Year-on-year performance remained healthy, with consolidated net profit advancing 22.96% from ₹46.09 crores in Q2 FY25, whilst revenue expanded 16.19% compared to the corresponding quarter last year. The stock, trading at ₹1,609.05 as of November 14, 2025, has gained 14.20% over the past year, significantly outperforming the Capital Markets sector which declined 7.03% during the same period.
However, beneath the headline numbers lies a narrative of pronounced margin volatility that warrants careful scrutiny. The operating margin excluding other income oscillated dramatically between 27.65% and 50.16% across the last seven quarters, reflecting the inherent lumpiness in the credit rating business model. This quarterly variability, whilst not uncommon in the sector, introduces an element of earnings unpredictability that investors must factor into their valuation framework.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | YoY Growth | Operating Margin |
|---|---|---|---|---|---|
| Sep'25 | 136.37 | +45.21% | 56.67 | +22.96% | 50.16% |
| Jun'25 | 93.91 | -14.35% | 25.78 | +24.36% | 29.55% |
| Mar'25 | 109.65 | +13.77% | 42.61 | +76.95% | 43.20% |
| Dec'24 | 96.38 | -17.88% | 27.80 | — | 31.57% |
| Sep'24 | 117.37 | +48.72% | 46.09 | — | 47.47% |
| Jun'24 | 78.92 | -12.46% | 20.73 | — | 27.65% |
| Mar'24 | 90.15 | — | 24.08 | — | 32.20% |
Financial Performance: Exceptional Quarter Driven by Revenue Acceleration
The September quarter represented a standout period for CARE Ratings, with net sales reaching an all-time quarterly high of ₹136.37 crores. The 45.21% sequential expansion from ₹93.91 crores in Q1 FY26 reflects robust rating activity, likely driven by increased corporate borrowing and refinancing activity during the festive season build-up. Year-on-year revenue growth of 16.19% demonstrates sustained momentum in the company's core credit rating business.
Operating profit before depreciation, interest, and tax (excluding other income) surged to ₹68.41 crores in Q2 FY26, yielding an exceptional operating margin of 50.16%—the highest recorded in the past seven quarters. This represents a remarkable 2,065 basis point expansion from the 29.55% margin reported in Q1 FY26, underscoring the operating leverage inherent in the business model when revenue scales up.
Employee costs, the largest expense component, remained relatively stable at ₹53.28 crores in Q2 FY26 compared to ₹53.70 crores in the previous quarter, demonstrating effective cost discipline. The employee cost-to-revenue ratio improved significantly to 39.07% from 57.18% sequentially, highlighting the fixed-cost nature of the workforce and the margin expansion potential during high-revenue quarters.
Net profit after tax climbed to ₹57.21 crores in Q2 FY26, translating to a healthy PAT margin of 41.95%. The consolidated net profit of ₹56.67 crores marked the highest quarterly profit in recent history, representing an impressive 119.82% quarter-on-quarter surge and a solid 22.96% year-on-year increase. Earnings per share for the quarter stood at ₹18.89, the highest recorded in the company's recent operational history.
Operational Challenges: Margin Volatility Reflects Business Model Lumpiness
Whilst the Q2 FY26 results appear impressive on the surface, a deeper examination reveals significant operational challenges centred around margin predictability. The operating margin excluding other income has exhibited extreme volatility, swinging from a low of 27.65% in Q2 FY24 to a high of 50.16% in Q2 FY26. This 2,251 basis point range reflects the inherent lumpiness in credit rating revenue recognition, where large mandate completions can significantly impact quarterly performance.
The company's return on equity stands at 17.02% for the latest period, representing a moderate improvement from the average ROE of 14.05% over recent years. Whilst this demonstrates reasonable capital efficiency, the ROE remains below the 20% threshold typically associated with exceptional quality franchises. In contrast, the return on capital employed (ROCE) of 19.59% for the latest period, down from an average of 31.27%, indicates declining efficiency in deploying capital—a concern that merits close monitoring.
The balance sheet remains fortress-like with zero long-term debt and net cash status (net debt-to-equity of -0.09), providing substantial financial flexibility. Shareholder funds stood at ₹806.27 crores as of March 2025, up from ₹717.13 crores the previous year. Current assets of ₹692.13 crores comfortably exceed current liabilities of ₹97.80 crores, yielding a robust current ratio of 7.08x, which underscores the company's strong liquidity position and ability to navigate business cycles.
⚠️ Key Concern: Margin Volatility
Operating margins have fluctuated dramatically between 27.65% and 50.16% over the past seven quarters, reflecting the lumpy nature of rating mandates. Investors should expect continued quarterly volatility rather than smooth linear growth. The Q2 FY26 margin of 50.16%, whilst impressive, may not be sustainable on a consistent basis given historical patterns.
Industry Context: Credit Rating Sector Facing Structural Growth Headwinds
The credit rating industry in India operates in a mature, highly regulated environment with limited pricing power. CARE Ratings competes primarily with CRISIL and ICRA for market share, with all three agencies subject to stringent SEBI oversight. The sector's growth trajectory is intrinsically linked to corporate credit growth, bond market activity, and regulatory mandates for credit ratings.
Over the past five years, CARE Ratings has delivered sales growth of 13.14% annually and EBIT growth of 17.59%—respectable but not exceptional figures for a company trading at premium valuations. The modest growth rates reflect the mature nature of the rating business and limited opportunities for market share expansion given the oligopolistic market structure. The company's sales-to-capital-employed ratio of 0.43x indicates relatively low asset turnover, typical for service-oriented financial businesses.
Recent regulatory changes, including enhanced disclosure norms and stricter conflict-of-interest guidelines, have increased compliance costs whilst simultaneously limiting revenue growth opportunities. The shift towards unsolicited ratings and increased scrutiny on rating methodologies has compressed margins across the industry. CARE Ratings' ability to maintain operating margins above 30% on average demonstrates relative operational efficiency, though the volatility remains a persistent challenge.
Peer Comparison: Valuation Premium Despite Operational Underperformance
CARE Ratings occupies a unique position within the capital markets sector, competing directly with ICRA and operating in a niche segment distinct from broader financial services peers. A comparative analysis reveals interesting valuation dynamics that warrant careful consideration.
| Company | P/E (TTM) | P/BV | ROE (%) | Div Yield (%) |
|---|---|---|---|---|
| CARE Ratings | 31.52x | 5.98x | 14.05% | — |
| ICRA | 32.44x | 5.79x | 15.29% | 0.95% |
| Indian Energy Ex | 26.33x | 10.86x | 39.71% | 2.17% |
| IIFL Capital | 16.90x | 3.52x | 23.93% | 0.94% |
| Prudent Corp | 50.46x | 13.58x | 30.65% | 0.10% |
CARE Ratings trades at a P/E multiple of 31.52x, broadly in line with direct peer ICRA's 32.44x but at a significant premium to IIFL Capital's 16.90x. However, the company's ROE of 14.05% lags behind ICRA's 15.29% and trails significantly behind Indian Energy Exchange's impressive 39.71%. The price-to-book ratio of 5.98x appears reasonable relative to ICRA's 5.79x, though both command premiums that require justification through superior growth or profitability metrics.
The absence of dividend yield for CARE Ratings, despite a dividend payout ratio of 53.45%, suggests the company last paid dividends in November 2024 at ₹7 per share. Compared to peers offering modest yields between 0.10% and 2.17%, CARE Ratings provides limited income support for investors, making capital appreciation the primary return driver.
Valuation Analysis: Premium Multiples Not Justified by Growth Trajectory
CARE Ratings currently trades at ₹1,609.05, commanding a market capitalisation of ₹4,829 crores. The stock's valuation metrics paint a picture of premium pricing that appears stretched relative to the company's fundamental growth trajectory and operational performance.
At a trailing twelve-month P/E ratio of 31.52x, CARE Ratings trades below the capital markets sector average of 41x, suggesting relative undervaluation within its peer group. However, this sector comparison may be misleading given the diverse nature of capital markets businesses. When assessed against the company's own historical context and growth prospects, the multiple appears demanding.
The price-to-book ratio of 5.98x represents a substantial premium to book value, justified only if the company can demonstrate superior return on equity and consistent growth. With ROE at 14.05% and five-year sales CAGR of 13.14%, the valuation premium appears difficult to rationalise. The PEG ratio of 0.95x suggests reasonable valuation relative to growth, though this metric assumes linear growth continuation—an assumption challenged by the company's lumpy quarterly performance.
Enterprise value multiples provide additional perspective: EV/EBITDA of 27.27x and EV/EBIT of 29.46x represent premium valuations typically reserved for high-growth franchises. CARE Ratings' modest growth rates and margin volatility make these multiples appear stretched. The EV/Sales ratio of 10.87x further underscores the premium nature of the current valuation.
The stock's 52-week range of ₹1,057.65 to ₹1,964.80 indicates significant volatility, with the current price 18.11% below the peak and 52.13% above the trough. This wide trading range reflects market uncertainty about the company's earnings sustainability and growth prospects. The valuation grade of "Very Expensive" assigned by multiple analytical frameworks suggests limited margin of safety at current levels.
Shareholding Pattern: Institutional Confidence Building Gradually
CARE Ratings operates without promoter shareholding, having transitioned to a professionally managed structure—a governance positive that eliminates promoter-related risks. The shareholding pattern reveals interesting institutional dynamics that merit examination.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 0.00% | 0.00% | 0.00% | — |
| FII | 23.61% | 24.62% | 23.74% | -1.01% |
| Mutual Funds | 16.14% | 14.59% | 14.42% | +1.55% |
| Insurance | 10.28% | 10.21% | 10.32% | +0.07% |
| Other DII | 5.18% | 4.96% | 4.64% | +0.22% |
| Non-Institutional | 44.79% | 45.62% | 46.87% | -0.83% |
Foreign institutional investors reduced their stake by 101 basis points to 23.61% in Q2 FY26, continuing a pattern of modest selling observed over recent quarters. This reduction, whilst not alarming in magnitude, suggests foreign investors may be taking profits after the stock's strong multi-year run or reallocating to more attractively valued opportunities within the financial services universe.
Domestic mutual funds demonstrated increased conviction, raising their stake by 155 basis points to 16.14% during the quarter. This marks a continuation of the steady accumulation pattern observed since September 2024, when mutual fund holdings stood at just 10.64%. The consistent buying by domestic institutional investors provides a counterbalance to FII selling and reflects growing confidence among local fund managers in the company's long-term prospects.
Insurance companies maintained stable holdings at 10.28%, whilst other domestic institutional investors marginally increased their stake to 5.18%. Combined institutional holdings (FII, mutual funds, insurance, and other DII) stand at 55.21%, providing a stable shareholder base that typically exhibits lower volatility compared to retail holdings. The non-institutional shareholding of 44.79% has declined steadily, suggesting retail investors are gradually exiting or being diluted by institutional accumulation.
Stock Performance: Solid Long-Term Gains Offset by Recent Consolidation
CARE Ratings has delivered impressive long-term returns whilst experiencing meaningful short-term volatility—a pattern consistent with the company's lumpy earnings profile and premium valuation.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -0.24% | +1.21% | -1.45% |
| 1 Month | +5.98% | +2.67% | +3.31% |
| 3 Months | -1.35% | +4.49% | -5.84% |
| 6 Months | +5.24% | +3.55% | +1.69% |
| Year-to-Date | +18.73% | +7.78% | +10.95% |
| 1 Year | +14.20% | +8.56% | +5.64% |
| 3 Years | +202.20% | +36.67% | +165.53% |
| 5 Years | +259.36% | +93.00% | +166.36% |
The three-year return of 202.20% and five-year return of 259.36% demonstrate exceptional wealth creation for long-term shareholders, significantly outperforming the Sensex returns of 36.67% and 93.00% respectively. This outperformance generated alpha of 165.53% over three years and 166.36% over five years, reflecting the market's recognition of CARE Ratings' franchise value and growth potential during the post-pandemic recovery period.
However, recent performance reveals a more challenging picture. The stock declined 1.35% over the past three months whilst the Sensex gained 4.49%, resulting in negative alpha of 5.84%. This underperformance coincides with the broader capital markets sector weakness and reflects investor concerns about valuation sustainability. The one-year return of 14.20% modestly outpaces the Sensex gain of 8.56%, though the alpha of just 5.64% represents a significant deceleration from the exceptional outperformance observed over longer timeframes.
Technical indicators present a mixed picture. The stock trades in "Mildly Bullish" territory according to trend analysis, having shifted from sideways movement in early October 2025. However, the stock remains below key moving averages including the 5-day, 20-day, 50-day, 100-day, and 200-day levels, suggesting technical weakness. The beta of 1.35 indicates high volatility relative to the market, with the stock classified as "High Risk Medium Return" based on risk-adjusted metrics.
"Whilst CARE Ratings delivered an impressive Q2 FY26, the structural challenges of margin volatility and modest growth rates make the premium valuation difficult to justify for fresh investors."
Investment Thesis: Quality Franchise Hampered by Growth Constraints
CARE Ratings presents a paradoxical investment proposition: a high-quality franchise with strong fundamentals trading at premium valuations that appear difficult to justify given the company's growth trajectory and operational challenges.
The company scores 64 out of 100 on proprietary quality metrics, earning a "HOLD" recommendation. This rating reflects the balance between genuine operational strengths and meaningful valuation concerns. The quality grade of "Good" acknowledges the company's solid long-term financial performance, zero-debt balance sheet, and respectable return ratios. However, the "Below Average" growth rating and "Very Expensive" valuation assessment constrain the overall investment attractiveness.
The financial trend classification of "Positive" based on Q2 FY26 results provides near-term support, with quarterly metrics including net sales, operating profit, and PAT all reaching record highs. However, investors must recognise that this exceptional performance may not be sustainable on a consistent quarterly basis given the historical volatility in the business model.
Key Strengths & Risk Factors
✅ Key Strengths
- Fortress Balance Sheet: Zero debt with net cash position provides financial flexibility and eliminates solvency concerns
- Record Quarterly Performance: Q2 FY26 delivered highest-ever net sales (₹136.37 crores), operating profit (₹68.41 crores), and PAT (₹56.67 crores)
- Strong Profitability Metrics: Operating margin of 50.16% and PAT margin of 41.95% demonstrate operational efficiency
- Oligopolistic Market Structure: One of three major credit rating agencies in India with regulatory barriers to entry
- Healthy Institutional Backing: 55.21% institutional holdings provide stable shareholder base
- Consistent Dividend Payer: Dividend payout ratio of 53.45% demonstrates commitment to shareholder returns
- Exceptional Long-Term Returns: 259.36% five-year return significantly outperformed broader market
⚠️ Key Concerns
- Extreme Margin Volatility: Operating margins fluctuated between 27.65% and 50.16% over seven quarters, indicating earnings unpredictability
- Modest Growth Trajectory: Five-year sales CAGR of 13.14% and EBIT growth of 17.59% insufficient to justify premium valuations
- Declining ROCE: Return on capital employed fell from 31.27% average to 19.59% latest, signalling deteriorating capital efficiency
- Premium Valuation: P/E of 31.52x and P/BV of 5.98x appear stretched relative to growth prospects
- Below-Average ROE: Return on equity of 14.05% lags quality benchmarks and direct peer ICRA
- FII Selling Pressure: Foreign institutional investors reduced stake by 101 bps in Q2 FY26
- High Beta Volatility: Beta of 1.35 indicates significant price volatility relative to market
Outlook: What Lies Ahead for CARE Ratings
The forward outlook for CARE Ratings hinges on the company's ability to demonstrate consistent growth whilst managing the inherent volatility in its business model. The credit rating industry's mature nature and regulatory constraints limit aggressive expansion opportunities, making operational efficiency and market share defence critical priorities.
🟢 Positive Catalysts
- Sustained corporate credit growth driving rating mandate volume
- Expansion in surveillance and monitoring revenue streams
- Margin stabilisation above 40% demonstrating business model maturity
- Consistent quarterly revenue above ₹120 crores establishing new baseline
- ROE improvement towards 18-20% range through better capital deployment
🔴 Red Flags
- Operating margins reverting below 35% indicating unsustainable Q2 performance
- Quarterly revenue declining below ₹100 crores signalling demand weakness
- ROCE continuing downward trajectory below 15%
- Further FII stake reduction exceeding 200 basis points
- Regulatory changes compressing industry pricing power
Investors should monitor quarterly margin trends closely, looking for evidence of stabilisation around sustainable levels. The company's ability to maintain revenue momentum through H2 FY26 will be crucial in validating the Q2 performance as a new baseline rather than an exceptional outlier. Any meaningful improvement in ROE towards the 18-20% range would strengthen the investment case and provide better justification for the premium valuation.
The Verdict: Quality Franchise, Premium Price
Score: 64/100
For Fresh Investors: Avoid initiating positions at current levels. The premium valuation of 31.52x P/E and 5.98x P/BV is not justified by the company's modest 13.14% sales CAGR and volatile margin profile. Wait for a meaningful correction towards ₹1,300-1,350 levels (representing 20% downside) to establish entry with adequate margin of safety. Any decline below the 52-week low of ₹1,057 would present a compelling accumulation opportunity for patient investors.
For Existing Holders: Continue holding given the company's strong fundamentals, zero-debt balance sheet, and oligopolistic market position. The exceptional Q2 FY26 results validate the franchise quality, though margin volatility will persist. Consider booking partial profits if the stock approaches ₹1,800-1,850 levels (representing 12-15% upside), particularly if accompanied by margin compression warnings. Maintain core holdings for long-term wealth creation given the 259% five-year return track record.
Fair Value Estimate: ₹1,400 (13% downside from current levels). This valuation assumes sustainable operating margins of 38-40%, revenue CAGR of 12-14%, and a target P/E multiple of 26-28x—more appropriate for the company's growth profile. Upside to ₹1,650-1,700 possible if the company demonstrates consistent quarterly revenue above ₹120 crores with margins stabilising above 42%.
Note— ROCE = (EBIT - Other Income) / (Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance does not guarantee future results. The views expressed are based on information available as of November 18, 2025, and are subject to change.
