Diversification is need of the hour and Care Ratings is working on it: Ajay Mahajan, MD & CEO

Ajay Mahajan, Managing Director & CEO, CARE Ratings Limited, talks about Q2FY22 numbers, client addition, demand and corporate ratings, upgrades, the company's blueprint to grow further and balance sheet among others during an exclusive interview with Swati Khandelwal, Zee Business. Edited Excerpts: 

Q: What brought the profits and margins into pressure in the September 2021 quarter and going forward what kind of trends are visible?

A: For the last one to one and a half years, since I took over my role here, I have always said that CARE Ratings is a medium to long term transformation story and we are absolutely, firmly and in a committed manner standing with that transformational story. We look at the result in such a way that we have a business of corporate credit rating in which we rate the businesses. If the credit growth of the country will contract the industry and services and will not grow then our business remains flat to sober, it does not grow very fast. And, as you that credit growth from April to August 2021 came at minus (-) 1.6% as growth to industry and to services.

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So, if there is a contraction in credit then it becomes very difficult for us to grow our business as our business is directly related to a credit growth business, if the growth comes at 10% or 5% then there is growth at our end as well but if there is a contraction in credit market then growing the revenues turn difficult for us. Despite that, in the first half, we have increased our revenue by 6%. We are quite satisfied with this revenue growth, of course, we would have done much better and we will continue to do so but we are quite satisfied with this performance as we have increased our revenue by 6% in the first half of the year. As far as the future is concerned, we were expecting that we will see an increase in credit growth this year as well but that growth has not come yet.

I think, the year will pass off while getting out of the COVID and the pandemic related things and things that occurred before it like the increase in the NPAs at the banks and the capital expenditure is likely to increase next year. Supply shortages are occurring worldwide, geopolitical alienation is happening, supply chains have been disrupted very rapidly and commodity prices are increasing rapidly. So, what is going to happen is that when there will be distortions in the supply chains then capacity expansions and capacity increases will become a necessity. It has not occurred yet but I think that from 2022 onwards investment demand will increase in the private sector. This increase in the investment demand gives us a sense that things will be good for Rating's core business. Now only time will tell, but we think it will be good.

Q: What kind of recovery did you see this time and how many new clients were added in this quarter. What trend is visible in terms of client addition?

A: I do not have the exact numbers but we have also added many clients. I would like to inform you that this industry is a very competitive industry, it has seven players and if the credit growth remains sober then client wins and loss remains within these seven players. If the incremental credit remains low then- in terms of new client addition - normally one has to bring clients from other agencies and bring them with themselves while maintaining the quality, which is a very difficult task.

As I have earlier informed you that we are quite focused on our rating quality, rating processes, rating supervision, and rating governance and in the short term due to it if any of our clients leave us after being disappointed by the ratings - we don't like it - but we do not compromise on the ratings, which is our philosophy. Despite this, we have added a lot of clients in the quarter but I do not have exact numbers for the same. 

Q: How this quarter had been in comparison to previous quarters in terms of fresh ratings? What kind of demand have you received from the companies and going forward, what is your outlook on corporate ratings in H2FY22?

A: If credit growth increases then our performance will go up but we have added some big accounts in the first half. As you know that credit has rationalised a lot and a few big businesses have been acquired in corporate India. So, when new businesses are acquired then it also brings opportunities to do the rating of an entirely new pool of assets that Business A acquires from Business B, so, we are seeing improvements in those types of ratings, where acquisitions are happening or some new business has been created or some big company had bought the assets of some small company, we have seen a huge surge in it. We in our business related to financial services, like PTC business, direct assignment business and business of securitization, we are making some progress in it and will continue to do so. As you asked about the future outlook, it seems, that the business will definitely improve. Cyclically, the business of ratings is running quite soft for the last three to four years and as I said that the capital expenditure is some short distance now and once investment demand in the economy picks up we will be in a more exuberant position to express our results going forward. 

Q: The companies are posting Q2FY22 numbers. So, what kind of upgrades you are seeing and how many upgrades, as per you, have been seen or you are cautious about the valuation because slight corrections have also been seen? What are your assessment and evaluation here? 

A: Rightly said, the market is very bullish from the equity point of view. Its advantage from the credit point of view is that the companies deleverage, i.e., they repay their debts and they get the equity at a good price. I have also said earlier that in the quarter earnings have been quite good since last two to three years due to which their balance sheet has turned credit light, their debts have reduced. This reduction in debt is not good news for rating agencies but it has led to upgrades. I think, there was a report in which it was said that in the last 10 years, the highest levels of upgrades have occurred in the first half. I cannot talk about the results of other rating agencies but our credit ratio has definitely have gone up well, i.e. there has been a ratio of 2:1 in the first half, which means that if we pick any three companies from our portfolio then on an average two companies have upgraded out of three and one has downgraded. So, if we will have a look at the upgrade to downgrade ratio then it stood at 2:1 in the first half. This is good news from a credit perspective. 

Q: Your company was preparing a broad plan blueprint to grow the company from where it is. What kind of volumes and margins will you expect in the future and what will be growth drivers in a broader sense like investment in technology, diversification of the business and the way revenue streams will be increased among others? 

A: I would like to share as it is an important part of our transformation strategy in which we have to diversify our revenue. As, I have said earlier as well that our 90-95% of revenue and income comes from rating, which is a high dominance of ratings. It is a good business and a business of free cash flows and has a good operating margin. But diversification is a big necessity from the shareholder point of view and we are working on that necessity. As I have also shared during our last interaction that we have two to three areas of diversification and they are 

(i) Risk Solution Business: It is our 100% subsidiary and we have appointed a new CEO, recently, to grow that business and he has worked in a major IT for several years. Under his guidance, the team is turning into a very strong team, which will grow our risk solution business in the next three to four years. 

(ii) Advisory and consulting practice: We took a CEO from an infrastructure advisory company who is focusing on advisory and consulting practice. 

So, if its contribution will even double in itself on our top line that is visible to you because the subsidiaries of the company are quite small. But I would like to say that there is a 33% growth in this first half compared to the corresponding first half in our subsidiary businesses, maybe it is on a small base due to which this 33% will have a contribution of just Rs 4-5 crore. But over a period of four to five years, I expect that almost one-third of our total turnover of the group will come from these two companies that we are building organically. We are also focusing a lot on diversification apart from being a high-quality rating company, we also want to become a very high-quality analytics company. For this purpose, there is a need to focus on technology and we are focusing a lot on data and we have shifted our entire data on the cloud and are adding an additional intelligent layer of artificial intelligence and machine learning so that on the basis of the same, we can manufacture our products and ease the decision making of our clients. So, this is our high-level strategy and gradually, we will be rolling out our products, so that we keep marching forward on this road, always. 

Q: What kind of funds does the company needs at present as you are talking about the investment in technology? Is there any requirement for fundraising at this point in time for the company to grow?

A: Every company has its culture. We have a culture in which we do not want to put entire money aggressively in any particular area. We have cash of around Rs 470 crore on the balance sheet of Care Ratings and I think, it is enough to meet our future plans. So, there is no need for capital raising at our end.