Improving prospects to support CRISIL valuations

Outlook for the agency's ratings and research businesses is turning out to be better

Improvement in its ratings business was a key positive in CRISIL's results for the July-September 2016 period. This is the third quarter (Q3) for the company, which follows a January-December accounting year. Notably, the ratings business has grown at a slower pace than that of CARE and ICRA in the past few quarters. In Q3, it grew 10.5 per cent to Rs 1,201 crore or 31 per cent of overall revenues - its first double-digit growth in eight quarters. Pick-up in corporate bonds overall, and small and medium enterprise segments in particular, led to this healthy momentum. The company is confident of sustaining this momentum in the ratings business due to the Reserve Bank of India's measures to grow bond markets, improved demand, as well as good monsoon. While CRISIL maintained its leadership in this segment with estimated market share of 35 per cent, peers such as CARE (28 per cent market share) have been growing at a robust pace and could reduce this gap, something the Street will keep an eye out for.

Meanwhile, CRISIL's research revenues, which form 65 per cent of the overall pie, witnessed seasonal slow-down in Q3 on the back of changes in timelines of regulatory submissions. "However, new clients in transaction banking and securities analytics in coalition along with traction in global financial research business continued, which offset margin pressure in traditional research," says Shradha Sheth, analyst at Edelweiss Securities. Overall, the management remains confident of delivering strong growth in research business in the next couple of years.

While analysts believe the slowdown in research revenues is one-off in nature, it did pull down CRISIL's overall revenue growth to 8.2 per cent year-on-year to Rs 389 crore, which as a result missed Street estimates. Net profit, too, grew a muted 3.9 per cent year-on-year to Rs 80 crore and missed analysts' estimates by three per cent. Not surprisingly, the CRISIL stock has fallen nearly four per cent from its pre-results levels against a near two-per cent uptick in the S&P BSE Sensex. At current levels, the CRISIL stock trades at 40 times calendar year (CY) 2017 estimated earnings, slightly below its historical average of 42 times.

On the whole, CRISIL is a play on India's under-developed bond markets, which could witness higher growth given continued regulatory push. The likely improvement in global and domestic economic environment will aid CRISIL's research business. Analysts at Nirmal Bang Securities expect revenues and net profit to grow at compound annual rates of 14.9 and 18.4 per cent, respectively, over 2015-18.