CRISIL Limited – Flash Equity Research Report

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BUSINESS: Rating, Research and Advisory (3 segmental business)

Rating business: In 2019, rating business accounted for 32% of the business.

Started in 1987 and currently working as a full-service rating agency.

They rate the entire gamut of debt instruments and serve lenders, investors, issuers, market intermediaries, and regulators by covering manufacturing companies, banks, NBFCs, PSUs, Financial institutions, state governments, state governments, urban local bodies, and mutual funds.

Issuers and Borrowers: Ratings enhance their access to funding.

Investors and Lenders: Supplement their internal evaluation process.

Research business: IN 2019 Research business accounted for 60% of business

Indian research:

Provides insight, Opinion, and analysis of the Indian economy.

Plays a key role in India’s fixed income market being the largest provider of valuation of fixed income securities to mutual funds, insurance, and banking industry.

Global research:

Within which offer Financial research to both Buy-side and Sell-side helping clients gain differentiated insights across domains such as Investment research, digital marketing, sales and marketing, client analytics, and portfolio analytics.

Advisory business: In 2019 Advisory business accounted for 8% of the business.

Focus areas include policy and regulatory advisory, public-private partnership frameworks, capacity enhancement and institutional strengthening for government and infra agencies, etc.

Management and shareholding:

  • Strong parentage S&P with promoter holding at 67.24%
  • FPI holding at 5.52% and GIC holds 3.55 with LIC holding 6.62, Total institutional holding at 17.67%
  • MD and Chief executive- Ashu Suyash

More than 26 years of experience in the financial sector and Prior to CRISIL in June 2015 she served as CEO of L&T Investment Management and also worked with Citi bank for a span of 15 years

  • Gurpreet Chhatwal President Ratings at Crisil limited who has been with CRISIL for 21 years and also alumni of IIM Lucknow.
  • Dimitri Londos President and Business head of CRISIL Global prior to which have worked with PWC and Deutsche Bank
  • Pawan Agrawal Chief Risk Officer also been with since long term and should his excellence in areas of analytics and modeling.
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TRIGGERS

  • During and after slowdown and recession importance of credit rating agencies increase a lot

(December ending Financial year)

  • Rating business from 2007 to 2008 rose by 45%. Also, the number of employees rose by 14%
  • Rating business from 2008 to 2009 rose by 26%. Also, the number of employees rose by 9.6%
  • In Concall company highlighted that of the companies which have gone to NCLT or bank accounts that have gone to NPA are those companies not rated by them which results in banks and other lenders prefer CRISIL over other rating agencies at these times.

Important Highlights:

  • Revenue and Profit although showed subdued growth but the business has remained resilient especially at this current time (in 5 years Revenue and profit have grown by around 25%)
  • The company is debt-free all along with very attractive ROCE and ROE at 43% and 30.8%.
  • The dividend yield has been good around 2%

2015

  • Rating clients in 2015, 91000 SME grading, and above 20800 large and mid-scale corporate grading.
  • CRISIL – GRA coverage of 3300 stocks
  • Revenue per employee which was 22.9 lakhs in 2006 rose to 39.2 lakhs in 2015 while profit per employee in 2015 is 10.2 lakh.
  • Postgraduates accounted for 64%, Graduates 31%, and 5% others. 94% of them below 40years.
  • Rating business in 2015 accounted for 31%, Research 64% and advisory 5%.
  • Employee cost accounted for 49% of Revenue.
  • Rakesh & Rekha Jhunjhunwala 5.62% stake.
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2018

  • Rating clients 1,40,000 MSME and more than 28000 large and Midscale operations.
  • In 3 years added 49000 MSME and 7200 Large and Midscale corporate.
  • i.e. on on average 16,333 MSME and 2,400 L&M sacle corporate p.a.
  • Rakesh & Rekha Jhunjhunwala 5.50% stake.
  • Rating business in 2018 accounted for 29%, Research 63%, and advisory 8%.
  • Employee cost accounted for 49% of Revenue.
  • Revenue per employee which was 39.2 lakhs in 2015 rose to 45.52 lakhs in 2018 while profit per employee in 2015 was 10.2 lakh rose to 12.27 lakh in 2018.

2015/2018/2019 FINANCIALS

  • The income per employee rose from 22.9 lakh in 2006, 39.2 lakh in 2015, 45.52 lakh in 2018, and 46.9 lakh in 2019 and these become important as employee cost accounts for around 50% of revenue or 67% of total expenses.
  • Operating Profit per employee rose from 11.2 lakh in 2015, 12.27 lakh in 2018, 12.34 lakh in 2019.
  • So the company is not only using its workforce effectively in increasing its revenue but also using it efficiently as operating profit has been increasing.
  • Rating Business accounts for 31% in 2015, 29% in 2018 & 32% in 2019 also rose by 17% in 3 years and rose by 7.3% from 2018 to 2019. (Which is expected to rise at a greater pace in 2020 & 2021 due to reason stated above )
  • Research Business which accounts for 64% in 2015 but falls to 60% in 2019. Linked mostly to the global economy which was already slowing in 2019 and which is expected to further shrink in 2020 before showing a recovery in 2021.
  • The advisory business which accounts for 4.8% in 2015, 7.7% in 2018 & 8.2% in 2019 also is expected to grow in 2020 and 2021.
  • From 2019 to 2018 company assigned around 10000 SME grading and 5000 Large and mid-sized corporate while the average for 2015 to 2018 was 16333 in SME and 2400 in Large and mid-sized corporate p.a. thus slowed grading in SME but more than double in Large and Mid-sized, which although hard to say but I feel the trend to continue more in a slowing economy. (Rating Business)
  • Rakesh/Rekha Jhunjhunwala stake which was 5.62% in 2015, reduced marginally to 5.50%, and further marginally to 5.48% in 2019 still holds a significant share.
  • Also, one interesting fact is CRISIL holds around 8.9% share of CARE rating which is part of its non-current investment which accounts for 12% of its total assets.
  • Also in Current assets investment accounts for 15% of total assets so in total, around 27% of assets is an investment.
  • Cash and cash equivalent account for 20% of total assets i.e. cash per share around 48 per share.
  • Companies FCF/EBITDA in 2019 is at 79 rose from 64 in 2018 so its clear company generates high cash with its biggest asset is its employee not Plant and machinery thus asset-light business.
  • Investments and cash and cash equivalent account for around 50% of Total Assets thus very asset-light business.
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CONCERN

  • High weightage of Research may result in a decline in revenue at a larger pace as global economies are facing deep problems.

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Arman Nahar
C.A. who is a USA CFA L3 candidate | Cleared L1 & L2 | Doing independent equity research since 2016 | Screens stocks for investment | Makes in-depth valuation models | Crafts portfolios.
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