Tuesday, 2 August 2016

Credit Analysis & Research ltd: Its Bond James Bond

CARE Ltd: There is one happy person and then there is another happy person; so, theoretically, if we combine these two happy fellows then the result should be more happiness and more happy persons. But still, married persons aren’t the happiest persons on the earth. Theoretically, equilibrium interest rate is the rate where demand for loanable funds equals the supply of loanable funds (say, Banks). But again in real life, interest rates aren’t decided in this way. As in the hunt for higher interest rates banks may end at providing loans to risky ventures like they can find out someone like Mallaya offering high rates with cheap whisky in other hand which can wipe out even the base amount; and they can refuse one genuine customer with credible business plan but offering low interest rates like one of my fellow Punjabi having the patent for making world’s first authentic “Somras”.  So banks don’t allocate their funds to customers as defined in the books. They took the help of specialized agencies which guide them about the creditworthiness of the prospective client.

Welcome to the world of credit Rating.

So credit Rating agencies like Crisil, ICRA and Care provide the services of evaluating the credit worthiness of the customer seeking loans/Bonds; it is all about the judging the strength of business model, cash flows, whether the business will be able to service the debt. Banks/Financial institutions take their interest rates decisions on the basis of credit worthiness of the client; interest equilibrium is basically for conceptual and academic framework.

India need huge investments in infrastructure to support or provide a base for high economic growth because without adequate infrastructure like cheap power we can’t manufacture cheap goods, without roads, warehouses and cold chains we continue to waste 30% of our agricultural produce. India need investments of around 6 lakh crores every year upto 2020 to achieve the minimum base of supportive infrastructure; this is 30 lakh crores for 5 years. A huge amount by any standards.

The question here is; how India is going to finance this. India tried banking route to finance big infrastructure projects which only resulted in huge piling of NPA’s in the books of banks. I have always felt Banks are not best suited for long tenure Infrastructure projects spanning 20-25 years where Banks are best suited for loans for periods of 10-15 years as this matches with their inflow-outflow of funds. But some of the big Indian corporate houses in most of the cases mismanaged the funds by inflating the cost of projects and then diverting the funds somewhere else; in other cases project was ultimately a bad business decision where corporates misjudged the future demand supply scenario miserably and Banks too were guilty of not doing their due diligence before allocating funds for these projects- poor state of real estate projects all over India is a perfect example.

Actually, Bonds are better suited for financing long term Infrastructure projects. Bonds are the best medium for getting the long term funds for infrastructure growth; they are traded on the exchanges so they have secondary liquidity market. Bonds ensure pricing on the basis of fundamentals and financials of the issuer. Just for putting things into perspective, had Mallaya Sahib had gone for Bond market instead of Debts from banks for Kingfisher Airlines, he would have scrapped most of his plans because market forces would have asked for higher rate of interest considering his weak balance sheet and riskiness of the business and he would have been happy selling cheap blends of Scotch whiskies.

But Indian Bond market is way underutilized and underdeveloped. Share of Bonds in corporate debt is just 4% in india wherein it is around 17% in China…it is high in most of the developing and developed countries like in Spain it is around 40%, South Korea 30%. So we are way down the line. However now is the time for the growth of Bond market in India as Banks are stressed and don’t have the funds and capital to finance much of the needs of infrastructure.

Last year, We bought NBFC's like Edelweiss, JM Financial, Piramal when everybody was banking on Banks; this time I think Corporate Bond sector can be the crucial factor. With the growth in corporate Bond market, need for Bond Rating will rise significantly and so I am investing in CARE Ltd continuously.

CARE Ltd is the cheapest rating agency trading at a PE of just 25 when others like CRISIL and ICRA are trading at 60 and 50. It has one subsidiary, Kalypto Risk Technologies, in the field of providing technical products (softwares) for enterprise risk management to the banking vertical. It is now eyeing global markets to fight the might of global rating giants Moody’s, S&P and Fitch having around 90% share of global rating business.

This is just an introductory post on the subject just to share the concept behind my latest investment. Bonds and Banking are my favorite subjects and I hope to provide much detailed study shortly. Reviews are welcome. I have entered at 1040 and it is just an entry...will continue to buy at every fall and at every significant event.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)


  1. Hi Sir.. Do you think tata chemicals is a good buy now that they got rid of the urea subsidiary


  2. Hi Dear, I am out of the town for some official work...so couldn't analyze the news although i was waiting for this for long time. This can be the major catalyst for future growth for Tata Chem as it is investing big for its B2C businesses. I am also planning to buy more but my avg is much lower at 300...will update once i am back in the town.