CRISIL is one of the leading rating agencies in India. (file)
The credit rating assigned to Lehman Brothers six days before its collapse in 2008 was “A” by the Standard & Poor’s rating agency. the rest is history.
But did you know that Lehman Brothers was also in trouble during the Great Depression of 1929?
The firm declared bankruptcy in 1933, and its failure had ripple effects throughout the financial industry. Many other companies also collapsed, leading to widespread unemployment, bank failures, and economic hardships.
The collapse of Lehman Brothers and other firms in the 1930s led to the creation of new regulations and safeguards in the US. were designed to prevent similar failures in the future, such as the Securities Act of 1933 and the creation of the Securities and Exchange Commission (SEC).
These new regulations were necessary, especially in the context of the business model of these firms. Let me tell you how the rating agencies deal with a story…
Once upon a time there used to be a rating agency named AAA Rating. It was known for its high quality credit assessments.
Companies and governments around the world will turn to the AAA rating to evaluate their creditworthiness. AAA ratings were trusted by investors and borrowers alike. Its rating was seen as a mark of excellence in the financial world.
However, over time, AAA ratings began to prioritize profits over quality. The agency began cutting corners, relying more on automated models and less on human analysts to evaluate creditworthiness.
It became even more liberal in its assessments, giving higher ratings to companies and governments that did not deserve them.
Despite these warning signs, investors continued to rely on AAA ratings. After all, the agency has a long history of providing accurate and reliable assessments.
One day, a crisis hit the financial markets. A large company that was highly rated by AAA ratings suddenly defaulted on its debt.
Chaos ensued in the markets and investors began to lose faith in AAA ratings. They felt that the agency was giving higher ratings to companies and governments that did not deserve them and that its ratings were no longer credible.
After the crisis, the AAA rating was heavily criticized for its lack of quality control and prioritization of profits over accuracy.
The reputation of the agency was irreparably damaged. It lost most of its business to more credible competitors.
Does it sound familiar?
The story of AAA ratings is a cautionary tale about the dangers of prioritizing profits over quality.
It shows that trust and reputation are essential in the financial industry, and that even the most respected institutions can fall from grace if they lose sight of these principles.
These firms are rated by customers for value. He was also appointed by his clients for other consultancy services.
I referred to the Lehman Brothers case, but this methodology is followed globally.
If we look at the Indian markets, we have the example of Dewan Housing Finance Corporation Limited (DHFL).
Three months before its collapse in June 2019, DHFL’s rating by CARE Ratings was “AA+”. This was changed to “D” after the company defaulted on its outstanding commercial paper (CP) debt of Rs 8.5 billion, of which Rs 7.5 billion was due in June 2019.
Can This Stop You From Investing In Credit Rating Companies?
As a technical analyst, I’m not sure of the fundamentals and valuations of these companies, but I do know that the technical formation on the charts is telling me that the bulls have the upper hand.
The constituents of the above India Credit Rating Agency equal-weighted index are CRISIL, ICRA and CARE Ratings.
A golden cross moving average technical pattern is visible on the weekly chart.
The golden cross is a bullish technical analysis pattern that occurs when the short-term moving average crosses above the long-term moving average.
Specifically, it refers to the 50-day moving average crossing above the 200-day moving average. This pattern is believed to signal a change in market or asset trend from bearish to bullish.
Traditionally, the 50-day and 200-day are used to define a golden cross, but when it forms on a weekly chart, the primary trend is more solid.
The sustainable move above the breakout confirms the bullish trend on the charts. it is supported by MOwing Aaverage Cexcesses DDivergence (MACD) Oscillator.
The MACD is a popular technical analysis indicator used to identify changes in the momentum, direction and strength of a particular asset or market.
A bullish crossover of the averages above the integer or zero line signals strength in the bullish trend momentum.
I don’t believe in valuation and growth stories, but the technical setup is offering a low-risk entry point in this sector.
a little bit about the basics
Let us have a look at the top rating agency stocks in India and how they compare with each other.
#1 CRISIL
CRISIL is one of the leading rating agencies in India. It also provides research and risk advisory services.
The company’s rating services cover a full range of debt instruments of over 8,000 companies. It has a worldwide presence and derives most of its revenue from North America, India and Europe.
CRISIL’s revenue has grown at a compound annual growth rate (CAGR) of 9.6% in the last three years. The net profit has also grown at a CAGR of 10.6% during the same period.
It is one of the most profitable midcap stocks in India.
Going forward, CRISIL plans to leverage its parent company’s brand (S&P Global) to expand into the international market.
#2 Care Ratings
Established in 1993, CARE Ratings is India’s second largest credit rating agency (in terms of share of domestic ratings). It provides credit ratings across a spectrum of instruments such as IPOs, loans, debentures, bank loans etc.
Its client list includes banks, financial institutions, private sector companies, central public sector undertakings, sub-sovereign entities, small and medium enterprises (“SMEs”) and microfinance institutions, etc.
For CARE Ratings, over 90% of revenue comes from the ratings business. This compares to a contribution of 30% in the case of CRISIL and 70% in the case of ICRA (other segments are advisory and research).
Nor does Care Ratings enjoy the patronage of global rating agencies such as Moody’s (majority stake in ICRA) and S&P Global (majority stake in CRISIL).
#3 ICRA
ICRA was established in 1991 as an independent and professional investment information and credit rating agency by major investment institutions, commercial banks and financial services companies.
It is involved in rating, management consultancy and outsourcing and information services etc.
Disclaimer: This article is for information purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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