Crisil: Ratings business to pick up in medium term

Momentum in debt issuances to rub off favorably on firm's ratings business; Mudra Bank, smart cities, could aid growth of SME ratings

CRISIL Ratings' September quarter results were ahead of the Street’s expectations on most fronts. Consolidated revenue grew 14.5 per cent over a year before to Rs 359 crore, fuelled by healthy growth in research revenue, up 24 per cent to Rs 235 crore.

This was due to the global research and analytics segment, largely in the US and Europe. Ratings revenue growth was flattish, down 0.2 per cent over a year to Rs 109 crore.

However, viewed in the backdrop of subdued activity in the bonds market and the government's cut in budgetary support to small and medium enterprises (SME) for ratings, this does not surprise. Notably, SMEs form about 14 per cent of its rating revenues. Though advisory revenues grew only 3.3 per cent over a year to Rs 16 crore, the management remains confident on the road ahead, given the strong order book. Overall revenues were ahead of Bloomberg's consensus estimate of Rs 339 crore.

Strong expansion in earnings before interest and taxes from research largely compensated for the fall in ratings on this count. Consequently, the operating earnings' margin contraction was restricted at 43 basis points to 29 per cent. A higher tax rate, though, restricted the net profit growth to 8.1 per cent in the quarter. This was Rs 77 crore, much ahead of Bloomberg’s estimate of Rs 66 crore.

The management expects debt issuance to gather momentum, which would be favourable for its ratings business. Government initiatives such as Mudra Bank and smart cities could be another factor aiding growth of SME ratings. This will further complement the fast growth witnessed in its research business.

CRISIL stands to benefit from potential pick-up in private sector investment. This, in turn, will push demand for individual project ratings, crucial for obtaining bank credit. Further, the regulators have been focusing on promoting the corporate debt market for the past few years. Given its dominant position in the ratings sector (revenue market share of 35 per cent), CRISIL is well poised to gain from improving macro fundamentals.

In this backdrop, most analysts are positive on the scrip. Their average target price of Rs 1,986, though very close to Monday's closing price of Rs 2,002, indicates the stock trades at fair valuations. It does so at 46 times the FY17 estimated earnings, which leaves little room for a rise, believe analysts.

“We build in 12 per cent earnings per share (compounded annual growth) over CY14-17, though this would be back-ended, with calendar year 2015 seeing flat EPS. The stock is richly valued at current valuations,” says G V Giri, analyst at IIFL. The fact that the stock barely moved on Monday despite a strong outperformance in the September quarter is another indicator.