CARE Ratings: A Tollbooth on India’s Credit Market with a Scarred Track Record

Dissecting the business model, sector dynamics, risks, and management signals behind a slow-growth but high-margin rating franchise.

CARE Ratings: A Tollbooth on India’s Credit Market with a Scarred Track Record

CARE Ratings makes most of its money by charging companies, banks, and bond issuers fees to rate their debt and then charging smaller annual fees to keep those ratings updated. Almost all revenue comes from this ratings work in India, so the business is asset‑light with very high margins and strong operating leverage.

CARE Ratings Key revenue drivers

• Volume: more bonds and loans being issued (especially by corporates and NBFCs) means more instruments to rate and more new mandates.​

• Ticket size and pricing: fees are usually a tiny percentage of the amount being borrowed, so larger loan or bond sizes push up revenue even if the number of clients doesn’t change much.​

• Renewals: every year, existing ratings have to be reviewed (surveillance), which creates repeat revenue as long as the issuer keeps that borrowing outstanding.​

CARE also recognises a relatively higher share of its fee income upfront when a rating is first assigned and a smaller share as surveillance over the next year, so quarters with more fresh ratings look particularly strong.

How the pricing and cost structure work

Fees generally have two parts: an initial rating fee charged when the rating is first given, and an annual surveillance fee to keep monitoring that rating. The fee is usually calculated as a percentage of the loan or bond amount, with minimum slabs, so a small borrower may pay a floor fee while a large bond issue pays more in absolute rupees but still a low percentage. This structure is mostly “transaction plus recurring”: a chunky one‑off when the rating is first done, then smaller recurring fees each year as long as the instrument or bank facility is live.​

The cost structure is dominated by fixed or semi‑fixed costs: employee expenses for analysts and support staff, office and IT costs, and compliance/regulation. There is very little “cost of goods sold” in the manufacturing sense; once the analyst team and systems are in place, rating one more bond does not cost much extra. This means high operating leverage: when revenue grows, profits and margins rise faster because fixed costs are spread over more assignments.

Competitive moats and lock‑in

Two big moats stand out:

• Brand and trust: investors and banks rely on the reputation of a rating agency; regulators and markets recognise only a few “registered” agencies, so being one of the established names (along with CRISIL and ICRA) is a major barrier to entry. This helps CARE maintain good pricing and steady flow of mandates because new, unknown agencies struggle to be accepted by lenders.​

• Network and switching costs: once a company’s bonds or bank lines are rated by CARE, those ratings are embedded in loan agreements, bond information memoranda, and investor risk models. Changing the rating agency means going through fresh due diligence, documentation, and sometimes lender approvals, so issuers usually stick with the same agency for years, which supports renewal revenue and some degree of customer lock‑in.​

  
  

Scale adds a softer moat: CARE has built in‑house sector databases and experienced teams over decades, which lowers its per‑rating cost and allows it to maintain high margins even if it gives discounts on large mandates.

Aspect	CARE Ratings	CRISIL	ICRA
Main revenue engine	Mostly Indian credit ratings (corporates, banks, structured finance)	Global and domestic research plus analytics; ratings a smaller contributor	Mix of ratings, research, and advisory, more diversified than CARE
Revenue concentration	Highly dependent on rating fees from India	More diversified by segment and geography	Moderately diversified
Business risk/exposure	More cyclical with Indian issuance and bank credit growth	Some insulation from domestic credit cycles due to research annuities	In between the other two

Competitive Dynamics: Market Concentration and Barriers

The Indian CRA market is an oligopoly dominated by three players, with a duopoly formed by the top two:

Agency	Market Share	Key Features
CRISIL	~60–65%	Subsidiary of S&P Global; FY24 revenue ₹3,349 crores (+3.6% YoY); dominant "flight to quality" winner
CARE Ratings	~22%	Independent; FY25 revenue ₹453 crores (+19.74% YoY); recovering from reputational damage
ICRA	~17%	Majority owned by Moody's; FY25 revenue ₹575 crores (+10.43% YoY)
Other Agencies(Acuité, Brickwork, India Ratings, Infomerics)	<10% combined	Smaller players; India Ratings (Fitch subsidiary), Brickwork, Acuité serve specific niches

Barriers to Entry: High but not impenetrable

Seven rating agencies are now registered with SEBI (up from three a decade ago). Regulatory approvals, building analyst expertise, establishing credibility with issuers and investors, and achieving scale in a fee-sensitive market are substantial hurdles. Brickwork and others have struggled to gain meaningful market share despite being RBI-accredited and SEBI-registered. However, lower registration thresholds and calls to encourage start-ups could incrementally intensify competition.​

Pricing Power: Moderate and declining

Agencies cannot freely set fees; they negotiate with issuers (who resist), and regulation caps rates in some cases. The issuer-pays model creates an inherent conflict of interest (agencies are incentivised to give favorable ratings to attract issuers), though this model remains in place globally and in India. Large corporate issuers enjoy fee discounts; smaller MSME/mid-market borrowers pay proportionally higher fees but in absolute rupees contribute less revenue.​

Regulatory and Technological Trends

Regulatory Tightening post-IL&FS

The IL&FS default in September 2018—where CARE and ICRA continued rating IL&FS AAA despite mounting stress—triggered a watershed in regulation and damaged the credibility of Indian CRAs. Key regulatory reforms:​

• SEBI investigations and fines: CARE and ICRA were each fined ₹1 crore for lapses; CARE's MD & CEO resigned in December 2019.​

• Enhanced disclosure and transparency mandates: Agencies must disclose rating criteria, methodologies, default policies, and rating sensitivities in quantitative terms.​

• Mandatory rotation and multi-agency ratings: Parliament-level committees have recommended mandatory rotation of rating agencies and requiring two ratings for instruments above ₹100 crores to reduce relationship capture.​

• "Investor-pays" vs. "Issuer-pays" debate: Regulators continue exploring alternative fee models to reduce conflicts of interest, though no major changes have been implemented.​

• SEBI operational timelines updates (January 2025): Streamlined working-day-based timelines for press releases and rating reviews to reduce operational drag and improve efficiency.​

Technological Disruption

AI and machine learning are reshaping the industry:

• AI-driven credit analysis: Agencies like CARE have partnered with providers (e.g., Tresata) to use AI for early fraud detection and improving rating quality.​

• ESG ratings and integration: ESG ratings are becoming material to credit assessments; tech-driven ESG analysis using natural language processing and IoT data is accelerating.​

• Automation risks: Standardized, automated ESG and credit scoring could commoditize ratings, further pressuring fees.

Sector Outlook: 2025–2030

Structural Growth Drivers (Bullish Factors):

1. NBFC-led capex and borrowing: The shift of NBFC funding from banks to capital markets is a multi-year structural theme. Upper-layer NBFCs are accessing global debt markets (ECBs at 60% CAGR); middle-layer NBFCs are leaning on NCDs (25% CAGR). Each borrowing round requires a rating, sustaining demand for at least the next 3–5 years.​

2. Corporate bond market deepening: SEBI's reforms—mandatory bond-raise percentages for certain-rated firms, improved disclosure norms, digital trading platforms—are progressively shifting corporate funding away from banks and toward bonds. The corporate bond market could realistically double or triple by 2030.​

3. Retail investor participation: The digitization of bond access and retail participation is expanding the addressable market. More retail-focused issuances mean more transparency requirements and rating disclosures, benefiting active rating agencies.

4. Government/infrastructure capex: Long-term infrastructure projects (roads, railways, green energy) will require bond and loan financing, driving baseline rating volume.

Headwinds and Maturity Challenges

1. Declining growth of new business: As most investable corporates are already rated, the share of new-business fees (which carry higher upfront revenue) is shrinking as a proportion of total revenue. Increasingly, revenue is driven by surveillance (annual monitoring), which is lower-margin and more commoditized.​

2. Regulatory overshadow: Mandatory agency rotation, multi-rating requirements, and potential fee caps or model changes could structure future revenue negatively. The regulator, not the market, is increasingly setting the competitive playfield.

3. Margin compression: Fee pressure from large issuers, compliance costs from tighter regulation, and competitive intensity will likely squeeze EBITDA margins across the sector. Agencies will have to grow revenue faster than historically to offset margin dilution.

4. Reputational fragility: If another large corporate defaults post-highly-rated status, the entire sector's credibility suffers anew. This could trigger regulatory overhaul or investor skepticism that dampens demand for ratings.

CARE's future hinges on two bets:

1. Successfully diversifying revenue away from pure ratings (target: grow non-rating revenue from 1–2% to 40–50%, a highly ambitious goal).​

2. Recapturing market share from CRISIL via superior analytical quality and client relationships as the NBFC and bond-market boom accelerates.

Q2 FY26 (November 13, 2025): Most Recent Results

Management's Key Messages:

"Even as we navigate through multiple global headwinds, we are pleased to report a healthy 13% year-on-year growth in standalone revenue from operations during Q2 FY26, driven by our strong and diversified client base."​

Strategy Updates & Guidance:

• Standalone revenue of ₹114.27 crore, up 13% YoY; consolidated revenue of ₹136.37 crore, up 16% YoY.​

• Critical observation: Q2 FY26 growth decelerated vs. Q1 FY26 (14% YoY YTD growth) and significantly vs. FY25 (19–20%).​

• Corporate bond issuances declined 37% YoY to ₹2 lakh crore in Q2 FY26 due to "elevated global economic uncertainties and higher yields."​

• Commercial paper issuances remained healthy: up 17.7% YoY in Q2 FY26.​

• Bank credit growth at 10.4% YoY (as of Sep 2025), moderated from 13% in prior year; large industries/services credit slowed to 7.4% from 11%.​

• Forward guidance: Management cautioned that performance "should be looked at from the overall year, annual performance perspective" rather than quarterly lumpiness.​

• Non-ratings business at 11% of consolidated revenue, maintained growth momentum at 30% YoY.​

Highlights & Surprises:

• Positive: Consolidated PAT margin of 38% (H1 FY26), reflecting continued operational efficiency and profitability.​

• Positive: H1 FY26 showed strong 17% revenue growth and 23% PAT growth on consolidated basis, masking Q2 weakness.​

• Negative/Warning: Rating business Q2 FY26 growth decelerated to 13% YoY standalone (vs. 16–19% in prior quarters), signalling slowdown in new mandates or pricing uptake.​

• Negative: Bond issuances plummeted 37% YoY; while CPs recovered, this suggests weakness in primary capital-raising activity.​

Aspect	FY25 (May)	Q1 FY26 (Aug)	Q2 FY26 (Nov)	Direction
Growth outlook	19–20% (achieved), confident on outpacing industry	Still positive, 16–19% growth	Deceleration noted: 13% YoY Q2 standalone, 14% H1 YoY	Downward shift
Credit cycle view	Moderate GDP growth (6.2% FY26 expected)	Mixed: CP strong (19%), bank credit moderating (9%)	Credit growth slowing: Large industries/services at 7.4% YoY (Sep 2025)	Cautious
Bond market	Bond issuances up 6% FY25	CP + bonds mixed signals	Sharp warning: Bond issuances down 37% YoY in Q2 FY26 due to high yields	Clearly negative
Pricing power	"Continuous efforts" to improve pricing	Implied steady pricing	Emphasis on "diversified client base" (suggests pricing pressure via mix dilution)	Eroding
ESG/New verticals	"Patient investor," acknowledged future losses	Reiterated growth trajectory	Continued ESG investments but silent on near-term profitability	Unchanged, cautious

The lack of specific guidance on pricing, regulatory developments, and near-term industry challenges may indicate management prefers to wait for more clarity before providing detailed commentary. The Q2 FY26 slowdown (13% YoY compared to the previous 16–19% range) alongside the sharp bond market decline (-37% YoY) represents a notable shift in business momentum that deserves attention. If bond issuance activity remains subdued through Q3–Q4 FY26, this could lead to adjustments in earnings expectations and potentially impact the stock's valuation.

Three Reasons for Weak 10-Year Growth

1. The IL&FS Shock (2018–2023): A six-year earnings stagnation period, during which CARE lost market share, reputation, and pricing power to CRISIL. Most of the last decade was spent recovering, not growing.

2. Structural Margin Compression (FY19–FY24): Even as revenue stabilized, profit margins fell 15–18 percentage points due to wage inflation, compliance costs, and competitive fee pressure outpacing any revenue gains.

3. Business Model Maturity (Structural): The Indian credit rating market is largely saturated. Most rated issuers already have ratings; incremental growth comes from occasional new issuances (spiky), not steady-state expansion. This inherently caps long-term growth rates at 8–12%, below what equity investors expect from a financial services business in India's growth phase.