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Crisil: Time for re-rating?

Aug 16, 2001

India’s premier credit rating agency Crisil has shown improvement in financial performance in the June quarter. This was possible due to changing conditions in the debt markets (both in the public and private companies ratings). Crisil’s business is divided into three segments: rating, CAS (Crisil Advisory Services) and CRIS (Crisil Research and Information Services). The company derives 65% of its revenues from the rating business. This business, which contributed 78% of total revenues in FY97, witnessed a gradual decline (65% in FY01) with increasing competition and lacklustre market conditions. The public issue market remained sluggish in FY01 and private placement do not require ratings (by law).

The past two years have been tough for the company. This seems to be changing now, as investors prefer rated companies before making any investments. In the last year out of a total of 247 debt issues, 245 were privately placed. However, nearly 70% of the privately placed issues were rated and a majority of them preferred Crisil’s ratings.

Mutual funds and insurance companies are looking for investment opportunities in the debt market, which has tremendous growth potential. This could force companies, which are issuing bonds to get rated. Crisil being the premier brand is likely to benefit with this change in the companies attitude. During FY01, Crisil also rated companies in media and airlines industries, which were hitherto not rated in India. New business areas for rating include securitisation, commercial papers issued by financial institutions, retail asset financing and mergers & acquisitions. The company also holds a strong position in infrastructure rating. The rating of the road sector relating to the Government’s Quadrilateral project is another achievement of the company during FY01. However, with the more players entering the market, the company’s realizations have been affected negatively.

Stagnant rating revenues
Year Total Instruments
(Rs m)
Rating Revenues
(Rs m)
FY97 351 248,480 207
FY98 573 503,570 279
FY99 327 163,290 290
FY00 283 310,900 253
FY01 272 530,130 284

Advisory services contributed about 24% to total revenues in FY01. The segment witnessed an impressive growth of 45% due to increase in corporate advisory services business. The business, which accounted for a marginal 9% in FY97, is likely to grow with more projects coming up in the infrastructure sector. During the year, the company added telecom sector to its existing list of sectors such as energy, transport and urban infrastructure.

Crisil’s information and services business was strengthened with the acquisition of INFAC. The research activity of Crisil was transferred to a wholly owned subsidiary Cris Ltd. The company provides research services to about 500 clients including SSB, TRAI, Ernst & Young and Reliance Industries. The business witnessed a growth of 273% and accounted for 11% of its FY01 revenues (just 3% in FY97). However, considering the current downtrend in the capital markets, the business is likely to get adversely affected., the company’s Internet initiative earned revenues of Rs 9 m in the first year of its operations. The company aims to web enable the entire research and information base of Crisil group of companies. It will then aggregate this information with third party content and provide comprehensive information in the Indian and overseas markets. The venture is still in a development stage., which incurred a loss of Rs 8 m in the first year, is expected to generate profits by FY03.

At the current market price of Rs 106, Crisil is trading at a P/E of 7x 1QFY02 annualised earnings. The company’s 1QFY02 performance was better than FY01 results with a 10% earnings growth and 20% rise in revenues. Although, the current sluggishness in the economy has affected its performance, the company stands to gain with the strengthening debt market conditions and opening up of other emerging areas like insurance and securitisation. The valuations of the company, which holds 60% market share, will however improve only with the growth in its business.

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