CARE Ratings – JOURNEY TOWARDS EXCELLENCE

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Significance of Credit Rating for Funding Options

CARE Ratings – JOURNEY TOWARDS EXCELLENCE

Presentation Structure • Funding Options • What is Credit Rating & its process • Credit Rating Services for Enterprises • Benefits of Rating Services • About & Why CARE Ratings
CARE Ratings – JOURNEY TOWARDS EXCELLENCE 3

Funding Options
Equity
Own Resources (Friends, relatives etc.) Venture Capital (VC) /Private Equity Initial Public Offer (IPO)/Private Placements

Debt
Institutional Finance
• Bank term loans and working capital facilities • Loans from financial institutions

Capital Market Instruments
• Bonds / Debentures / Structured Products • Commercial paper (CP)

Fixed Deposit (FD)
CARE Ratings – JOURNEY TOWARDS EXCELLENCE

What does investor looks for Safety of Investment Return on Investment CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

You do the talking….How do you convince investor? OPTION I . Is it very effective?? May be yes or no… OPTION II – Let others talk about you: Much more effective Need for Third Party Assessment CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

What is Credit Rating & its process CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

an independent.” CARE Ratings – JOURNEY TOWARDS EXCELLENCE . essentially.Concept of credit ratings “Credit rating is. unbiased and objective opinion on the relative ability and willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise.

Rating Scale Investment Grade AAA Speculative Grade BB B C D Long Term AA A BBB PR1+ Short Term PR1 PR2 PR3 PR4 PR5 CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Key Parameter Evaluated Industry Risk Business Risk Management Evaluation Financial Risk Project Risk CARE Ratings – JOURNEY TOWARDS EXCELLENCE 10 .

Policy • Govt. bargaining power of suppliers / buyers.g. ERC. TRAI etc. input related risk. of players.Industry Risk Regulatory Environment • Govt. substitute products etc. Input Related Risk • Availability • Price Volatility Demand-Supply Gap • Trend Analysis – Stable/Growing/Declining • Market Size • Investment plans of existing/new players Cyclicality / Seasonality • Sensitivity to economic cycle • Rating “Through the Cycle” • Product Life Cycle Industry Financials • Aggregate Industry Financials • Aggregate Industry Ratios Industry Competition • No. entry barriers. Priority Level • International Competition / Restrictions • Role of Regulators E. CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Business Risk Location Availability of Utilities Availability of Raw Materials Cost Structure Capacity Utilization Level of Integration Technology Product/Business Mix Mkt. & Distribution R&D Edge Manpower Environmental Regulations Size of the Company CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Management Evaluation Industry Experience Composition of Board Risk Management Approach Debt Servicing Track Record Management Proactiveness Past Successful strategies Ability to meet projections Integrity / Ethics Management Succession Labour Relations Policies & Processes Support from / Propensity to support Group Companies CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

FinancialRisk Financial Risk Past Financials Growth in Revenues Profitability Solvency Liquidity Projected Financials Growth Assumptions Cash Flow Adequacy DSCR Financial Flexibility Quality of Accounts CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Project Risk Project Risk Project Rationale – Expansion. Integration. Diversification Financial Flexibility Resource Mobilisation Necessary Approvals & Clearances Size of the Project Management’s Experience in Project Implementation Project Viability Post Implementation Risk – Financial Risk & Business Risk CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Project Risk is also considered CARE Ratings – JOURNEY TOWARDS EXCELLENCE .In nutshell Credit Risk Industry Risk Industry Characteristics Industry Financials Business Risk Market Position Operating Efficiency Mgmt. Evaln. Position Cash flow adequacy Financial Flexibility Strategic initiatives Others Accounting Quality External Risk Internal Risk For Companies with Capex. Track Record Credibility Financial Risk Existing Fin.

Rating/Grading Services IPO Grading & Equi-Grade Banks and FI ratings SME/SSI ratings Structured Finance Ratings Corporate ratings Subsovereign ratings Infrastructure ratings Services Corporate Governance ratings Issuer Rating Insurance/ CPA ratings Grading of MTI Fund credit Quality rating Construction Grading CARE Ratings – JOURNEY TOWARDS EXCELLENCE 17 .

Rating/Grading Services For Enterprises CARE Ratings – JOURNEY TOWARDS EXCELLENCE 18 .

Bank Facility Rating under Basel-II framework Banks are required to arrive at their capital requirements for loan/facility exposures to various entities using stipulated risk weights. CARE Ratings – JOURNEY TOWARDS EXCELLENCE 19 . An unrated loan/facility exposure by the Bank gets a higher risk weight whereas a rated exposure gets lower risk rate. These risk weights are linked to the credit ratings of loans/facility assigned by RBI/SEBI recognized rating agencies such as CARE.

Credit Risk & Ratings Mapping of Rating & Risk Weights (Corporates) Long Term CARE RW (%) Short Term CARE RW (%) PR1+ 20 PR1 30 PR2 50 PR3 100 AAA 20 AA 30 A 50 BBB 100 CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Credit Risk & Ratings Unrated fresh sanction/renewals attract higher risk weight > `50cr exposure (aggregate basis) by Apr’08 > `10cr exposure (aggregate basis) by Apr’09 10cr CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

Better rated borrowers can get credit facilities at lower rate of interest on account of lower capital requirement of banks. it will need capital of `13.Implications Banks are likely to price their exposures on the basis of rating.50. CARE Ratings – JOURNEY TOWARDS EXCELLENCE . bank will have to keep aside capital of `1.80 whereas for unrated borrower.lent to a AAA rated borrower. An illustration For every `100/.

bonds and convertible bonds. CARE Ratings – JOURNEY TOWARDS EXCELLENCE 23 . fixed deposits and certificates of deposits. Short term debt obligation such as Commercial Paper. Inter-corporate deposits.Debt Instruments Rating of all types of medium and long term debt securities Long tern instruments such as debentures.

000 35.605 4.841 22. one-time assessment of the credit risk of entity Comparison with credit risk of other SMEs.841 29.445 9. Considers credit risk over one year horizon. NSIC.960 CARE Ratings – JOURNEY TOWARDS EXCELLENCE 24 .954 38.781 38.605 51.651 12.CARE SSI Rating subsidised rating fee Particulars Rating Fees (`) Service Tax @ 10.781 3.SME Rating/NSIC – CARE SSI Rating An issue specific. Reflects the overall debt-management capability.000 2.3 % (`) Total Fees (`) Subsidy from NSIC (`) Amount payable by SSI (`) Turnover (` Lakh) < 50 50-200 >200 27.000 47.336 28.881 7.

undertakes site visits and analyses data submitted by client CARE Assigns rating team Interacts with team. published in website. RATING COMMITTEE awards rating. Rating Letter & rationale issued to client Accepts Rating? Yes Press Release. CAREVIEW and Rating Reckoner Rating Kept Under Periodic Surveillance No Appeal for Review of rating (once) CARE Ratings – JOURNEY TOWARDS EXCELLENCE .Credit Rating Process CLIENT Request for Rating Submits information detailed schedules and The team analyses the information Team interacts with client. responds to queries and provides additional data necessary for the analysis.

Benefits of Credit Rating For Investors & Banks An independent. unbiased and objective opinion on risk To assess the risk premium To effectively monitor and manage investments For Regulators… To monitor financial soundness of organisations Promote transparency in the debt market CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

awarding contracts For entering into collaboration agreements CARE Ratings – JOURNEY TOWARDS EXCELLENCE .Benefits of Credit Rating For Enterprises An independent third-party evaluation Wide access to funds For pricing and timing of issues correctly Scope of self correction & self improvement For Business counterparties For establishing business relationships For opening letters of credit.

What is IPO Grading • An independent and professional assessment of equity issues offered to public • An opinion on the “fundamentals” of the issuer • Relative assessment of the issue in relation to the universe of other listed peers CARE Ratings – JOURNEY TOWARDS EXCELLENCE .

growth prospects. environment •Market position.Grading Methodology Business fundamentals •Industry dynamics. product mix •Technology. cost structure Promoter/management evaluation •Experience/background of promoters •Management competence. functional allocation •Clarity of business strategy Financial analysis •Trends in margins and profitability •Financial flexibility and liquidity •Financial projections CARE Ratings – JOURNEY TOWARDS EXCELLENCE . operating efficiencies. competitive advantages.

Grading Methodology Accounting policies •Transparency. adequacy of disclosures •Changes in accounting policy •Auditors’ comments in annual reports Project risk •Project completion risk – time and cost overruns •Status of financial closure •Required approvals for project Corporate governance practices •Separation of ownership and management •Size. composition and independence of board •Regulatory compliance CARE Ratings – JOURNEY TOWARDS EXCELLENCE 30 .

IPO Grading Scale Grading IPO Grade 5 IPO Grade 4 IPO Grade 3 IPO Grade 2 IPO Grade 1 Definition Strong fundamentals. Below Average fundamentals. Poor fundamentals. Average fundamentals. CARE Ratings – JOURNEY TOWARDS EXCELLENCE . Good fundamentals.

its financial position. which in turn is based on the Current Intrinsic Value (CIV) of the stock vis-a-vis its Current Market Price (CMP) • CARE Independent Equity Research Product to be christened as ‘CARE Equi-Grade’ • CARE Equi-Grade shall touch upon all the three key parameters considered by the investor before making any investment decision CARE Ratings – JOURNEY TOWARDS EXCELLENCE .CARE EQUI-GRADE • The critical factors considered by an investor while investing in a particular company’s equity share are: FUNDAMENTALS Whether the company is fundamentally sound with respect to its business. its management and its prospects RETURN LIQUIDITY What return can the investment potentially offer.

P/E. Replacement Cost. EV/EBITDA. NAV.PARAMETERS CONSIDERED FUNDAMENTALS Business Fundamentals and Prospects STOCK LIQUIDITY CARE to choose apt valuation methodology DCF. Independent Financial Projections Financial Soundness Management Quality Corporate Governance Current Intrinsic Value v/s Current Market Price (Return Potential) CARE Ratings – JOURNEY TOWARDS EXCELLENCE . etc. P/BV.

CARE Ratings – JOURNEY TOWARDS EXCELLENCE . • This leads to increase in trading volumes on the stock exchange • Companies can easily raise funds from the market. the investor confidence in the company increases. right issues. as CARE IER provides grading on both fundamentals of the company and valuation of its equity. etc.BENEFITS TO THE COMPANY • With unbiased opinion available. both equity as well as debt. • Ease in raising long term debt based on Fundamental Grade • Ease in private placement of company’s equity based on Valuation Grade • Ease in raising equity through follow-on public offers.

About CARE Ratings CARE Ratings – JOURNEY TOWARDS EXCELLENCE 35 .

Second Largest Rating Agency in India CARE Ratings – JOURNEY TOWARDS EXCELLENCE 36 .

Major Shareholders IDBI Bank Canara Bank State Bank of India First Leasing CARE ING Vysya Bank Federal Bank Tata Group IL&FS Group Sundaram Finance CARE Ratings – JOURNEY TOWARDS EXCELLENCE 37 .

S. Former Wholetime Member of Securities & Exchange Board of India and Chairman and Managing Director of Corporation Bank. Former Managing Director of State Bank of Mysore. R.P. Leeladhar Mr.Pattanayak Mr. Billimoria & Co.B.An Independent External Rating Committee Mr. S. Former Dy. D. Chopra Mr. Malegam Chairman Former Managing Partner. H. Dogra CARE Ratings – JOURNEY TOWARDS EXCELLENCE 38 .K. Managing Director & Chief Credit Officer of State Bank of India MD & CEO Mr.P. V. Reserve Bank of India. Doreswamy Mr. Member of Board of Directors of a number of companies and organizations including Reserve Bank of India Former CMD. Governor.. Central Bank of India and Dena Bank Former Dy. Y. V.

Leadership Position in Indian Banks / FIs Ratings Rating of 51 Indian Banks & FIs Substantial rating coverage of NBFCs & HFCs Rating diverse financial entities CARE Ratings – JOURNEY TOWARDS EXCELLENCE 39 .

Leadership in Various Sectors Construction & Real Estate Power Transmission Shipping & Shipyards Hospitality Sector Steel & Steel Products Telecom Textiles Cement CARE Ratings – JOURNEY TOWARDS EXCELLENCE 40 .

Leadership Position in Sub Sovereign Ratings All rated Indian states have a CARE rating CARE Ratings – JOURNEY TOWARDS EXCELLENCE 41 .

Leadership Position in IPO Grading Achieved Market Leadership in IPO grading 43% Market Share 82 IPOs Graded CARE Ratings – JOURNEY TOWARDS EXCELLENCE 42 .

Leadership Position in Structured Finance Leadership in ABS & MBS rating More than 40% market share in current financial year More than ` 9.000 crore of pools rated in FY’10 Highly stable ratings (no downgrades or defaults till date) Largest securitization in Asia(Japan) and Largest Single CLO rated CARE Ratings – JOURNEY TOWARDS EXCELLENCE 43 .

International Footprint Technical assistance to Rating Agencies in Mexico Ecuador Bangladesh Nepal Assignments for ADB Founder member of Association of Credit Rating Agencies in Asia (ACRAA) CARE Ratings – JOURNEY TOWARDS EXCELLENCE 44 .

Why CARE? Impressive Track Record of more than 17 years Approved by RBI/ SEBI / Other Regulators Empanelment with NSIC for SSI Ratings Best practices IOSCO Code of Conduct Comparable Transition Matrix / CDR Independent Rating Committee CARE Ratings – JOURNEY TOWARDS EXCELLENCE 45 .

Why CARE? Ratings widely accepted by market participants Capability Highest number of ratings in shortest span of time Capable team of more than 200 analysts & growing CARE Ratings – JOURNEY TOWARDS EXCELLENCE 46 .

Marketing Associate Incentive driven partnering options for CAs & CSs for origination of rating business CARE Ratings – JOURNEY TOWARDS EXCELLENCE 47 .

Thank You CARE Ratings – JOURNEY TOWARDS EXCELLENCE 48 .

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