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CRISIL: Meeting takeaways –
Under-rated?
Event
Steady growth in profitability to continue: We met CRISIL’s management
for an update on its business outlook. Management expects revenue and
profit momentum to continue, driven by strong growth in the rating and
research services segments. Over the past five years, CRISIL has reported a
revenue CAGR of 20%+, profit CAGR of 30%+ and ROEs of 45–50%.
Impact
Strong momentum in rating business: Bank loan ratings form a major
component of CRISIL’s rating revenues (which make up 45% of overall
revenues), and the company expects continued strong traction as they have
huge potential, with more SMEs trying to get their loans rated. With risk
weights now aligned with ratings, SMEs also have an interest in getting their
loans rated. Moreover, bank loan ratings revenues in general should at least
mirror overall loan growth. CRISIL’s new products include real-estate project
ratings and education grading, which are showing strong momentum,
according to management.
Research services – another important driver of profitability: Research
services (predominantly offshore research) form nearly 45% of CRISIL’s
overall revenues and management said the business is doing well. The
company is adding more clients and also exploring more geographies, among
them Australia, Poland and Latin America. Moreover, with existing clients, the
company is adding more departments. In domestic research services, it offers
industry reports and equity research reports on a wide range of companies.
Corporate bond ratings – needs reforms to see meaningful upside:
Management conceded that corporate bond ratings and CP ratings are
unlikely to be a major driver in the near term; the company believes rating
services are used almost exclusively by large corporates, and meaningful
reforms need to happen if smaller companies are to tap this market. Among
the obstacles to wider usage of rating services, according to management,
are that FII investments in debt instruments are capped, and there is no
separate bond market regulator.
High operating leverage, low variable costs provide margin upside:
Management said the rating business is largely free of variable costs, so an
increase in revenues directly translates to an increase in operating margins.
Over the past few years, the pick-up in margins has been driven largely by the
ratings business. Also, CRISIL has managed to use technology effectively
and has moved regular, maintenance-related activities/research to low-cost
locations. Management expects to maintain margins at current levels and
sees no downward pressure.
Outlook
Has traded at expensive multiples: Over the past five years, CRISIL’s oneyear-
forward PER has averaged 18x and the stock is currently trading at a
PER of 27x on CY12 based on consensus Bloomberg estimates. ROE is
around 48%. Its competitor, ICRA, is cheaper at a PER of 14x (FY13E based
on consensus), but its ROE is lower at 20%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CRISIL: Meeting takeaways –
Under-rated?
Event
Steady growth in profitability to continue: We met CRISIL’s management
for an update on its business outlook. Management expects revenue and
profit momentum to continue, driven by strong growth in the rating and
research services segments. Over the past five years, CRISIL has reported a
revenue CAGR of 20%+, profit CAGR of 30%+ and ROEs of 45–50%.
Impact
Strong momentum in rating business: Bank loan ratings form a major
component of CRISIL’s rating revenues (which make up 45% of overall
revenues), and the company expects continued strong traction as they have
huge potential, with more SMEs trying to get their loans rated. With risk
weights now aligned with ratings, SMEs also have an interest in getting their
loans rated. Moreover, bank loan ratings revenues in general should at least
mirror overall loan growth. CRISIL’s new products include real-estate project
ratings and education grading, which are showing strong momentum,
according to management.
Research services – another important driver of profitability: Research
services (predominantly offshore research) form nearly 45% of CRISIL’s
overall revenues and management said the business is doing well. The
company is adding more clients and also exploring more geographies, among
them Australia, Poland and Latin America. Moreover, with existing clients, the
company is adding more departments. In domestic research services, it offers
industry reports and equity research reports on a wide range of companies.
Corporate bond ratings – needs reforms to see meaningful upside:
Management conceded that corporate bond ratings and CP ratings are
unlikely to be a major driver in the near term; the company believes rating
services are used almost exclusively by large corporates, and meaningful
reforms need to happen if smaller companies are to tap this market. Among
the obstacles to wider usage of rating services, according to management,
are that FII investments in debt instruments are capped, and there is no
separate bond market regulator.
High operating leverage, low variable costs provide margin upside:
Management said the rating business is largely free of variable costs, so an
increase in revenues directly translates to an increase in operating margins.
Over the past few years, the pick-up in margins has been driven largely by the
ratings business. Also, CRISIL has managed to use technology effectively
and has moved regular, maintenance-related activities/research to low-cost
locations. Management expects to maintain margins at current levels and
sees no downward pressure.
Outlook
Has traded at expensive multiples: Over the past five years, CRISIL’s oneyear-
forward PER has averaged 18x and the stock is currently trading at a
PER of 27x on CY12 based on consensus Bloomberg estimates. ROE is
around 48%. Its competitor, ICRA, is cheaper at a PER of 14x (FY13E based
on consensus), but its ROE is lower at 20%.
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