About Company :
CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better. It is India’s foremost provider of ratings, data, research, analytics, and solutions. A strong track record of growth, a culture of innovation, and a global footprint set the company apart. The company has delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers. Their businesses operate from India, Argentina, Australia, China, Hong Kong, Poland, Singapore, Switzerland, the United Arab Emirates (UAE), The United Kingdom (UK), and the United States of America (USA). The company is majorly owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics, and data to the capital and commodity markets worldwide.
CRISIL provides a wide range of services. These Services include independent equity research, bond ratings, Credit research, Risk and analytics, Economy and industry research, Bank loan ratings, fund research, etc. The company operates in main three segments as Ratings, Research, and Advisory.
Subsidiaries: As of December 31, 2020, the Company had three Indian and 13 overseas wholly-owned subsidiaries. CRISIL Irevna Australia Pty Ltd was incorporated as a subsidiary of CRISIL Limited with effect from August 28, 2020.
- Strong Name In Rating Space – Over the decades, the company has maintained a strong growth momentum by focusing on new client acquisition and maintaining traction in the securitization market led by strong operating leverage benefits. The business saw a growth in corporate bond ratings, which will lead to an increase in market share. Their superior rating standards, diversified and innovative product offerings, and strong analytics skills have seen it emerge as the strongest credit rating agency (CRA) across business cycles. CRISIL’s domestic rating revenue market share has ratcheted up to 50%+ (CRISIL, ICRA, and CARE combined). Going ahead, CRISIL is expected to strengthen its leadership position by expanding geographically in new markets which will enable them to grab new opportunities.
- Research Segment gaining traction – Credit rating agencies operate on asset-light models. These businesses generate huge cash unlike that of banks/NBFC which require capital infusion on regular basis. Effective utilization of cash is vital for any organization as yields on cash/ liquid funds are lower than potential RoEs that the businesses can generate. CRISIL has at regular intervals resorted to acquisitions in the research business. The foray into the research segment has resulted in diversification in revenues while also being RoE accretive. Over CY05 – CY20, the share of research revenues has inched to 65% (vs. 34%). The acquisition of Greenwich and traction in the Coalition and domestic research piece will translate into superior growth over CY20-22E.
- Advisory division – CRISIL advisory division is in the business of providing a wide array of services across the infrastructure development cycle. The segment aids in the creation of a vibrant ecosystem for infrastructure development through the work in the areas of policy and regulatory advisory, public-private partnership frameworks, infrastructure financing mechanisms, business/commercial diligence, and strategic advice, program management, monitoring, and evaluation, and institutional strengthening for infrastructure agencies. In CY20, despite COVID-19 led headwinds, the advisory division won new mandates in areas of regulatory reporting, credit risk, and selected city infrastructure projects. It booked new assignments especially post the first half, largely driven by international mandates, extension mandates from existing domestic clients, and some specific opportunities around commercial coal mining.
- Financial Performance – CRISIL is a zero-debt company since its inception. The Company has been incurring Capex completely through internal accruals. The company made a dividend payment of Rs.33 per share in CY20. Also, the company maintained an average ROCE of 40%+ and an average ROE of ~30% for the past 5 years.
The country’s financial services sector consists of capital markets, the insurance sector, and non-banking financial companies (NBFCs). India’s gross national savings (GDS) as a % of Gross Domestic Product (GDP) stood at 30.50% in 2019. In 2019, US$ 2.5 billion was raised across 17 initial public offerings (IPOs). The number of ultra-high-net-worth individuals (UHNWIs), with a wealth of US$ 30 million or more, is expected to rise 63% between 2020 and 2025 to 11,198; India has the second-fastest growth in the world. Issuances of commercial papers (CPs) rose sharply by 47.8% year-on-year in April-August due to heavy fundraising by non-banking finance companies (NBFC) for funding requirements, especially to finance high net worth individuals for initial public offerings (IPOs). CPs worth Rs.8.77 lakh crore has been issued between April and August, which was sharply up compared to the corresponding period in a previous financial year. Of the total fundraising in April-August of the FY22, almost 50% or Rs.4.33 lakh crore has been raised by NBFCs, while the remaining were raised by manufacturing and housing finance companies.
Growth Drivers :
An institutional framework will be created for the corporate bond market to inculcate confidence among participants and augment the liquidity of secondary markets. Commercial paper issuance is picking up steam among Indian corporates and a growing number of domestic firms are turning towards these short-term debt instruments to meet their working capital needs even as risk-averse banks continue to sit on huge liquidity. Investment by FPIs in India’s capital market reached a net Rs. 12.52 lakh crore (US$ 177.73 billion) between FY02-21 (till August 10, 2020).
Competitors: ICRA and Care Ratings
Though CRISIL has historically traded at a premium to its peers – ICRA and CARE, its diversified revenue mix, healthy margins, superior return ratios, and strong parentage justifies the value. The revenue per employee is the core metric for companies with fixed cost-centric businesses. Clearly, CRISIL is the winner in the said metric too with Rs.54 lakhs of revenue-generating from a single employee.
CY20 saw CRISIL report strong growth in revenues led by growth acceleration in the research business, especially in the Greenwich division. Even on the rating side, CRISIL reported stable growth in domestic rating revenue (vis-a-vis decline in revenues for ICRA and CARE) and validates our argument on market share gains. Our back of the envelope calc. suggests for CRISIL share in domestic rating revenue at 50%+. CRISIL’s focus on capacity optimization and cost rationalization measures has started to deliver positive outcomes. CY20 was the second consecutive year of rating division EBIT margin of 40%+. Even on the research side, Q1CY21 saw EBIT margin inch up to 17% vs. 16% for CY20, and it can rise further as synergies from acquisition start to play out.
Valuation & Conclusion:
In CY20, CRISIL reported strong growth in revenues led by growth acceleration in the research business, especially in the Greenwich division. Even on the rating side, CRISIL reported stable growth in domestic rating revenue and validates our argument on market share gains. Given the healthy margin profile, strong balance sheet, and FCF nature of business, CRISIL is well-poised to strong revenue/earnings growth over CY20-22E. Hence, we recommend a BUY rating in the stock with the target price (TP) of Rs.3360, 61x CY22E EPS.