Mr. R. Ravimohan started his career with ICICI where he held several assignments in project appraisal, systems designing, credit administration and merchant banking. He also set up the country's first electronic stock exchange the OTC Exchange of India. At present, he is the Managing Director of Crisil, India's leading credit agency and among the top five credit rating agencies in the world. Crisil has a strategic business alliance with Standard and Poor's (S&P) Rating Services, USA, which is the world's leading rating agency. Mr. Ravimohan is a chemical engineer and he has also completed the Advanced Management Programs from Harvard Business School.
In an interview with Equitymaster, he spoke about the state of the economy, expressed his concerns on the prevailing over capacity across commodity industries and his strategies for Crisil.
What is your outlook for the economy, considering the fact that non-food credit is showing some revival? What kind of changes do you see taking place in the economy in the last few months compared to the previous year?
Mr. Ravimohan: The Indian economy is expected to do well in the first half of the current fiscal. Commodity prices have picked up and credit growth is also rising. However, investments are still not happening and the gap between demand and supply still exists. I am not too bullish on investments other than infrastructure investments in roads and telecom. Industry investments I think will not happen this year. Next year there may be a chance. Companies are however, expected to do better. But in the second half of the year, if oil prices increase then it’s a matter of concern.
What is your view on external environment and reduction in demand for forex?
Mr. Ravimohan: Forex demand in the last few months has slowed down, which is reflected from the current account surplus. Strong inflow of FCNR deposits is mainly responsible for this surplus. Capital goods import has reduced. However, it has been replaced by imports of consumer goods to an extent.
Do you see the ratio of rating upgrades to downgrades, which is the key economy indicator, in favour of upgrades in the current year? What will change the mix?
Mr. Ravimohan: In my view, the ratio is likely to remain negative in the current year also, with marginal rise in the number of upgrades. Perversion, which took place in corporate balance sheets, is likely to impact ratings. Our rating decision depends more on the company’s balance sheet than its profit and loss account. Leverage analysis and interest coverage of the company determines its financial strength. Any upgrade in rating also depends on improvement in profit and loss statement. But it should be such that key ratios of the balance sheet should also improve. There is still some ambiguity about the situation in the second half of the current year, which could lead to more downgrades.
Coming to Crisil, how do you see competition affecting the company’s rating business? What kind of growth do you see in rating volumes in the coming years and what will drive the growth?
Mr. Ravimohan: Crisil’s market share in the past has fluctuated between 35%-65%. From 65% in 1995, our market share came down to 35% in 1998. During the period 1995-97, we downgraded many companies, largely because of the slowdown in economy. As a result, during this period, we also lost some of our business. However, these clients have returned in the last three years. We got back at a time when debt markets went private and there were hardly any public debt issues. Private placement of debt does not require any rating. However, the markets became risk conscious and preferred to go for rated instruments. The penetration of rated debt instruments (for private debt issues) has gone up from 25% in 1997 to almost 100% today. Most of our market share is coming back and we are confident of achieving 10%-15% growth in rating fees in the current year. We are continuously focusing on three strategies to achieve these growth rates. Our market share now is back at 65%.
Strengthening the business development team: We have a team of 8 people in business development, which pushes our rating business. Our team spends 50% of their time with investors explaining the value of Crisil’s ratings and the lengths to which we go to get correct insights. The team also makes presentations to the companies we rate, explaining our ratings.
Analytical innovation: We have introduced a new mechanism by which credit strength of the foreign parent will be reflected in the Indian company’s rating. Rating innovation has to be done carefully and should be objective so that we don’t dilute our standards.
New products: We aim to launch 2-3 new products every year. These products will be introduced in areas where there is no competition. For example, in the hospital segment we have not seen any competing product yet. Till now we have graded 12 hospitals and have targeted to carry out grading for 50 hospitals before March 2003. In securitization also, we have over 95% market share and 80%-95% share in rating of foreign companies.
What advantages is the company drawing from S&P (in terms of international business)?
Mr. Ravimohan: Last year we received a project worth Rs 15 m from S&P. It’s a project taken on contract basis, where some part will be performed by us. We have been given an assignment for rating of collateralized loan obligation of an MNC where 50 cases are to be rated. We also participate in the criteria discussions and criteria workshop on an analytical interchange. We try to explore joint business opportunities in India and some of the other countries where either ratings or risk solutions models are required. So it’s a growing relationship, which helps us in increasing our revenues. We send our people on deputations to places like Singapore, Hong Kong, Paris, New York and Australia for 6- month to 2-year periods. This training gives them good exposure to the international markets.
For most companies financial restructuring is over in view of lower interest rates. Considering this, do you think the company would be able to achieve higher growth rate in its ratings business?
Mr. Ravimohan: Last year interest rates dropped by 400 basis points, so there was a very strong case for companies to refinance their existing debt. There is still a fair amount of rigidity in borrowings program of companies where they have not built in put and call option. But the refinancing option doesn’t work for small reductions in interest rates, as premium (prepayment penalty) you have to pay for raising the debt would nullify the advantage of lower interest rates. Volume growth in this area could remain at the same level as last year. Securitization however, has strong growth potential, which we have seen in the first quarter of the current fiscal. This will be our main focus area this year. On the whole, I am not very optimistic about a repeat of last year, but we will be able to grow rating business by 10%-15% this year.
Crisil has forayed into several new industries for ratings including media, airlines, healthcare, retail asset financing and M&As. How does the business model of these industries work?
Mr. Ravimohan: Ratings of media and airlines are similar to any other industry, which basically help companies in raising debt. So we have a business analyst to understand the business and it helps us in rating the company. Hospitals grading however, works differently. It’s not credit rating but a performance rating. It’s the ability of the hospital to deliver patient care, which determines it’s grading. It’s a completely different domain, requiring expertise. We have a separate rating team for this and we have hired 3 doctors and 3 hospital administration staff. It took us almost 18 months to develop this expertise on all different segments of hospital grading. To insure patients, hospital grading is required and it helps insurance companies too. Otherwise the risk of fraud and risk of mistreatment is very high. We think that medical insurance will happen in a big way in India because coverage of mediclaim is less than 1% of the total population. In terms of medical expenses, today almost 97% of expenses are borne by an individual. In the US it’s exactly the opposite (only 3% is borne by individual). Even if this 97% goes down to 50%, we are talking of insurance payouts of close to Rs 100 to Rs 150 bn whereas the total spend on medicals is Rs 250 bn. Out of 19,000 hospitals, we aim to cover 900 hospitals (conservatively). So growth potential is immense.
What kind of advisory services is the company’s CAS division performing for road and power projects? What is the potential of growth in these businesses? How does the business model of CAS work?
Mr. Ravimohan: Basically this division is involved in infrastructure advisory work. We do have some corporate clients but we are growing carefully in this segment. While there is a good potential, we are trying not to go into businesses, which involve conflict of interest between our ratings and advisory activities. In this division we have more government clients. We went very aggressively into energy, as we knew that there would not be much rating potential. Today we are leading consultants for the coal and power sectors. Transportation and telecom are the other growth areas. Most of the work is related to financial modeling and risk management. Also a huge amount of commercial analysis is required. We help private and public enterprise in selecting policies and in their bidding process. We have got a good pipeline of projects this year and I think we should be able to grow our revenues in this division by about 40% in the current year.
What impact do you see on revenues of CRIS in the current year, which has recorded a relatively lower growth of 10% in FY02?
Mr. Ravimohan: Without giving up our existing product line we are adding new products and focusing on the higher end. We have created a new department called Crisil Information and Risk Management Services (CIRM). We offer integrated information and risk management services. These reports, which we are selling today, will be part of this division. But if you want then we can add to these reports and can give you a customised solution. We hope to get a slightly higher price than what you would have paid for a normal report. We didn’t have any company data earlier. So we have created a database, which provides more information from an analytical point of view. We are planning to price this product 3 to 4 times higher than the normal data base product. Thus we are trying to transform the business. This year is, however, likely to be a problem if the equity markets don’t pick up.
We are diversifying our client base and increasing coverage on a number of industries. Today our largest clients are banks, followed by consulting companies. Earlier we used to have a strong client base of brokers and FIIs. Companies are increasingly looking for outsourcing, to reduce their costs, which could bring in more business opportunities. We expect to grow about 15%-20% in this division in the current year. But it is going to be a challenge and we are closely watching the developments.
A word on your favourite personalities.
Mr. Ravimohan: I have benefited a lot from the guidance, which Mr. Vaghul (Chairman of ICICI Bank) has given me. It was very instrumental in shaping my value system. Prior to that Mr. Nadkarni’s (ex Chairman of ICICI) business focus inspired me. Dhirubhai Ambani was another person to inspire me.