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Crisil: Pressure on margins - Views on News from Equitymaster
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  • Aug 8, 2002

    Crisil: Pressure on margins

    Crisil has reported a moderate growth rate for the first quarter ended June 2002. The company's revenues were up by 13% and its profits also witnessed a similar growth rate. Fall in revenues from advisory services by 1.9% YoY and decline in operating margins trimmed the overall growth rates of Crisil.

    Rs m) 1QFY02 1QFY03 Change
    Income from operations 130 146 12.6%
    Other Income 4 4 8.4%
    Expenditure 72 85 17.4%
    Operating Profit (EBDIT) 58 62 6.7%
    Operating Profit Margin (%) 44.5% 42.2%  
    Interest 0 0  
    Depreciation 18 16 -10.4%
    Profit before Tax 44 51 13.5%
    Tax 16 19 16.9%
    Profit after Tax/(Loss) 28 32 11.6%
    Net profit margin (%) 21.7% 21.5%  
    No. of Shares (m) 6.2 6.2  
    Diluted Earnings per share 18.2 20.3  
    P/E (at current price)   14.3  

    During the quarter Crisil launched new grading for hospitals, which has been well received in the health care industry. The company is currently grading around a dozen health care institutions all over India. Among other new initiatives, Crisil assigned rating to securitisation program for an MNC bank and has completed micro finance institution rating assignments under the World Bank scheme. Crisil's rating revenues which forms 74% of total income, witnessed 500 basis points decline in operating margins. With increasing competition from rating agencies including CARE, ICRA and FITCH, it could become a challenging task for Crisil to sustain such high level of margins in the coming years.

    Revenue breakup
    (Rs m) 1QFY02 1QFY03 Change
    Ratings 94 109 16.0%
    Advisory services 25 25 -1.9%
    Information's services 11 13 17.0%
    Total 130 146 12.6%

    The company however, aims to boost volume growth by foraying into new rating areas like training and education. In the next three years, Crisil plans to bring down the proportion of rating revenues to total revenues to 40% 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 data base 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 Crisil.com) achieved break even in the June quarter. The company launched a mutual fund portfolio tracker and a mutual fund performance benchmark for four debt fund categories. These new launches assisted the company in achieving break even. Crisil also launched its data base product with more analysis named 'CRIS Finalysis' through its wholly owned subsidiary, Global Data Services. The company aims to price this product at a significant premium compared to normal data base products due to value added services provided by it. Considering the dismal state of capital markets, Crisil could have to struggle hard to sell this product at a premium. The company aims to increase the proportionate revenues from this segment to 36% of total revenues from the current 8%. With increasing revenues from information, Crisil's margins are likely to come down to less than 40%, information providing being Crisil's worst business from the operating margins perspective.

    Operating margins dips
    Particulars 1QFY02 1QFY03
    Ratings 60.5% 55.5%
    Advisory services 32.7% 34.7%
    Information services 1.8% 1.3%

    On a consolidated basis, the company's revenues grew by 19% to Rs 156 m and profits were higher by 37% to Rs 31 m. 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 290, Crisil is trading at a P/E of 14x 1QFY03 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.



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