CRISIL

Fresh investments can be considered in Credit Rating Information Services of India (CRISIL) stock. CRISIL is the largest credit rating agency in India also engaged in research and advisory services.

The credit rating business offers huge growth potential in India as the corporate debt and fixed income market in India is still in a nascent stage. While demand for rating services (especially bank loan ratings) provides high earnings visibility, CRISIL’s significant market share, zero debt, diversified revenue mix and superior margins (net profit margin of 27 per cent) are the key investment arguments.

At the current market price of Rs 3,265, the stock is trading at a trailing one year price to consolidated earnings multiple of 16.4.

That is at a discount to its lone listed competitor ICRA (20.2 times). CRISIL is essentially a defensive stock despite its mid-cap status. A low beta (0.47) led to its under-performance in the bull market, but the stock fared better than the market in the 2008 meltdown.
Business

CRISIL claims a more than 50 per cent market share in bank loan ratings and a 70 per cent market penetration in debt ratings. The company’s net profit grew at 59 per cent compounded annual rate over the three years to 2008, while revenues grew at 42 per cent during the same period.

For the year 2008, 44 per cent of CRISIL’s revenues came from the research business, 37 per cent from ratings and the advisory business contributed to 19 per cent of the revenues.

In recent years, the contribution from the research business has steadily risen, from 13 per cent in March, 2005 to 44 per cent in December, 2008. However, ratings contributed 48 per cent in the latest March quarter.

After net profit growth of 67 per cent, on consolidated operations in the calendar year 2008, growth moderated to a modest 12 per cent for the quarter ended March 2009.

Lower revenue growth (3.6 per cent year-on-year), operating loss in its advisory business (Rs 1.4 crore loss against 1.36 crore profit last year) and discontinuation of revenues from the Gas Strategies group which CRISIL divested in December 2008, were triggers.

Operating margins moderated from 37 per cent to 36 per cent, even as the ratings business continued to grow at a strong pace (32 per cent for the quarter ended March) during the quarter.

Going forward, the ratings business may contribute more to the revenues, with potential to lift the overall margin profile.

Over the next few quarters, growth in bank loan ratings (BLR) (all bank loans above Rs 10 crore should be rated by the end of FY10) and SME ratings may contribute to earnings.

Any incremental loans originating from this year may also have to be rated, which may support BLR growth.

Rating income from securitisation may start flowing as the demand for structured finance products increases post-revival.

A Rs 2.02 lakh crore Infrastructure investment is estimated to be required in the current Five Year Plan (2007-12). Even if this is funded through a debt-equity of 75:25; it offers immense scope for debt fund raising and thus, ratings.

Other rating opportunities include banks’ capital raising of over Rs 5 lakh crore to meet the minimum capital adequacy norm of 12 per cent.

The international business of CRISIL’s rating is also progressing well primarily due to S&P’s outsourcing to CRISIL.

While the research and advisory businesses have been vulnerable to the meltdown in equities until last quarter, the recent buoyancy in equities may perk up prospects for these divisions.

Despite the slowdown in domestic and global equity markets, IREVNA, CRISIL’s research arm, has managed to acquire more clients during the March quarter and Crisil Research, domestic research arm which provides EIC research, has managed to retain its clients.

IPO gradings, also part of CRISIL Research, may also contribute to the top-line if the expected level of primary market activity does materialise, due to divestments and private fund raising.

For the currently loss-making advisory business, infrastructure advisory may see some revival, given that the uncertainties pertaining to elections are over and that capital expenditure is expected to be back on track.

CRISIL Risk Solution, a part of advisory services, may see demand as banks and other financial institutions plan to strengthen their risk management framework ahead of Basel II.

Employee expenses form a chunk of operating expenses (40 per cent of revenues) for CRISIL. CRISIL increased headcount by 11 per cent last year anticipating higher demand for Bank Loan rating and other businesses. Employee expenses may moderate, going forward, due to lower pay hikes, as attrition levels moderate.
Risk

Though there are early signs of financial market revival worldwide, the business environment for International Research and Advisory business remains relatively uncertain. If the recent equity market revival is not sustained, both margins and client retention may pose a challenge.

via BL