to the Audit Committee are highlighted.

Regulatory Compliance Status #

• General Compliance: The Company states compliance with the Companies Act, 2013, SEBI Listing Regulations, and other applicable laws. The Secretarial Audit Report confirms compliance with applicable statutory provisions.
• Specific Compliance: The Company is registered with SEBI and recognized by RBI as an eligible credit rating agency. Compliance with SEBI (Credit Rating Agencies) Regulations, 1999, and SEBI (Intermediaries) Regulations, 2008.
• No Penalties/Strictures: The Company reports no penalties or strictures imposed by regulatory authorities (SEBI, Stock Exchanges, etc.) on capital market-related matters in the last three years.

Legal Proceedings and Potential Impact #

• Pending Litigation:
  • SEBI initially imposed a penalty of Rs 25 lakhs and subsequently enhanced it to Rs 1 crore. An appeal has been filed before the SAT.
  • A suit filed by 63 Moons Technologies Ltd., where the Hon’ble Madras High Court directed the Company to deposit 10% of the total value of the suit claim, failing which an interim order of injunction restraining the Company from dealing with any of its assets will continue till the suit is disposed of. The Company has filed appeals.
• Management’s Assessment: Management believes the likelihood of outflow of resources related to certain litigations is “remote”.
• Potential Impact: While management assesses the risk as remote, these litigations represent potential financial and reputational risks.

Related Party Transactions #

• Arm’s Length Basis: All related party transactions were stated to be in the ordinary course of business and on an arm’s length basis.
• Disclosure: Transactions with related parties are disclosed in Note 32 of the Standalone Financial Statements and Note 34 of the Consolidated Financial Statements.
• Loans to CAAPL (subsidiary).
• Royalty income from subsidiaries.
• Remuneration and sitting fees to Key Management Personnel (KMP) and Directors.
• Policy: The Company has a policy on the materiality of and dealing with Related Party Transactions.

Subsequent Events #

• Incorporation of CareEdge Global IFSC Limited as a wholly owned subsidary on April 29,2024.
• CareEdge ESG received Category I ESG Ratings Provider license from SEBI on May 2, 2024.

Analysis of Accounting Quality #

• Positive Aspects:

  • Unqualified audit opinion.
  • Consistent application of accounting policies.
  • Detailed disclosures in compliance with Ind AS.
  • Use of actuarial valuations for employee benefits.
  • Regular review of impairment indicators.
  • Commitment to transparency and stakeholder engagement.

• Areas for Attention: The observation in the Audit report is critical for data integrity.

Regulatory Risk Assessment #

• The Company is under regulatory scrutiny, as evidenced by the SEBI penalty and ongoing litigation.
• The ongoing legal matters pose a regulatory risk.