Prospects don't look bullish for CARE's stock: Analysts

MUMBAI: Credit Analysis and Research ( CARE) listed today at Rs 940, a 25% premium against its issue price of Rs 750. Post its listing on the bourses, the valuation gap between its closest peer, ICRA has narrowed down.

CARE is trading at a price-earnings ratio (P/E) of 22 compared to the P/E valuation of 19-21 it asked during the initial public offer. ICRA is trading at a P/E multiple of 24 times. Both these companies derive 70% of their revenues from the rating business compared to CRISIL which earns just 30% from the rating business.

Given the similarity of business models between ICRA and CARE, CARE can command a maximum valuation equivalent to ICRA. However, according to some analysts the gap between the two will always exist. This is because when CARE expands into other business segments like SME ratings, the high margins it currently commands due to its primary focus on bank loan ratings will decrease.

Considering that the RBI has not reduced either the CRR (cash reserve ratio) or the base rate, borrowing costs are expected to remain firm and investment activity will remain subdued. Thus the ratings business will not see much traction in the next two quarters.

Though CARE listed at a premium, investor interest in the other two rating companies, CRISIL and ICRA remained muted with the stocks remaining flat. Therefore we do not see a major uptick in the share price of CARE in the near term.