The emergence of rating agencies as a proxy to the capex recovery theme

While there is no hard data out there, the rating agencies sector is dominated by three major listed players - CRISIL, ICRA and Care Ratings. Put together, the three companies control over 75-80 percent of the overall market.

So, if there is going to be more business then operating leverage should play out because employee cost is the highest amount of expenditure for rating agencies.

Secondly, these companies have been giving solid cash flows, the balance sheets are clean and dividend yields have been very high. So put all this together, these companies could be favourably placed in case the capex cycle recovers.

However, a factor to note here would be that some of the corporates may do lumpsum business with these agencies. While this may mean more volumes for them, it may not necessarily translate into more revenue.

On the valuation front, there is a gap between the peers considering the promoter group entities which include some foreign banks as well. CRISIL trades at 31 times financial year 2024 price-to-earnings while ICRA trades at 29 times and Care trades at 17 times.

Shares of ICRA have been an outperformer over the last 12 months, gaining nearly 40 percent. On the other hand, shares of CRISIL have gained 5 percent and those of Care have been flat.