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CRISIL - Buy
Initiating Coverage
Price - `5,800
Target Price - `7,785
Well Rated
CRISIL was incorporated in 1987 as India's first credit rating
agency. Over the years, the company has evolved to become
the industry leader with a market share of around 65% and
has diversified into research and infrastructure risk and policy
advisory services. The company is currently one of the largest
research houses in the country, providing research to over 65
industries and 150 corporates in India. The company also
provides high-end offshore research and analytical services
mainly to top financial institutions (including six of the world's
top 10 investment banks), insurance companies and asset
management firms. With the recent acquisition of Pipal Research
Corp. (Pipal), robust credit demand and strong infrastructure
spend, we expect strong growth across all the segments of the
company. We Initiate Coverage on the stock with a Buy rating.
Acquisition of Pipal to boost research revenue: Pipal is a strong
player providing offshore research services to the corporate
sector, while CRISIL's Irevna is a leading offshore research
provider to the financial sector. The synergy between the two
firms will help CRISIL to service its clients better and further
expand its client base, resulting in a strong growth platform in
the coming years. Post the acquisition, with the combined
strength of the two firms, we expect a 22% CAGR in the research
segment's revenue over CY2010-12E.
Robust growth in credit ratings to continue on strong credit
demand: We believe credit demand will continue to grow at a
faster rate than India's nominal GDP as financial depth continues
to increase. The need for large capital formation of 30-35% of
GDP for sustaining 8%+ GDP growth in India is well
acknowledged; hence, we expect credit demand to witness a
20% CAGR over CY2010-14, considering the actual and latent
credit demand in India. CRISIL has been growing at ~2x India's
credit growth since CY2005. Further, the company will continue
to benefit from Basel II norms, as the number of entities to be
rated will increase further. CRISIL, being the market leader with
65% market share in credit rating, will continue to benefit greatly
from India's strong credit growth. Thus, we conservatively expect
it grow at 1x India's credit growth, registering a 21% revenue
CAGR in the ratings segment.
Infra and risk advisory services segment to benefit from huge
infra spend: CRISIL is set to benefit from the estimated
US $800bn spend on infrastructure from FY2010-14E (US $1tn
in the XIIth Five-Year Plan), as it will provide a huge opportunity
to the company to expand its infra and risk advisory services
segment. Accordingly, CRISIL has undertaken aggressive hiring
across hierarchy and will expand its customer base going ahead.
Hence, we expect CRISIL's infra and risk advisory services
segment to report a 25% CAGR over CY2010-12E.
Outlook and valuation
We expect CRISIL to register a 21% CAGR in revenue over
CY2010-12E and continue to maintain its leadership position,
with robust growth across all its segments. The company benefits
from its asset-light business model, which is high on intellectual
assets (employee cost-to-sales is around 40%). Further, the
company is debt free and has 40% plus RoE business.
Additionally, the company enjoys its strong parentage (Standard
and Poor's). Currently, the stock is available at the lower end of
its five-year median of 16.4x CY2012E earnings (historical
range of 16.4-29.9x one-year forward EPS), which makes it
attractive. Hence, we Initiate Coverage on the stock with a Buy
rating and a Target Price of `7,785, valuing it at its five-year
median of 22x CY2012E earnings, implying an upside of 34%.
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