CRISIL Ltd - Muted Growth And Margin Pressure; Result Update Q3CY14 :: Edelweiss, PDF link

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CRISIL’s Q3CY14 top line (up 9.5% YoY) and EBITDA (down 3% YoY) were lower than our estimates by 2% and 12%, respectively. Surge of 12% YoY in research revenue was the key positive. Key negatives were: (1) 394bps YoY fall in overall EBITDA margin to 29.5%; (2) ratings EBIT margin plummeted 481bps YoY to 36.3%; and (3) 680bps YoY dip in research EBIT margin to 28.3%. Led by lower-than-expected performance in both ratings and research, we are revising our CY14E and CY15E earnings down 6% and 8% to ~10% and ~23% growth, respectively, and introducing CY16E EPS-to grow 26%. With ~65% consolidated revenue from outside India and ~29% revenue being Europe linked, the company’s overall revenue could be under some pressure. Despite rolling over earnings to CY16E EPS, we are maintaining ‘REDUCE’ due to rich valuations with revised TP of INR1,825 (INR1,593 earlier) at 30x CY16E EPS.

Ratings and research belie expectations

CRISIL reported lower-than-expected Q3CY14 with revenue growth of 9.5% (our estimate 11.6%) YoY led by 4.6% (estimate 7%) YoY surge in ratings and 12% (estimate 15%) YoY rise in the research segment. Ratings segment grew led by pick up in bank loan ratings and SME ratings segments; however, the capital markets segment was muted. Favourable client additions in financial research, analytics & model validation, strong performance by Coalition and launch of new products and services led to double digit growth in the research segment, however India research business was a drag due to investment slowdown.

Overall EBIT margin subdued

Operating profit fell 3.4% YoY with overall margin slipping 394bps YoY to 29.5%. CRISIL reported 7.6% YoY decline in ratings EBIT and 9.3% dip in research EBIT. Ratings EBIT margin fell 481bps to 36.3% and research EBIT margin plummeted 680bps to 28.3%.

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https://www.edelweiss.in/research/CRISIL-Ltd--Muted-Growth-And-Margin-Pressure;-Result-Update-Q3CY14/27313.html