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Credit Rating Industry Sheet

Industry Sheet - Indian Credit Rating Industry - As on 10 June 2021

VALUE PROPOSITION

Customer Segments

Customer segments of Indian Credit Rating industry can be divided as:
1. Industry – Finance, Infra, Manufacturing, Oil, etc
2. On the basis of Issuer – Private Companies, Public Companies, Corporate & SME, REITs, INVITs.

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Customer Gains and Pains

Products and Services

Different Services offered by the industry players are:
1. Rating services – Bonds, Preferred shares, FD, CD and CP.
2. Research Services
3. Information & Advisory Services

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Activities and Participants

Value Chain

Key Activities to perform while operating a CRA
1. Rating Process
2. Team management – Rating team, analyst team
3. Regulatory Compliance
4. Communication & Information Management
5. Lead Sourcing Activities
6. Brand building & Reputation Building Activities

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Industry Map

Key Players that companies in Credit Rating Industry have to deal with:
1. Rating & Analytical Team
2. Government Authorities, Regulators & Associations
3. Financial Institutions & banks
4. Customer Segments

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Demand- Supply Scenario

Demand for Credit Rating Industry is directly related to the growth of the overall debt market i.e. growth of the followings:
– Corporate bond market
– Commercial Papers (CPs)
– Bank Credit

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Industry Characteristics

Market Size

The market size of Credit Rating Industry in India is directly related to the size of the overall bond market. The Credit Rating Industry Size should be understood as a percentage of overall bond market.

FY20 Bonds Issued in India – 309,332 (INR Billion)

Revenue of top 3 rating agencies in India from Rating and allied services in FY20 – Rs. 1002 crores.

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Market Stability

Common Sized revenue share of listed companies in the space indicate that the market share of companies take time to change.

So, Credit Rating Industry is a Stable Industry.

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Pricing Power

Reputation and credibility of the rating agency is more important than the price charged by the agency.

Also, Rate Shopping an important factor in Issuer-Pay models. So, High Pricing Power

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Competitive Life Cycle

The industry is in Growth Stage. The reasons for the same are-
1. Growth in the overall debt market.
2. Growth in the securities being rated.
3. New Products being introduced in the industry.

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Disruptive Forces

Different Disruptive Forces to Traditional Credit Rating Models are –

1. Scenario Planning Methods over outright ratings.
2. Market- Based Methods.
3. Fundamental Analysis of Creditors using consensus models.
4. Third Party Ratings other than typical CRA.
5. Use of new technologies like Blockchain to ascertain credit worthiness.

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Regulations

In India, CRAs are regulated by the Securities Exchange Board of India SEBI. CRAs need to comply with the SEBI (Credit Rating Agencies) Regulations, 1999 (‘CRA Regulations’).

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Porter's Profit Forces

Supplier Power

Buyer Power

Threat of Substitution

Threat of New Entrants

Source – ZebraResearch

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Threat of Competitive Rivalry

Financial Health of Companies in the Industry

ROE and DuPont Analysis

ROE = Profit margin x Asset Turnover x Leverage

Crisil Ltd(FY20) – 20% x 1.03 x 1.44 = 29%
CARE Ratings(FY21) – 37% x 0.37 x 1.13 = 15%
ICRA Ltd. (FY21) – 27% x 0.34 x 1.18 = 11%

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Growth

Investment Needs

CRISIL Ltd. – High CFO and low CFI leading to high FCF.
Care Ratings – High CFO and low CFI leading to high FCF.
ICRA Ltd. – High CFO and low CFI leading to high FCF.

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Outlook

Trends in Industry

Industry Specific Risks

Growth Factors

Growth Factors of Credit Rating Industry are
1. Growth due to increased regulations in the bond market.
2. SME Market to drive volume growth.
3. Growth in real estate sector issues.
4. Growth in Commercial papers and their penetration.
5. Increasing NPA levels beneficial for the Rating Companies.
6. Corporate Borrowers moving from Banks towards Debt Issues.
7. Improved market penetration for corp. debt rating

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Variables for success in Industry

Variables for Success in the Industry
1. Reputation & relationship with existing clients
2. Adequate Product mix – Bonds (long-term, Short term, Commercial paper, Zero coupon bond, SME Ratings), BLR & other instruments (like Structured products)
3. De-risked business model (diversified into various geography, various related business etc and product lines.)
4. Deepening of bond markets (including bank credit growth) & pick up in corporate capex

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