CARE Ratings Ltd

NSE:CARERATING

Earnings Call Transcript 2022-Q3

[Kumari Nisha]

Good morning, ladies and gentlemen. I am Kumari Nisha from the Corporate Communications team, and on behalf of CARE Ratings Limited, welcome you to our Q3 FY '22 Earnings Conference Call. [Operator Instructions] Also please note that this conference is being recorded. Ajay Mahajan, Managing Director and CEO, CARE Ratings Limited, will be interacting on this call.Now I would request Mr. Ajay to take over the proceedings, please.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Thank you, Nisha. Good morning, friends, and welcome to the investor call of CARE Ratings Limited for the last quarter.While we have glided through the first month of the year so swiftly, let me take this opportunity to wish each one of you a very happy and prosperous 2022. I hope you've had the chance to go through our results for the third quarter ended December 31, 2021, and have analyzed the same.I'm here with the senior management of CareEdge to explain how the company has fared so far this year and address questions that you may post after my preliminary remarks. I will also briefly take you through our vision for the coming years, which will give you a perspective of the plans we have in place.The government, as you know, is optimistic about India's economic prospects for the coming fiscal. Indian economy, as announced by the Finance Minister yesterday, is projected to grow at 9.2% in FY '23, the highest among all large economies. In our view, the Finance Minister has done a stupendous job by announcing a very forward-looking budget focused on what India needs over the next decade to return to high growth rates, infrastructure, green and sustainable development and all-inclusive welfare.A higher-than-expected allocation of INR 10 trillion to CapEx in the infrastructure sector is likely to crowd in private sector investments as well. [ Growth ] in agriculture, organic farming, faster wasteland development with an outlay of INR 3 trillion will definitely help build part the rural economy, so to say, and lead to transformation of life there. The extension of ECLGS scheme by another year with an increase in allocation to INR 5 trillion is an excellent step to support the MSME sector that faced the brunt of the second wave of the pandemic.It is impressive that the government is spearheading increased digitization, scaling it from rural to urban areas, planning to create portals and platforms to deliver digital services in critical areas of health and education. All this, obviously, will consume a large dose of capital expenditure, to be precise INR 7.5 trillion next year.Economic growth would essentially be led by government capital spending and measures to support consumption. The Union Budget announced yesterday had some announcement to this fact. The size of FY '23 budget has been raised by 5% capital expenditure for FY '23, as has been said, 24% over the revised estimate of FY '22. Notably, CapEx as a percentage of GDP at 2.5% is the highest in 24 years since FY '99.On including the CapEx to be undertaken by the public sector undertakings through their internal, external resources, approximately INR 4.7 lakh crores in FY '23, the push to CapEx would be over INR 12 lakh crores in FY '23, which is a good 10% increase over FY '22.In our view, the Union Budget for '22, '23 is a super positive one. While short-term challenges may exist, the road ahead is being seen and communicated with a great deal of clarity. The focus is on making India future-ready with increased digitization or even giving the PM Gati Shakti an even stronger push to build infrastructure in the country.Let's now look at the economic performance in the third quarter. Domestic economic activity has been gaining ground, progressively strengthening from the sharp decline in FY '21. The low severity of the COVID-19 latest infections, coupled with the high rate of the vaccination, has added overall activity and mobility, carrying forward the improvement seen in the second quarter to the third quarter.The readings from the various high-frequency economic indicators attests to the improvement during the period. GST collections, e-way bills, toll collections, PMI manufacturing and services, petroleum consumption among others have recorded further improvements in the third quarter over the second quarter of the current fiscal. Consumption demand during the quarter, too, received a very strong festive period boost.During the advancements, the output of various segments remained below pre-pandemic levels during the third quarter of FY '22. Also, the pace of improvement has been uneven across segments, with some seeing robust growth while some seeing only modest advances. Adding to this, the new variant of COVID-19 virus towards the end of the third quarter and the resultant intermittent restrictions have been a bit of a drag on the activity, underscoring the fragile nature of recovery and the persistent economic and business uncertainty.Fundraising by businesses, which has a direct bearing on the company's business in the quarter gone by, presented a mixed picture. While fundraising from the corporate bond markets was subdued, it was strong for commercial paper. Bank credit demand by corporates, although restrained, picked up pace.Corporate bond issuances during the quarter totaled INR 1.45 lakh crores, which was 19% less than the issuances in the preceding quarter and 15% lower in the corresponding -- over the corresponding quarter of Q3 FY '21. Issuances in the first 9 months of FY '22 at INR 4.14 lakh crores was also 26% lower than the same period of last year.Commercial paper issuances in the third quarter, however, were at INR 6.5 lakh crores, approximately 4% higher than the second quarter and 50% more than a year ago. The issuance of these short-term securities during the first 9 months of FY '22 has seen a 36% increase from corresponding period of FY '21.Bank credit offtake has seen a notable improvement as well. The incremental bank credit growth as of end December 2021 was 6.7% as against 3.2% growth in the corresponding period of 2020. This improvement in credit demand is, however, driven by the retail segment. At the same time, even as the incremental credit growth to the industry and services sector continues to be in contractionary territory, the decline has been less severe. The credit growth to industrial and services during April to November '21 was minus 0.5% as against degrowth of 1.4% in the same period of last year.There has been stability in the overall environment in the credit and debt markets during Q3 with high levels of economic activity and mobility.The strengthening of the economy bodes well for a revival in the investment cycle in the near future. Moreover, with the government having maintained emphasis on public investment-led economic growth in the budget announced yesterday, private investments are likely to gradually crowd in, too. This, in turn, holds encouraging potential for the debt and credit markets. That said, we are cautious in our optimistic outlook as we need to be watchful on how the pandemic triggered episodic disruptions play out in the recovery.Also with our subsidiaries businesses getting reassuring traction, our resolve and focus on diversification and developing new viable business opportunities for CareEdge remains strengthened.Forced by circumstances, we adapted well to the flexible work style, which enables our employees to work from home in a seamless manner when the need arises. Even as our offices across regions continue to operate with less than physical -- full physical attendance on all working days, we continue to complete all our mandate and assignments, both new and surveillances within the stipulated time line. Given the uncertainties regarding the pandemic, we are confident of being able to work effectively and efficiently for the smooth functioning of our businesses even in the future.Let us now give a quick overview of our financial performance for the third quarter of the ongoing financial year, which I believe most of you would have already read and analyzed.Our total income increased from INR 54.83 crores to INR 55.45 crores for the quarter, while our expenses increased by 5.4% from approximately INR 33.78 crores to INR 35.6 crores. Employee cost and other expenses increased by INR 1.24 crores and INR 0.63 crores, respectively. Our PBT decreased from INR 21-odd crores to INR 19.85 crores with 36% margins. PAT was at INR 14.9 crores with 27% PAT margin.To quickly place the financial results -- I've actually gone through this, so I'll skip this section.As a famous saying by Steve Forbes goes, your brand is the single most important investment you can make in your business. And so during the quarter gone by, we reinvented ourselves where CARE Group onboarded a new and energized brand called CareEdge. We engaged a professional global agency to reinvent the brand and architecture from its first principles. We are dynamic with strong values and has a vision to -- and have a vision to become a financial powerhouse. We are backed by a team led by industry experts and thought leaders to establish CareEdge as a trusted knowledge purveyor.We also further strengthened our outreach efforts. The economics, ratings and industry research teams published their views on various developments blended with the expertise of our rating and research specialists. In Q3 alone, we published 64 daily, 27 weekly, 6 fortnightly, 37 monthly and 49 special reports. Moreover, CareEdge's senior management, economists, sector specialists, industry research teams along with our business development teams participated in multiple knowledge-sharing forums. In Q3 alone, we conducted 22 knowledge-sharing forums.What's more, in continuation of our knowledge dissemination series, CareEdge Ratings conducted 8 webinars in Q3. Representations were made by industry experts invited as guest speakers along with CareEdge senior management and sector specialists.We continue with the initiatives to cement our transformation agenda as well. With technology being one of the key identified enablers of our transition endeavor, we have been upgrading, modifying and establishing new innovative solutions for our businesses as an ongoing process.Our focus and emphasis on our human resources has been continuous and multi-pronged. Training programs have been conducted for our staff on an ongoing basis to keep them up to date with the evolving and latest skill requirements. On the side of leadership, we've also hired some very senior professionals to assist in the transformation of the company.We are formally on a transformative journey at CareEdge, and we are pleased about the overall performance in such challenging times. Our focus strongly remains on improvement in productivity, strengthening analytical rigor in our ratings and also diversifying revenue streams going ahead.Our journey ahead rests on 4 pillars: first, group approach to synergize multiple offerings with a singular trust; second, the technology factor to drive digital transformation in ratings businesses and enhanced product quality; third, talent, where we have employees and culture-centric initiatives to drive growth and customer transformation; and fourth and important one, rebranding to create a distinguished brand worthy of a financial powerhouse.In conclusion, we are confident that the economy would have a strong bounce back in the remainder of FY '22. And with the thrust of the Union Budget announced yesterday, hopefully, the capital expenditure in the economy will only grow from here.The strength in the economy is bound to stimulate investment sentiments and climate, albeit at a gradual pace. The budget announced yesterday, as I said, will bring more corporate interest to spend on CapEx. This will be reflected in debt and credit markets. That said, even though the economy appears to be on a strong footing, the pandemic still remains a threat and carries with it certain amount of uncertainty. Despite this, we believe we are better positioned to navigate these challenges due to the valuable learning from the past as well as our transformative process, which is deeply underway. We shall continue on disciplined execution of our strategy to create better shareholder value in times to come. With that, I close my speech. Thank you very much, and we'll be very happy to take questions.

[Mradul Mishra]

Thank you, sir. Dear participants, we will now open the floor for Q&A session. [Operator Instructions]The first query we'll take from the line of Mr. [ Kunal Shah ] who is from [indiscernible] Capital.

[Unknown Analyst]

Can you hear me?

[Mradul Mishra]

Yes, [ Kunal ].

[Unknown Analyst]

Yes. So basically, I had a question on the rating business per se. So yes, so I have a question on the rating business per se. So if I look at the 9-month number for the rating business, we had a growth of 6%, whereas some of our competitors had a better growth than ours. Now, it's been quite some time that we have done changes in the team and [ Board ] as well as far as the rebranding exercise and all has gone. So how should we look at the rating business acceleration from hereon for CARE per se? What's your take on growth in comparison to peers basically as far as the rating business goes?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Well, it's a good question. Are you able to hear me? Mradul, can you hear me?

[Mradul Mishra]

Yes, sir. Please go ahead.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Okay. Now -- can you hear me now?

[Unknown Analyst]

Yes.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Okay. Okay. So [ Kunal ], it's a good question. I would say that it's a very competitive market out there. So I agree with you that while you may not see our performance, I got a chance to look at the other listed company results. And I think we are broadly, on the 9 months, in line with the operating revenue growth with our competitors.Having said this, we aren't -- we obviously continue to strive to do better. I think in these very different times, while we have fixed the -- with some of the challenges that we had in the company and we are very nicely poised for growth in the future, we have to look for the overall revenue basket to increase within the constraints that we have and the disruptions caused by the pandemic.We are broadly in line with the market. We haven't yet seen the results announced by one of the large competitors, but I think the other listed company in our space, we have seen, and we are broadly in line with them in terms of our operating income increase.I will also add to this that while that 6% number is right, it's not a very large change that I would suggest. But we have had some provision write-backs from COVID provisions that we made at the end of March '20. So we had a INR 2.67 crore write-back last year. If you adjust for that, our growth is actually 7.123%.We are -- I know that, that doesn't change the 6% by a very vast margin. But the fact is that a 7% increase in operating expenditure while the credit to manufacturing and industry is a negative number still or reach a lower negative, I think it's a satisfactory performance for us. But we are not getting complacent with that, and we remain focused for seeking higher growth in the future.

[Unknown Analyst]

Ajay, I think -- this is [ Vikas ]. The question we had is, see, we've made a lot of investments or we are making investments in higher growth, right? So the question is twofold, that when do you see these investments resulting into gaining of the market share?And secondly, how are you seeing the -- with the whole CapEx cycle, taking up investment cycle, picking up -- our tail growth also is, by and large, coming about 18%, 16% to 18% range as per the bank's results. So how are you seeing our growth over the next few years?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

I think it's -- [ Vikas ], my answer, actually, it's not going to substantially change. I think the question that you're asking is we made investments. I think we've made investments in 2 things really, in more in sort of fixing the gaps in the senior and middle management structure at CARE and importing stability to an otherwise declining franchise over the last 3 years, particularly between '18 and '20. So I think that has clearly -- you can see the numbers. That has clearly -- the firm has stabilized and is poised for growth when we get the right sort of lift off in the capital expenditure and in corporate credit.The bank balance sheets that you're referring to, I mean, I've given the credit numbers. The wholesale and sort of credit is very marginally growing. If you see the growth in corporate bond volumes, I've given the numbers. In the back -- economic backdrop, there has been a shrinkage of corporate debt issuances in the capital markets. Bank credit on a bilateral basis, there are pockets of growth opportunities, and we are seeking all of that. Let me also highlight one very important element, which is that our initial ratings business, the new [ 2 ] company business has actually seen a significant growth, and that's embedded within these numbers. It is sometimes -- the industry is very competitive, so there are lots of challenges underneath in the continued business from the previous years, which is what we normally call surveillance basket. In that, we are seeing challenges because of the maintenance of those accounts especially at a time when corporate sector financial performance has been very good.Our focus is large and medium clients. We are not in the SME space in a substantial manner. We don't believe we get paid there to offset our costs appropriately. In the large and medium segment, there is a lot of deleveraging that has happened in the last 1.5, 2 years. We are seeing, as a result of that, a lot of clients come back and not needing the ratings anymore. Also, the industry is quite competitive. So retaining the past accounts is a challenge, but I think we are very well placed to deal with that challenge.Also, like I said, the initial ratings business has actually grown reasonably well. And we believe that, that momentum will continue into the fourth quarter and into the next year, as we have all seen the reactions of corporate India to the budget. There is going to be a substantial tailwind with the government investing in a lot of infrastructure projects. We see a lot of private sector crowding and happening over a sustained period of time.And I think -- I refrain from making any forward-looking statements, but I'm confident that CARE Ratings today is very well-poised to benefit from the -- from this tailwind that will be unleashed post the budget announcements and actual spending of the government that starts from next year.

[Mradul Mishra]

Sure, sir. Sir, we will take the next query from the line of Mr. [indiscernible], [indiscernible] Group.

[Unknown Analyst]

Congrats, again, for a reasonably decent set of numbers.So I was going through the YouTube page that CARE has recently activated. And obviously, there is a lot of content that is being created by way of webinars, et cetera, that you're doing. So I just wanted to understand your thought and focus on that particular aspect because that has also become a new way to generate income. Anybody producing content now is actually a media company, so I see CARE as a media company or a potential media company also. So any thoughts in that direction? What is the focus? What is the outlook?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Yes. So it's a very good question. My answer to that would be that at this moment of time, we are sort of just learning to open up to the market in line with the very communicative, let's say, businesses that already exist in the market. I think CARE Ratings has had a distance to cover that. While we have always printed and produced a lot of thematic research reports as also our sector specialized reports and then producing research and sharing it with the market, with the media, with the press and so on and so forth, I think it requires a very concentrated effort to build, firstly, the brand and the brand that stands for all the subsidiaries as well as one group. And I think earlier, every company was a little -- doing a little bit in the marketplace but only [indiscernible].So if you go back to some of the comments I made earlier, the first and foremost approach that we are changing is a group approach. We all exist together in the business, so all our subsidiaries are now deeply integrating into our strategy. And even on the execution plane, there is a lot of conversation internally happening as opposed to the past where subsidiaries were generally a little distanced from our core businesses, number one.Number two, on the branding, this -- we've put in a lot of effort. And like I said in the opening remarks, our CareEdge is a result of that. And dovetailed with that is a very clear, transparent and a constant commitment to share content with the market and stand up against the -- our very able competitors, specifically also the MNC competitors, in terms of the quality of articles we write, the quality of communication, more importantly the quality of insights we share.And we believe that we are second to none in regards to our comprehensive understanding of multiple sectors and the ability to share and communicate where I think we needed to work a little bit more. So it's more around creating the right pipeline and right networks into various forms of communication, including social media, where you will see CARE and CareEdge group, particularly, take -- put in more effort.And lastly, on the back of this content, ultimately, the objective is to generate more business. And while some investors may or may not see necessarily the results of it on a quarter-to-quarter basis, but I think I have said it very firmly and very consistently over the last 2 years that transformations don't happen by flicking your fingers and changing culture overnight. We are working painstakingly but very consistently internally in the company to become a better communicator of the skills we get.Ultimately, the multiple pillars required are knowledge, technology and also a very strong communication and brand strategy. And I think that third pillar of marketing, communication and brand, we have recently reworked and we are working on that. The benefit of this will be derived over a period of time as the perception of quality takes time to embed in the marketplace.And the benefit of that will also accrue to our subsidiary businesses, the advisory business, the consulting and advisory and the ESG businesses that we are focusing on. And we'll be unveiling ESG very soon. It's a part of this quarter. And likewise, in our Risk Solutions businesses, which may be still early stages at this moment of time, but we are seeing a very, very positive outlook for that business as well.So I think these benefits will take a little bit -- little time to be seen in the top line and in the bottom line, but we are firmly on our path to build a very communicated brand because we believe that we have all the knowledge and skill across sectors, but we needed to work on our communication.

[Unknown Analyst]

Right. So once again, sort of very well put the entire thought process. I would, once again, just wanted to understand that in terms of YouTube, in particular, because I was very intrigued by seeing the kind of content and the potential at YouTube. So do we have a dedicated resource for YouTube, the age bracket of that? Because this is a different world. This -- it requires -- I'm a 30-year-old, you're a 50-year-old, so yes, so my perspective on this is slightly different from yours. So -- but yes, so that's where I was trying to lean you towards that there is a lot of potential and not many people from your industry have looked at it.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

It's a very good point to make. We are very happy to learn. We have a marketing team in the making. We already had a team, but I think we are -- we needed to deeply strengthen that team and create various channels of communication, like I mentioned earlier.In your questions, so we are focusing on multiple channels, YouTube, of course, LinkedIn, of course, and various other forms of communication, including Twitter. But your question is very specific to YouTube and how can content be monetized there. Very happy to seek your ideas. You could write me an e-mail. We could hook up on a call. It's fair that for now we move on from this point, but I have noted it down, and I will do some work on it.

[Mradul Mishra]

The next query we'll take from the line of Mr. Sanjay Kumar from ithought.

[Sanjay Kumar]

So I have a few questions. So first is on, as you rightly said, large and medium is deleveraging, and they're not giving credit to MSMEs. So that is kind of forcing MSMEs to borrow, which is why we are also seeing banks posting good growth at least in that segment. So why are we not focusing on that segment?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Two things. One, I don't know if you're aware that bank loans to companies that have INR 50 crores of loans or lesser don't require any rating anymore. So a lot of MSME is typically lower than that threshold, and they don't require ratings. That's number one.And number two, in segments above the MSME, going up to, let's say, INR 200 crores type of turnover, and I may be not exactly right on the exact thresholds. But broadly, the point is that in the SME space, again, it being an overly competitive market, several rating agencies here at play, we felt that the price to effort ratio of rating a company even in SME is not commensurate with the amount of work that we do in the large and medium space. So while on a marginal basis, we don't turn down business, but we look for specific opportunities in this space which meet our cost hurdles and generate a return for the shareholder.

[Sanjay Kumar]

Okay, sir. Makes sense. So just to follow up on that. The large banks, given the limited demand in credit, so they're gaining market share because of their low cost of funds. So would you play the pricing game, not in the MSME segment, but in the large and medium segment? What would you go for? Would you go for low growth, high margins; or high growth, low margins?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

It's a good question. The honest answer is that nothing, unfortunately, in life, certainly business life, is a formula. Having said this, I will give you the general pricing discipline we have followed for the last 2 years. Again, I've said -- commented on this in the previous conversations as well that we very clearly know the amount of effort that goes into the rating process. The cost of rating analysts, the cost of technology, the cost of supervisory ranks above them, the group head, the rating head, the CGMs and the directors and senior directors of the businesses, of course, and then the senior management. So we have our internal thought processes and worksheets around what it takes on the margin to price our product and in what size. And we have very clearly put our foot down to not play the game in this race to the bottom on pricing.And having said this, if there is -- on a basis point basis, the cost may or may not necessarily be exactly what we think we should get from a client, but if the absolute value of the money makes sense for us, we don't say no to business. Having said this, there are internal strong pricing controls. And within those pricing controls, we try our best to win the business rather than look for any excuse to lose it.

[Sanjay Kumar]

Okay, sir. Makes sense. That's an excellent reply. Just a second or the last question. Everybody is talking about the CapEx cycle, but I have a slightly contrarian view at least from CARE perspective. Cement, steel, textile and even chemicals, all of them are expanding, but we're not seeing that reflect in the credit growth because it's mostly internal accruals. So we might even see debt-free textile and steel companies, which is a very rare sight in India. So where will our growth, CARE's growth, come from given this limited demand due to the internal accrual-led CapEx? Any thoughts on that would be great.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Well, actually, I agree with you, and that's the point I was making that in the last couple of years, we've seen a significant deleveraging. And internal accruals are very strong, and past loans are being paid back by very large companies who, until a few years ago, were a matter of concern for banking, frankly. And I come from a banking background. I can assure you of that, that some of the commodity companies in the cycle that hit in '17, '18, there were questions around whether those companies will be robust enough to pay back their debt. And today, we have a situation where they are pretty much debt-free.So I agree with the comments you're making, particularly on the commodity side, but I do believe that the metals business is on a very strong upswing. And while the absolute large players at this moment of time, maybe, may have the resources to be self-sufficient on it, there is a lot of middle market out there which we also focus on, which will have a needs for CapEx, particularly since their balance sheets are quite light and their debt EBITDAs and their sort of debt servicing ratios are now looking very attractive to raise money. Even if interest rates went to be 100 or 150 basis points higher, the cost of money is still very, very nominal in India considering the inflation levels where they exist both globally and in India. So I think the cycle is -- it will get also support from the corporate sector.But just to remind you that our 2 focal and big concentration of clients in our portfolio is in infrastructure where we are very strong, and that requires money regardless of any of the other comments made up until now. So infrastructure will need money. And as private sector crowds in as we set up more green energy, as we set up more hydrogen plants and facilities, as we set up more roads and highways, there will be demand across the board, including from EPC for funded and non-funded facilities. So I remain very positive on infra.And BFSI has seen, particularly the lower end of BFSIs and smaller NBFCs micro-finance, has seen contraction and some challenges in the last couple of years, particularly driven by the second wave of COVID. We think some of that will alleviate over a period of time, and it will be time for NBFCs and the banks also to gear up for stronger credit growth in the economy in general. So frankly, our big bets are infra, followed by BFSI, followed by corporates [ tech ].

[Mradul Mishra]

Thank you, Sanjay. The next query we'll take from the line of Mr. Mudit Minocha from M3 Investments.

[Mudit Minocha]

Am I audible?

[Mradul Mishra]

Yes, Mudit.

[Mudit Minocha]

I wanted to make a comment and then follow on with the question. I'm sure you already know that buying back something which is worth [ 100 ] at [ 50 ] creates instant shareholder value. Not only it creates long-term wealth, it also showcase capital allocation prudence of the management, also the minority shareholder treatment. Such decision in time also leave trail of evidence of good governance in the company.So where I'm coming, since last 5 years, a lot of minority shareholders have lost a lot of wealth, and you might already know about that. Last 2 CEOs were not able to convince the Board of this simple concept of buyback. They have given some of the other reasons not to pursue the same. So what assurance would you give to make a very strong case for a buyback which could yield on the positive side?We have enough money to, say, buy back 1/3 of the company. And I don't think there is any argument that could substantiate it, anything against buyback. I mean, you, yourself must be very convinced of the same. So I would want to hear your thoughts on the same, and what your commitment towards it.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Okay, Mudit. There are very strong regulatory issues around this, so very hard to give you a timeline or an answer that throws any clarity on the question you asked with regard to timing and all of that. But as you rightly summarized, this is an important matter for us to internally deliberate. We are working on it in terms of deliberations. But is the Board actively considering it at this moment of time? No is the right answer. But is the Board open to a conversation on this? Yes is the right answer. And I assure you of both my commitment and also the ability to move further on this matter with the Board in the not-so-distant future.

[Mudit Minocha]

All right. So would you be needing any help from the shareholders' side about giving some support on this? We are happy to share all our ideas and thoughts around that.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Mudit, at the right time, I could reach out or our investors' help would reach out to you. But at this moment of time, we believe that for whatever discussions and preliminary discussions we need to have, we have the materials with us. We are also going to be seeking help from the right players in the system, the intermediaries in the system at the right time. Can't show you a firm view on this right now because the matter is under discussion and only at the management level. We haven't yet taken it to the Board in a formal manner.

[Mudit Minocha]

All right. I'm hoping that you'll give us some positive result this time.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Mradul? Mradul?

[Mradul Mishra]

Yes. The next query will be from the line of Mr. [ Akash Mittal ].

[Unknown Attendee]

[ Akash ] here. Sir, I'm a [ digital investor, small guy ]. So just a couple of thoughts I had. So globally, I was reading some trends on the rating industry, how is it going, what has led to the growth, how is it sustaining. So one of the trends I find very clearly is the role of technology in it, right? Technology means automation, RPA, machine learning and a lot of analytics into it.Now the question is when I go through your reports, when I look at your documents, when I look at competitors who have a foreign parentage or MNCs or some sort of linkage like sister [ company ], sir, I do not find that sort of confidence in the technology investments and the role of technology. So is there anything that you are doing which is not yet shared or something is different than that?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

And what document, if I may ask you, are you referring to when you say that you don't see enough on technology?

[Unknown Attendee]

So I was -- so the way I was looking at the reports, I couldn't feel that you are leveraging enough of analytics, enough of machine learning for your reporting purposes, for generating the credit reports.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Yes. So the honest answer to this is as follows. We are -- any projects that we embark on in technology takes a little bit of time to, first, lay a plan, a PRD document, an FSD document and then an implementation of technology, code writing, [indiscernible] and then finally, production of that technology. These things take time. I'm on record in the past, and we have -- on all our technology projects, we are continuously working, monitoring.As a result, so far, a massive, massive sort of a flux of talent in technology from a lot of companies, including people who are working with us, both in-house and as vendors, we have seen some delays. It is counting to 1 to 3 months in some of our technology projects, but we are firmly on the path to build a very tech level business.On my comments also, I've been saying that the 4 pillars of our strategy are: one, the group approach; second, talent; third, technology; and fourth, branding. So tech is a very, very important component of our evolution for the future. Not just a facilitator of the business in terms of improving productivity and focusing on a proper workflow platform and reporting and all of that, but you will see our continuous effort on technology also for deployment in the marketplace for third-party products that we are building in Risk Solutions and even in our advisory business through ESG platform and so on and so forth.So rest assured, technology is absolutely center stage. If we haven't communicated that well, we will improve on our communication.

[Mradul Mishra]

Thank you, [ Akash ]. The next query is from the line of Mr. Chetan Cholera from Pragya Equities.

[Chetan Cholera]

Can you hear me?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Yes, please.

[Mradul Mishra]

Yes, please.

[Chetan Cholera]

I heard the communication word a few times during your answers. I hope same kind of communication you keep with the shareholders by keeping regular consults on every quarter. And you need to improve the presentation quality also. It's not that good. I think you need to improve it.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Okay. And do you have a specific document in mind? We take your criticism very constructively. What document do you have in mind?

[Chetan Cholera]

I think if you go through the quarterly presentation, quarterly which is last Q3 presentation, I think you -- kind of it's not that properly...

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Okay. Any particular section you want to highlight?

[Chetan Cholera]

No, the whole, whole presentation I'm talking about.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Whole presentation. Okay. Okay. Thank you for that.

[Chetan Cholera]

And I think you keep the con call in every quarter after each quarterly results.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Okay. Okay. We have a -- please -- sorry, do you want to say something else?

[Chetan Cholera]

And we are very, very busy. I don't know why you're taking so much of time convincing management and then go to the Board for the buyback. I don't know what -- still, I'm not clear what is -- why it is taking so long?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

We've noted your concern. I've already had my comments. I don't want to say anything more. So -- but we've noted your comments, and we'll work on it.

[Chetan Cholera]

And then we expect the growth to restart the growth. I think when you came, we have very high expectation from you, but it is taking very long.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

I'm sorry to have disappointed you. We are doing our best, and our teams are also doing their best. Both on the business development side, we've had a very strong growth of new business. I think in the aggregate, you are seeing a little less growth. And like I said, if you adjust for the provisions, we have 11% up in Q3, the top line revenue against the market where credit growth is actually negative to flat.But if that disappoints you, I can only tell you that the team will do very -- is very focused on working hard. We have no other objective. We have no other distraction. We are fully working on both improving internally and also increasing our revenue and improving our analytics, improving our technology, diversifying our businesses. I take your comments on board, and all I can tell you is that we will make note of that and work harder.

[Mradul Mishra]

Thank you, Chetan. The next query is from the line of Mr. Shalabh Agarwal from Snowball Capital.

[Shalabh Agarwal]

Hello. Am I audible? Am I audible?

[Mradul Mishra]

Yes, Shalabh. Please go ahead.

[Shalabh Agarwal]

Yes. Good morning again. Thank you for giving this opportunity. So the first question is, one of the earlier, to one of the earlier questions you alluded that the initial rating has grown, but it's the surveillance basket which has kind of disappointed. Just wanted to understand, is it primarily because of issuers not cooperating or as you said because of deleveraging and the exit from the pool is higher than inflow, which is what is leading to this degrowth?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Actually, there is no degrowth. I'm repeating myself that the quarter 3 operating revenues are up 10%, 11% adjusting for INR 26,700,000 of provision write-back in Q3 of last year. And even otherwise, we have a 6% growth, a 5% operating income growth for Q3. But the point is right. While the new business has seen significant traction, there is a little leakage from the basket below because of the deleveraging in the corporate sector. That's one reason.Second reason is some issuers don't cooperate. If they switch rating agencies or have any other form of other distractions, I don't know. But there is a little contribution from there as well. So it's a mix of deleveraging and some INC accounts, both.And third is that if the debt is not replaced with a bond, it wouldn't get us. And there is more switch to shorter-term borrowings, then automatically, the surveillance basket does not get benefit from that. And you can see corporate bond issuances are reducing. In other words, even if debt is sustained but in shorter baskets, it becomes very hard to make the same amount of fee from the customer from a commercial paper issuance versus dated bonds. Also, it does not add to the surveillance basket for next year. So it's a mix of all of these factors.

[Shalabh Agarwal]

Sure. Sir, having analyzed the numbers of competitors and you also said you've seen some of those numbers, would you believe that this issue is little more affecting CARE compared to our competitors or it's more of an industry phenomenon?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

It's very hard to get that breakup of new and surveillance rating business from competitors. It's very hard to comment. We only have the top line numbers. And one of our competitors in the listed space, it has grown in the 9 months, I have the numbers in front of me, by 7% in terms of operating revenue. I'm keeping away the investment income because they will be very different. But operating revenues are up 7%. And ours, adjusting for provision, is also 7.23% up. So we are broadly neck-to-neck. I wouldn't therefore be able to derive any further insights on their surveillance basket.

[Shalabh Agarwal]

Sure. Sir, is there any seasonality in our numbers? Because if I look back a couple of last years, the first and third quarters seem to be lower compared to the second and fourth quarter. Anything that you would like to point on?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Yes. So it's, again, this is something that we have discussed before, but it is a good sort of point in the discussion today to refresh this, our thinking and our, more importantly, the characteristics of our book. The book is such that there is a larger sort of surveillance basket due as also new ratings typically are, as you all know, the busy season is indeed the second half of the year.So from a new business point of view, the business is indeed loaded in favor of second half of the year. Apart from that, from a services standpoint, I think the way the business exists at CARE historically is that the quarter 2 and quarter 4 are more dominant. Quarter 1 and quarter 3, as you rightly point out, are relatively lower environment. So it's a correct observation.And my last comment on this is, it's also got to do with accounting. And some of our competitors, regardless of when the surveillance is due, they account for the revenue on a accrual basis, as in they will count for the surveillance revenue on a 1 by 12 basis every month. Whereas in our case, the accounting policy is such that we take 90% of the revenue of the surveillance in the month that we complete the surveillance.So historically, the cycle of surveillance is annual, and there's very little that we can do. On an annual surveillance, if we did the credit in September last year, chances are we'll look at it again in September this year. And therefore, the quarter 2 and quarter 4 predominance in our revenue basket continues to sustain year after year.

[Shalabh Agarwal]

Sure. No. That's very helpful, sir. That's very helpful. Sir, the last question is, sir, a couple of quarters back, you had mentioned about the platform that you were trying to create where all the companies, all the rating companies will come together and kind of have a representation to the regulator. Just wanted to understand, and I guess then only you and one more smaller rating company had agreed on. So what's the update on that? Any pointers on that, where we are on that journey?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

So this is one of those things that you want to do for the larger sort of market development, and I think that's market welfare. I am acutely aware of that. We have not been able to make as much inroads into, firstly, improving the membership of AIRA. That's called the All India Rating Association, if I accurately get my mnemonic right.I'm the Chair for the first year, but unfortunately, a lot of that time was lost in setting up the organization and just getting things to get started. As you know, in anything that you set up anew, it takes a little while to put that into motion. So in my defense, I would say that some of that was caused by it being the first year effort. And the second is the pandemic also has sort of somehow slowed this initiative. And the third is that we have made efforts with 1 or 2 of our larger sort of set of rating agencies, but they have had their diffidence in joining for whatever reason.So at this moment of time, it's work in pipeline. And until we get the representation from the MNC group, it will be hard to actually make any market binding sort of effort here and becoming one single mouthpiece for the rating agencies and also one single association to engage with government. We are working on that. But indeed, it's slower than we had imagined.

[Mradul Mishra]

Thank you, Shalabh. The next query we'll take from the line of Mr. Prayesh Jain from Motilal Oswal.

[Prayesh Jain, Research Analyst]

Sir, just a few questions. Firstly, you spoke about a lot of tailwinds for the industry going ahead. But could you just highlight any regulatory issues such as Basel III. How does that impact the industry going ahead? Secondly, you alluded to competition, but what's happening on the Brickwork front? Is there any further action out there?Thirdly, could you talk about your inorganic activities which you had alluded earlier that you might look at particularly on the risk analytics side, that you would look to expand your operations on that side? So any developments happening around there?And my last question would be your thoughts on how the margins will pan out going ahead. In this quarter, you've seen some pressure on margins, significant pressure on margins. So how do you see on a full year basis margins now and going ahead? And those will be my questions.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

That's a lot of questions, but they're all very good questions. I'll make an attempt to answer them rather quickly with short comments. Basel III, it's been one of those things that has been around for a while. There has been concern about this and rightly so. But I think the way the banking industry has evolved over the last few years, they've had their own challenges in dealing with Basel. There's some noise in the background. Is it possible to mute? Yes. Thank you. Okay.So I was saying that Basel III has been a challenge, and so far, so good. The banks have been internally challenged on their NPA front. And at this moment of time, even with the decline in their GNPA ratios from 8.5% across the industry to more like 7% or low 7% across the industry, it's still a big challenge for banks to be able to first build internal models and then also convince the regulator of the same. And if that happens, it happens, we need to be mindful of that risk and consistently keep gearing our business towards fixed income and capital markets. And therefore, keep reducing reliance on that business. It's not possible to do that in 1 year, but our objective is to consistently improve the mix towards capital markets. That's the first answer.On Brickwork, I would avoid speculation. It's not something that's in my remit. And I have not heard anything about this other than that speculative report that appeared in some newspaper. I've not heard any follow through on it. So I would think that matter at this moment of time is on the back burner, if not dead. So I would not want to comment on it.Third, inorganic activity. We said so again in one of our previous calls, I don't remember which one, the previous one or the previous one. We said so that when we looked at this with a very clean lens over the last 1 year of real hard work as to what are the 3, 4 areas that we should be interested. We did arrive at risk analytics, data analytics, KPO, a couple of those type of opportunities as areas where rather than build from scratch, we should look for opportunities in the inorganic space.Having said this, once you determine that, that space is a good space, you have to also find the right suitor, the right opportunity. And while we remain very open, but there is no immediate thrust within the constraints of our cash corpus. And obviously, from a diversification standpoint, we don't believe that we should use all of that in one acquisition. And considering the cash pool, the constraints of prudence on top of that cash pool and the market opportunity in the desired segments, at this moment of time, we don't have necessarily anything specific to go after. But we will remain vigilant in the space and if we find something interesting that we can build upon at the right value.Ultimately, we are very mindful of the right value. Having said this, we are not short of risk taking. So don't misconstrue that to think that we don't have the ability to take risk, but we are taking the risk on behalf of the shareholder. And therefore, we will apply the lens of prudence on valuation as well as the future growth that business can provide to us. Because you would have paid in full for what it brings to the table, if not higher, through goodwill. And the future growth of that business and synergy with the CARE platform will be the driver for making the acquisition in the first place. And we're very conscious of that considering the very strong secondary market for equities, very, very frothy valuations. We believe that, that opportunity may or may not arise in the immediate future. I hope I answered that well, not well, but comprehensively.And my last comment is that instead, we will continue to, and that's the guidance I gave last time as well, that we'll continue to invest in our own businesses, our Risk Solutions business, our advisory and consulting business, internationalize some of that and make more investments there. So at the early part of the call, a few investors have had some concerns around revenue growth as well as on reducing PAT margins. The challenge always is, how much of that cash we can put to use in 1 year versus spread it over a longer period of time. We have been very prudent on that. But sometimes the key lies in making the right investments and not be blinded by accounting in making those investments. And we remain very vigilant on what needs to be done to build businesses for the future and not just be focused on quarterly performances. So that's the comprehensive answer on inorganic.My last question, your last question on margins, it's a pure-play on revenues. Margin in our business, in a high operating leverage business, as you can understand very well, is totally a function of revenue growth. In a quarter where we can grow 20%, 30% or in a year where we can grow even 12% to 15%, the PAT margins will improve significantly.If you see our cost structures, despite the fact that CARE is still not the best paymaster, we have tried to manage our expenses very, very effectively. Our incremental expenses in technology are less than INR 5 crores in 9 months' time. And on all other headline expense items, we have actually saved. Our expenses are really in manpower, and that's 75% of our expenses and technology and other expenses are the balance, 25% of our expenses. And we have tried to manage that very well. I don't think we will have significant negative surprises there, and our margins will definitely improve as our revenues improve. I've already shared my outlook for the future. We remain very, very positive, very optimistic but only worried about no resurgence of the epidemic further from here.

[Prayesh Jain, Research Analyst]

Just a follow-up on the first question that you answered with regards to Basel III. So is it fair to assume that in case the credit growth revives in the industry and the services segment, is it fair to assume that the growth in the ratings industry's revenue would be relatively much lesser as compared to the credit growth that we'll see in the space?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Well, it's very hard. Maybe now that you ask, we will put some, we'll back test this hypothesis and then see if we can through AI and ML, as some of my other friends on the call suggested, we'll see if there is any predictability to this that we can create. But the marketplace is a very dynamic one. It's very hard to say that at an aggregate level there is a certain correlation or a certain factor of bank credit growth that you can translate into credit growth.The first and foremost is, how much of that credit growth is wholesale growth and how much of that credit growth is retail growth? The retail growth also comes to the rating agencies through NBFCs but very rarely through the banks. Because banks, as you know very well, we rate only subordinated and hybrid papers. We don't rate bank deposits and we don't rate bank-related, those type of assets.So effectively, if we start thinking about this, it's a very complex situation to solve. Again, the dynamics in banking are spread between public, private and cooperative sector very differently. Then you have the NBFC space where you have retail NBFCs and some of them very marginally, but some of them also do wholesale. It's very hard to model some of this to derive the conclusions you derive. But I would say that with infra and BFSI as our strong segments, I would believe that there would be a reasonable correlation. It's very hard to guess how much lower to the headline credit growth number you see from the BFSI at least.

[Mradul Mishra]

Due to scarcity of time, I'll take the last question for the day, and that comes from Mr. Keshav Garg.

[Keshav Garg]

I hope my voice is audible.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Yes.

[Mradul Mishra]

Yes, Keshav, go ahead.

[Keshav Garg]

So I don't think there is any point in talking about the buyback because all we get are false assurances. So I'll let that pass. Sir, I wanted to understand that we have heard so much talk about the growing non-rating advisory business but we don't see it in the results. What we see is a degrowth from INR 7 crore revenue in Q3 of last year to INR 5 crore revenue with a loss. Sir, so anything you can tell the shareholders which can reassure them about the prospects of this company will be very grateful. Thank you very much.

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Keshav, I understand your frustration with regard to the buyback. I have only said and you will appreciate that this requires a consultation and discussion with the Board. And you kindly leave this with me is all I will say to you, and we don't have any intent to mislead you or any other shareholder.In regard to your question on subsidiaries, I have the numbers. I'm also a little disappointed that in one of the 4 subsidiaries, we had some challenges in this year, and I'll explain that to you. But let me start by saying that in one of our subsidiaries in Africa, we have grown revenues 9 months by 53%. Again, the baselines are smaller, but we are talking of INR 5 crores of revenue from INR 3.29 crores in our Africa business. We are growing. Our Nepal business is flattish but not degrown. It's grown 7.24% in revenue terms. And even in PAT terms, both these companies are significantly higher than last year.They are also thinking about how we can use our Mauritius subsidiary to also see some contiguous geographies around Africa and build a growth strategy without taking any undue risks. And you will understand that Africa is still a market that most people are exploring, so it is very important in credit ratings businesses to not go overboard and bet your reputation online. So we want to be very careful. But nevertheless, we are exploring opportunities in both these businesses. To summarize, both our rating subsidiaries are sharply up in revenue terms, particularly Africa.Our third subsidiary, it is advisory business. That business is up on revenue terms 55% in the first 9 months. It made a total revenue of INR 5.7 crores in the first 9 months as opposed to INR 3.68 crores in the first 9 months of the last year. So it's up 55%. This business will obviously take a little while to meet its operating costs and start making money. But kindly note that these are not insignificant numbers considering that they are literally built from scratch businesses. CART was a INR 3 crore business March '20 ended. So from there, we have gone to INR 5.7 crores in 9 months and advisory businesses in India are very hard to build. I hope you appreciate that point. And within that context, these 3 businesses, these 3 subsidiaries have done reasonably well, and we are quite happy with the growth we are seeing. And we will continue this momentum and these numbers will become more meaningful in times to come.The fourth subsidiary, which is our IT technology-focused subsidiary, unfortunately had a difficult second quarter on the back of exodus of tech talent and also some markets outside the country which were becoming inaccessible due to even more severe pandemic conditions in those countries. So those project delays cost us some revenue reversals. And as a result, on CARE Risk Solutions, we are 16% down on 9 months revenue, but we hope to make that up hopefully in the not-so-distant future.So assuring you, Keshav, that the subsidiaries is not just a high-level talk. It is a very focal area for CareEdge's new management, and we are working as a larger group within the constraints of regulations to make sure that this franchise develops across the world and not just in India.

[Keshav Garg]

Sir, also wanted to understand that, sir, ICRA in the third quarter, their profits have gone up Y-on-Y from INR 12 crores to INR 15 crores in the ratings business vertical only. Sir, so your comments on this?

[Ajay Mohanlal Mahajan, MD, CEO & Executive Director]

Well, I think, look, these are all numbers and facts so I cannot disagree. All I can say to you is the nature of the business seems to suggest that through the year, numbers improved quarter-by-quarter. But I would just compare the 9-month performance. They are 7%. We are 7%. Their expenses are more controlled than ours because we are operating from a lower base. And their operating profit is indeed up because of the significant increase in the revenue in the quarter 3. So we are as competitively driven. I can only tell you that we have to be our best, very hard to replicate somebody else's strategy or somebody else's balance sheet. We are doing our best.

[Mradul Mishra]

Thank you, Keshav. Thank you, Ajay, sir. With this, I'll close this call. Dear participants, thank you for participation, and we look forward to your comment submission, which will be coming no sooner when the session ends in your mailboxes. Thank you and goodbye for now.