CRISIL - Ratings Muted; Margin Under Pressure; Result Update Q4CY14 :: Edelweiss

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Buy CRISIL between Rs 1980 and Rs 2033, Stoploss at Rs 1900 :: HDFC Securities

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

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Credit Rating - Sector Initiation - "A credit-able proposition" :: Centrum

“A credit-able proposition”



We initiate coverage on Credit Rating Agencies (CRA) with a positive
bias – CARE (Buy) and CRISIL (Hold). Elevated interest rates, policy
lapses and moderation in GDP growth impacted the investment cycle
during FY11-14 and in turn the ratings business. With stable
government, prospects have emerged of policy reforms across core
sectors of growth which will push corporate capex plans. This, in
addition to initiatives on reviving the corporate bond market will
result in a surge in the rating business and lead to improved
profitability for CRAs. CRISIL and CARE stand to gain given their
leadership positions and superior returns profile.

$ Green shoots emerging; but it will be a gradual process: The period
between FY11-14 was characterised by weak investment activities
following policy lapses, sticky interest rates and moderation in GDP
growth. This, in addition to excess leveraging by the corporates and
higher levels of delinquencies (NPAs) led to moderation in funds
raised by corporates to 15.2% CAGR vs 21.4% CAGR in the preceding
period (FY08-11). Green shoots have emerged following early signs of
progress in reforms across core growth sectors. With a stable
government and the need to accelerate growth, leading corporates,
lenders and associations expect gradual recovery beginning H2FY15.

$ Efforts to revive corporate bond market; SME, the next business
opportunity:  The Indian corporate bond market remains
under-penetrated (~3% of GDP), partially due to the financial
structures and regulatory intervention in the past. Efforts have been
made towards reviving the corporate bond market by encouraging
participation of various investors. With huge capex pipeline and
constrains on bank funding, the growth in corporate bond market though
gradual, will improve steadily. SME is the backbone of large
industries (contributing 45% to manufacturing) and with immense
benefits of rating, is the next business opportunity for rating
agencies.

$ Asset light model; credibility of utmost importance: CRAs deal with
the capital requirement of corporates and reflect the health of
investment activities in the economy. These agencies operate on asset
light models that generate healthy EBIDTA margins and superior return
ratios. Judicious utilisation of cash is vital from the shareholders’
perspective and hence these agencies have resorted to payback or taken
up in-organic growth. Default study / stability reports play a vital
role in assessing the health of corporates and quality of ratings by
the agencies, but it can affect their credibility if they fail to
recognise early signs of stress. Though CRISIL and ICRA have done
well, CARE’s performance was equally good. (exhibit 36-39).

$ Outlook and recommendation: CRISIL commands premium to its peers
given its strong parentage, well diversified revenue mix and superior
return ratio profile. Valuations at 31.1x CY15E EPS is on the higher
band and limits upside. Initiate with HOLD (TP of Rs1,340). CARE
trades at 34% / 48% discount to ICRA and CRISIL respectively. While
the discount to CRISIL is justified given the superior profile of the
latter, we believe the valuation gap to ICRA is on the higher side and
should narrow as CARE scores well on all ratios when compared to ICRA.
Initiate with Buy and target price at Rs1,150.



Thanks & Regards

--

Technicals- Cairn, GTL Infrastructure, Sterlite Industries, Reliance Infrastructure, Arvind, Crisil :: Business Line

 

Technicals:: EID Parry, Carborundum, Aries Agro, BGR Energy Systems, A2Z Maintenance, GAIL, Crisil :: Business Line

 

Alok Industries Ltd:: CRISIL IER -IndependentEquityResearch

Alok Industries Ltd
Pulled down by retail and real estate


Alok Industries Ltd’s (Alok’s) fundamental grade has been revised to 2/5 from 3/5 by CRISIL
Research. The company’s balance sheet has deteriorated more than our expectations. Its
consolidated debt-to-equity has increased to 6.1x in FY12 after adjusting for goodwill. Losses
in the UK retail store, higher than expected working capital levels despite rising share of
polyester business and no further deals in its real estate business have worsened its financial
profile. However, the core textile business continues to do well given Alok’s strong
capabilities and the huge capacity in this business. We expect the core business to help Alok
to improve its financial profile in times of tight liquidity

JBF Industries Ltd - Detailed Independent Equity Research report :Crisil

JBF Industries Ltd Moving a step ahead by going backward Fundamental Grade        3/5 (Good fundamentals) Valuation Grade         5/5 (CMP has strong upside) Industry         Chemicals                                                                                                    Date: July 10, 2012

Polyester chip manufacturer JBF Industries Ltd (JBF) is backward integrating to produce PTA (purified terephthalic acid) to ensure a steady supply of raw material for its chips plant. Post integration, it will benefit from lower raw material and freight costs along with lesser working capital requirement. This will make it cost competitive and improve its operating margin. We maintain our fundamental grade of 3/5, indicating that its fundamentals are goodrelative to other listed securities in India.

TTK Prestige Q1FY13 results were in line with CRISIL Research’s expectations

·         Revenues grew by ~30% both y-o-y and q-o-q to Rs 3,025 mn, which demonstrates that the company has been able to maintain its business momentum.

·         EBITDA grew ~26% y-o-y to Rs 478 mn; however EBITDA margin declined 44 bps y-o-y to 15.8% because of higher raw material cost. We believe that higher raw material cost was driven by 18% y-o-y decline in the rupee vs. the US$ as TTK imports products that constitute ~30-40% of its overall sales.

·         PAT grew by 21% y-o-y to Rs 307 mn. PAT margin of 10.1% was lower than 10.9% in Q1FY12 because of higher interest costs.

CRISIL Research will release a detailed update based on its discussion with the company’s management on these results. Subsequently, CRISIL may revise its assessment.

Angel Broking - CRISIL - RU1QCY2012 - Result Updates

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CRISIL - RU1QCY2012

Emmbi Polyarns Ltd Riding on capacity expansion ::Crisil

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Emmbi Polyarns Ltd (Emmbi) manufactures flexible intermediate bulk containers (FIBCs) and
other woven polypropylene (PP) and polyethylene (PE) specialty packaging products. It
serves both domestic and export markets (exports contributed 36% of revenues in FY11).
Given Emmbi’s relatively small scale of operations in a highly competitive flexible packaging
industry, we assign the company a fundamental grade of 2/5, indicating that its fundamentals
are moderate relative to other listed securities in India.
Capacity expanded three fold
Emmbi expanded its capacity to 18,200 MTPA (metric tonne per annum) as of September
2011 from 5000 MTPA in FY10 largely to increase its export footprint and the share of
specialty products (which comprised around 14% of revenues in FY11).
Share of value added products on the rise
Emmbi is diversifying into various high-margin woven polypropylene and polyethylene
speciality products to expand beyond its woven sacks and FIBC manufacturing. Its target is
to improve its operating profitability over the long term with increased sales contribution from
these newer products.
Client concentration risk, offtake risks remain
Emmbi’s top two clients account for ~30% of its overall revenues. While good client
management has ensured repeat orders, it also exposes Emmbi to client concentration risk.
Any change in clients’ procurement policies can have a negative impact. Further, given its
export concentration (over 90% to the US and Europe), we believe Emmbi will soon find it
challenging to fully utilise its expanded capacity with the slowdown in key export destinations.
Working capital to be stretched
Emmbi has to pay in advance for a large portion of its raw material purchases, whereas its
cash conversion cycles are long. Its working capital cycle is expected to be stretched further
as it would be required to aggressively market its increased production.
Valuations – the current price has ‘strong upside’
CRISIL Research has used the discounted cash flow method to value Emmbi and arrived at a
fair value of Rs 23 per share. This fair value implies P/E multiples of 8.4 FY12E, 9.0 FY13E
and 6.2x FY14E earnings. We initiate coverage on Emmbi with a valuation grade of 5/5.

ISMT Ltd Pushing for seamless growth ::Crisil

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ISMT is one of the leading producers of seamless tubes in India and the only domestic player
to be backward integrated. Though the company faces demand slowdown in the medium
term, both locally and globally, as well as higher competition, the recent commissioning of the
premium quality finishing (PQF) mill and the upcoming power plant are expected to improve
its profitability. We initiate coverage on ISMT with a fundamental grade of 3/5, indicating that
its fundamentals are good relative to other listed securities in India.
Diversification provides better industry positioning
ISMT produces tubes of varying outer diameters (ODs) up to 273 mm which enables it to
cater to the varied industries, securing a diversified revenue portfolio. The diversified industry
mix helps it to negotiate the vagaries of end-user industries better than its peers. However,
ODs above 273 mm not produced by the company have better margins though the end-user
market is mainly Oil and Gas. ISMT’s current capacity utilisation is low at ~40% due to
significant expansion by the company in FY11 and also overcapacity in the industry. We
expect utilisation to improve to 47% in FY14 supported by growth in underlying industries.
Captive power plant + process improvement   margin expansion
The commissioning of its captive power plant (CPP) coupled with the improved capacity
utilisation of the PQF mill will result in margin expansion from an expected 14.1% (down from
16.3% in FY11 due to demand slowdown and increased competition) in FY12 to 15.3% in
FY14. The newly added PQF mill will also expand its addressable market and enable cost
savings for the company due to higher efficiency leading to improvement in margins.
Susceptible to industrial cyclicalities and Chinese dumping
ISMT is exposed to cyclicality of the end-user industries. Also, raw material being a
significant part of the cost structure, any upward price movement is bound to result in margin
erosion for the company. Aggressive imports of seamless tubes from China have lowered
profitability for domestic manufacturers. Countries like the US and Europe has already levied
anti- dumping duty on Chinese imports; a similar move in India will benefit the industry.
Expect three-year revenue CAGR of 12.3% and margins of ~15%
We expect revenues to grow at a CAGR of 12.3% to Rs 24.7 bn in FY14 driven by 9.3%
volume CAGR. We believe that-despite challenges in the industry-CPP commissioning and
process improvement will result in margin expansion (though it would be lower compared to
its past performance) over next two years. Adjusted PAT is estimated grow at 12% over the
same period.
Valuations: Current market price has strong upside
CRISIL Research has assigned price to earnings (P/E) of 5x on FY14E EPS of Rs 8.1 to
arrive at a fair value of Rs 40 per share.

EBITDA margins to drop 200-250 bps inQ4FY12: CRISIL

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CRISIL Research has come out with its report on 'Financial performance preview for Q4 FY12.

 

As per the said research airlines, auto components, commercial vehicles, metals, real estate, hotels, textiles, organised retail, and paper sectors are expected to experience a particularly steep moderation in revenue growth compared to Q4 FY11.

 

India Inc set for a tepid Q4 FY12
CRISIL Research expects corporate India to report a 200-250 basis points (bps) decline in aggregate earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins in January-March 2012 (Q4 FY12). Revenue growth for the quarter is projected to be around 15% from a far healthier 25.5 % in Q4 FY11. The drop in revenue growth is reflective of the slowdown in consumption growth and sluggish investment activity, coupled with an uncertain global environment.

EBITDA margins to drop 200-250 bps compared to Q4 FY11
Based on an analysis of the aggregate financial performance of 227 companies across 26 industries (excluding banks and oil companies), CRISIL anticipates a 200-250 basis (bps) decline in EBITDA margins in Q4 FY12 from 22 % in Q4 FY11, mainly on account of slower volume growth and high cost of inputs coupled with limited pricing flexibility. At the net profit level, the pressure is expected to be even more acute. Net margins in Q4 FY12 are likely to decline even more sharply from the 12.7 % reported in Q4 FY11 due to increased interest costs. On a QOQ basis, however, EBITDA margins will improve marginally due to the usual seasonal effect.

Revenue growth and margin pressure to be broad-based
The pressure on revenue growth and EBITDA margins will be felt across industries, though companies in consumption-linked and interest rate sensitive sectors will be most vulnerable. CRISIL Research expects airlines, auto components, commercial vehicles, metals, real estate, hotels, textiles, organised retail, and paper sectors to experience a particularly steep moderation in revenue growth compared to Q4 FY11. During Q4 FY12, we anticipate a sharp drop of 400-800 bps y-o-y in margins for players in airlines, aluminium, hotels, cotton yarn, and manmade fibres sectors, mainly due to slower volume growth and high raw material and wage costs. EBITDA margins for auto and auto component makers, steel, and paper manufacturers even are likely to decline by 100-300 bps.

Cement, IT, and Telecom sectors to fare relatively better
On the other hand, cement companies, IT, and telecom service providers are expected tooutperform by reporting around 18% YOY revenue growth in Q4 FY12, driven in equal measure by higher volumes and improved realisations, while EBITDA margins are likely to stay stable. IT service providers are expected to report strong revenue growth of around 25% and a 100-150 bps improvement in EBITDA margins, aided by an increase in offshore volumes and the depreciation in the rupee. For telecom service providers, although volume growth would be muted, increased realisations and reducing competitive intensity would support margins.

ELSS better than PPF, NSC: Crisil in Indian Expres

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Investment in an Equity-Linked Savings Scheme (ELSS) of a mutual fund can yield higher returns compared to other instruments like PPF and NSC, a report by Crisil has said

"Our analysis shows that ELSS gave 26 percent and 22 percent annualised returns over three and 10 years respectively vis-a-vis 8-9 percent offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC)," Crisil said.

Crisil noted that interest on Employees Provident Fund (EPF) for 2011-12 was slashed to 8.25 percent from 9.5 percent in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns over the long run.

The PPF accounts fetched 8.12 percent over the last 10 years and in the similar period, the NSC gave an interest of 9.10 percent. The average inflation over the past 10 years stood at 6.05 percent.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7 percent over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14 percent, which is significantly higher than returns offered by other tax saving products," Crisil senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and fixed income research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

CRISIL - Research continues to drive growth: Emkay

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¾ CRISIL’s Q4CY11 revenue came in at Rs2.2bn, inline with
expectation. However net profit at Rs498mn was slightly
below expectation led by higher opex
¾ Research continues to grow at a strong pace at 34%yoy,
while rating grew by a moderate 14%yoy. Continued
momentum in IREVNA & leverage on pipal bus to drive
research rev further
¾ Op margins contracted by 149bps qoq to 33.5% led by 313/
117 bps contraction in rating and research margins.
Resultantly op profit grew by 3.9%yoy, slightly below exp
¾ Strong cash flow generation capabilities of the company
should continue to support the expensive valuations.
Maintain BUY rating on the stock with PT of Rs1,050

Hold Crisil :: PPFAS

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Ÿ Good operating performance for the quarter & year ended December 2011
Ÿ IREVNA & Pipal Research report sustained growth
Ÿ Rating business was supported by BLR & SME ratings as bond issuances remain sluggish due to high
interest rates & liquidity constraints
Ÿ Margins have taken a hit on account of rising staff & other expenses
CRISIL Limited has reported a good set of numbers for the quarter ended December 2011. The company clocked a
3% Q-Q & 23% Y-Y growth in its consolidated total income to `2,175Mn from ` 2,111Mn in September 2011 &
`1,774Mn in December 2011 respectively. Growth in the current quarter is on the back of sustained performance of the
Research (Irevna, Pipal), Ratings and Advisory businesses.

MF assets enlarge eight per cent by Jan end: Crisil ::Business Line

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The Indian mutual fund industry’s assets increased to Rs 6.59 trillion in January, registering an increase of Rs 477 billion on a month-on-month basis.

According to Crisil Research, the 8 per cent rise last month over December was on higher inflows in money market funds and mark-to-market gains in equity funds.

Money market funds witnessed inflows of Rs 264 billion in January, taking the total assets under this category to Rs 1.48 trillion compared with Rs 1.21 trillion in December.

Meanwhile, as a result of the uptick in the equity market, assets under equity funds surged by Rs 184 billion or 11 per cent to Rs 1.80 trillion.

The equity market represented by the benchmark S&P CNX Nifty rose around 12 per cent in January spurred by positive global and domestic cues, the first monthly gain for the market since October 2011.

Gilt funds recorded highest inflows since September 2010 of over Rs 5.21 billion in January, the second consecutive month of inflows.

“Sentiments for gilt funds have risen on views of peaking of interest rates and easing of monetary policy going forward.

This is expected to benefit long-term debt funds including gilt funds,” the report said.

Meanwhile, Income funds (including ultra short-term debt funds) saw outflows of Rs 29 billion in January, the third consecutive month of outflows, primarily because, investors preferred “long-term debt avenues on views of peaking of interest rates in the domestic economy” the report said.

Fixed Maturity Plans (FMPs) continued to garner majority of the new fund offers (NFOs) during the month.

In January, 49 FMPs were launched garnering Rs 78.44 billion compared with three other NFOs launched, which in total garnered only Rs 6.57 billion.

An analysis of month-on-month mutual fund flows and AUM distribution, shows that Money Market Funds, Gilt Funds and Gold ETF funds were the three categories which witnessed a net inflow of Rs 264.29 billion, Rs 5.21 billion and Rs 0.82 billion respectively.

In January, income funds witnessed a net outflow of Rs 29.26 billion, followed by equity funds which saw outflow of Rs 3.80 billion and, balanced funds — Rs 1.01 billion, Crisil said.

52-WEEK BLOCKBUSTER: CRISIL :: Business Line,

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India's largest credit rating agency gained as much as 55 per cent in a year, mainly because the rating agency has managed to diversify its business. While rating margins came under pressure in 2011 as competition for mandates was high, the company's research business which provides services to global clients saved the day.

Buoyed by its research segment and depreciating rupee, CRISIL managed a 30 per cent growth in revenues in the nine months ended September 2011. Profits before tax too expanded by 25 per cent after excluding other income. Apart from utilising cash for acquisitions, the company has also managed to reward its shareholders by providing dividends and buying back shares.

CRISIL acquired Pipal Research in late 2010 to strengthen its global foot print and also expand into verticals such as telecom and technology. For the first nine months, the research division's revenue grew at 33 per cent year-on-year as against 15 per cent of the rating segment.

Rupee depreciation helped the case, with the company booking Rs 89 crore on forex gains from the outsourcing arm. The research segment in fact contributed more of the profits than the ratings business.

The company's superior performance compared to peers and its IT tilt drove market fancy, with its price-earnings improving from 21 times consolidated earnings last year to 32 times now.

Financial performance preview for Q3 FY12:: Crisil

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EBITDA margins to drop 200 bps in Q3 FY12; Net profits to de-grow due to high interest costs
and marked-to-market losses
CRISIL Research expects corporate India to report a 200 basis points (bps) decline in earnings before
interest, taxes, depreciation, and amortisation (EBITDA) margins in October-December 2011 (Q3
FY12). While revenue growth is forecast to drop following a slowdown in consumption growth and
sluggish investment activity, the pressure on net profits would be more acute.
Based on an analysis of the aggregate financial performance of select companies across 21 industries
(excluding banks and oil companies), CRISIL Research expects year-on-year (y-o-y) revenue growth of
around 14-15 per cent in Q3 FY12, as compared to a far healthier 22.5 per cent in Q3 FY11. We
forecast EBITDA margins to decline by 200 bps in Q3 FY12 from 19.7 per cent in the corresponding
period last year, mainly on account of slower volume growth and high cost of inputs coupled with
limited pricing flexibility. Companies with substantial debt on their balance sheet will be further hurt
by increased interest costs and marked-to-market losses reported on foreign currency debt and
derivatives due to the depreciation of the rupee. Net margins are, therefore, likely to decline even
more sharply.
The pressure on EBITDA margins will be felt across industries, though companies in consumptionlinked
and interest rate sensitive sectors will be most vulnerable. During Q3 FY12, we anticipate a
sharp drop of 300-500 bps y-o-y in margins for textiles, real estate and hotels mainly due to slower
volume growth and high raw material and wage costs. EBITDA margins for automobiles, steel, and
organised retail even are likely to decline by 100-200 bps. Airline companies are expected to report
robust volume growth, but their EBITDA margins will remain under pressure, as these companies will
be unable to fully pass on the sharp rise in fuel costs. For cement manufacturers and telecom
services providers, though volume growth would be muted, increased realisations will lend stability
to EBITDA margins.

Banks/Financial Institutions: Takeways from conference call with CRISIL ::Kotak Sec

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Banks/Financial Institutions
India
Takeways from conference call with CRISIL. We hosted a conference call with
rating heads of CRISIL. Key takeways from the call: Corporate credit quality is
worsening as highlighted by lower upgrades in 1HFY12. Pressure on profitability due to
rising rates, input costs and wages are key reasons. Demand moderation is broad
based, with a slowdown evident in 10 of the top 20 industries. Overall credit metrics
are not very worrisome, but they could potentially deteriorate at an alarming pace. For
instance, CRISIL expects interest coverage to decline to 3.5X from 4.8X, factoring a 225
bps rise in interest rates and150 bps margin decline.
Signs of weakening credit quality
CRISIL’s rating action ratio (ratio of rating upgrades to rating downgrades) increased to 1.03X in
1HFY12 from 1.1X in FY2011. The upgrade ratio declined to 4.6% in September 2012 from 6.3%
in September 2011 even as downgrades have remained steady at 2.5-3% in the recent past.
�� One of the key reasons for lower upgrades was lower profitability. Net profit margin (for about
7,000 CRISIL-rated companies) declined to 10% in September 2011 from about 13% in
September 2010. Rise in interest rates, employees wages and inputs were key drivers for the
decline in profit margin.
�� Macro demand has shown clear signs of moderation - 10 of 20 industries (in terms of loans
outstanding for Indian banks) have shown signs of slowing demand.
�� In 2009, the shock was induced by external factors and governmental action thereafter bailed
out corporate India; deterioration seems to more gradual and hence acute in this cycle. The
slowdown has also been more prolonged, underpinning CRISIL's concern.
�� Developments on the international front (and forex volatility) would be the key factors tracked
by the rating agency.
CRISIL stress test: Signs of weakening, no crises though
Assumptions: CRISIL has conducted a stress test on a sample portfolio of 5,500 rated companies.
In order to reflect the impact of recent rates hikes, the rating agency has assumed 225 bps rise in
interest rates. Other assumptions include: growth moderation of 15% from 20% and decline in
margins by 150 bps.
Output: PBT of these companies declines by about 13%. Interest coverage, on an aggregate level,
remained healthy at 3.5X as compared 4.8X in base case.
The rating agency highlighted that current liabilities across corporates have increased due to a
tighter working capital management and may not necessarily construed as higher debt levels being
camouflaged in payables.