Crisil: Pressure on margins

Crisil, the credit rating major, has announced a healthy growth in its topline for 3QFY03. The bottomline however, has not grown on a commensurate basis. For 3QFY03 the company has reported over 8% growth in topline, but bottomline growth was marginal at 1% on a YoY basis. This, despite a 91% YoY jump in its other income.

Rs m)	3QFY02	3QFY03	Change	9mFY02	9mFY03	Change
Income from operations	160	174	8.5%	440	488	10.9%
Other Income	6	11	91.1%	15	22	53.4%
Expenditure	73	83	13.7%	227	259	14.1%
Operating Profit (EBDIT)	87	91	4.2%	213	229	7.4%
Operating Profit Margin (%)	54.6%	52.4%		48.4%	46.9%
Interest	0	0		0	0
Depreciation	16	19	21.8%	55	53	-3.6%
Profit before Tax	77	82	7.0%	172	198	14.8%
Tax	23	28	21.1%	59	70	18.6%
Profit after Tax/(Loss)	54	55	1.0%	113	128	12.9%
Net profit margin (%)	33.9%	31.6%		25.7%	26.2%
No. of Shares (m)	6.2	6.2		6.2	6.2
Diluted Earnings per share	34.8	35.2		24.2	27.4
P/E (at current price)		8.0			10.2

Fall in operating margins has been the main reason for the dismal performance of the bottomline. Though there is a healthy growth in the topline, the expenditure has risen at a faster clip. There is a rise in all the expenditure heads especially in the staff expenses. Operating margins have fallen by over 200 basis points. With increasing competition from rating agencies including CARE, Investment Information and Credit Rating Agency Of India Ltd. (ICRA) and FITCH, the environment is becoming challenging for Crisil to sustain high margins in the coming years.

Expense breakup

(Rs m)	3QFY02	3QFY03	Change	9mFY02	9mFY03	Change
Staff expenses	38	43	11.5%	104	127	21.8%
Establishment expenses	12	13	10.2%	44	43	-0.8%
Professional fees	12	13	14.6%	40	39	-2.7%
Other expenses	11	14	24.0%	39	50	27.5%
Total	73	83	13.7%	227	259	14.1%

In the December quarter, the company launched a new product called 'CRISIL Governance and Value Creation' ratings. This new product aims to assess corporate governance practices within the organisation. The company has also completed the project on evaluation of the power sector in 15 Indian states. Crisil has identified new rating areas like training and education as its main growth drivers in the future. In the next three years, Crisil plans to bring down the proportion of rating revenues to total revenues to 40% (over 70% currently) to reduce its overdependance on rating fees. Although, this will lead to a gradual decline in operating margins, topline growth would remain healthy.

Crisil has forecasted a CAGR of 31% in total revenues for the next three years. This would be achieved by diversifying into areas including advisory, selling research and information based products. Currently, the company has strong presence in debt market areas. It also sees opportunities in providing research based products and information about equity markets. S&P's relationship would further assist the company in generating revenues by outsourcing its database for projects in emerging markets. Crisil has already started providing technical consultancy for setting up of rating agencies in the emerging markets.

Crisil's wholly owned subsidiary, Cris-Risc (earlier

On a consolidated basis, the company's revenues grew by 11% to Rs 185 m. Profits have however fallen by 8% to Rs 50 m. This has been due to the more than proportionate increase in the operating expenses of the company. Operating margins have fallen by nearly 400 basis points. Consolidated accounts include performance of CRIS, Cris-Risc, Global Data Services and Crisil Properties. Global Data Services is expected to break even in the next two years.

At the current market price of Rs 280 , Crisil is trading at a P/E of 10x 9mFY03 annualised earnings. We have projected a conservative 7-8% growth in pre tax profits for the current fiscal. Consequently, on FY03 forecasted EPS, Crisil gets P/E multiple of about 8x. In the last five years, the company has traded in the average P/E range of 12-40x. With competition increasing and margins under pressure the stock seems fairly valued and may remain lacklustre in the short term.