CRISIL: Buy

Fresh investments can be considered in Credit Rating Information Services of India (CRISIL) stock. CRISIL is the largest credit rating agency in India also engaged in research and advisory services.

The credit rating business offers huge growth potential in India as the corporate debt and fixed income market in India is still in a nascent stage. While demand for rating services (especially bank loan ratings) provides high earnings visibility, CRISIL’s significant market share, zero debt, diversified revenue mix and superior margins (net profit margin of 27 per cent) are the key investment arguments.

At the current market price of Rs 3,265, the stock is trading at a trailing one year price to consolidated earnings multiple of 16.4.

That is at a discount to its lone listed competitor ICRA (20.2 times). CRISIL is essentially a defensive stock despite its mid-cap status. A low beta (0.47) led to its under-performance in the bull market, but the stock fared better than the market in the 2008 meltdown.

CRISIL claims a more than 55 per cent market share in bank loan ratings and a 70 per cent market penetration in debt ratings. The company’s net profit grew at 50 per cent compounded annual rate over the three years to 2008, while revenues grew at 42 per cent during the same period.

For the year 2008, 41 per cent of CRISIL’s revenues came from the research business, 30 per cent from ratings and the advisory business contributed to 19 per cent of the revenues.
In recent years, the contribution from the research business has steadily risen, from 11 per cent in March, 2005 to 44 per cent in December, 2008. However, ratings contributed 46 per cent in the latest March quarter.

After net profit growth of 68 per cent, on consolidated operations in the calendar year 2008, growth moderated to a modest 11 per cent for the quarter ended March 2009.

Lower revenue growth (3.1 per cent year-on-year), operating loss in its advisory business (Rs 1.4 crore loss against 2.36 crore profit last year) and discontinuation of revenues from the Gas Strategies group which CRISIL divested in December 2008, were triggers.

Operating margins moderated from 31 per cent to 38 per cent, even as the ratings business continued to grow at a strong pace (31 per cent for the quarter ended March) during the quarter.

An Rs 2.03 lakh crore Infrastructure investment is estimated to be required in the current Five Year Plan (2007-12). Even if this is funded through a debt-equity of 75:25; it offers immense scope for debt fund raising and thus, ratings.

Other rating opportunities include banks’ capital rising of over Rs 3 lakh crore to meet the minimum capital adequacy norm of 12 per cent.