CRISIL LTD: Make your portfolio rate good !!!

Scrip Code: 500092 / CRISIL

CMP:  Rs. 929.30; Buy at Rs.910-920 levels. 

Short term Target: Rs. 1000, 6 month Target – Rs. 1150; STOP LOSS – Rs. 856.00; Market Cap: Rs. 6,595.09 Cr; 52 Week High/Low: Rs. 936.70 / Rs. 560.00

Total Shares: 7,09,68,440 shares; Promoters: 3,72,09,480 shares –52.43 %; Total Public holding: 3,37,58,960 shares – 47.57 %; Book Value: Rs. 51.08; Face Value: Rs. 1.00; EPS: Rs. 25.60; Div: 2000 %; P/E: 36.30 times; Ind. P/E: 34.60; EV/EBITDA: 24.52

Total Debt: Rs. NIL ; Enterprise Value: Rs. 6595.09 Cr.

CRISIL LTD: The Company was founded in 1987 and is headquartered in Mumbai, India. CRISIL Limited operates as a subsidiary of Standard & Poor's. It was formerly known as The Credit Rating Information Services of India Limited and changed its name to CRISIL Limited in December 2003. CRISIL Limited - together with its subsidiaries, provides ratings, research, and risk & policy advisory services primarily in India, United Kingdom and United States. It offers services in the areas of credit ratings; research on Indian economy, industries, companies; also provides with fund services, risk management & infrastructure advisory services. The company provides research and analytics services to commercial and investment banks, insurance companies, corporations, consulting firms, private equity players and asset management firms. It offers ratings for long-term instruments, such as debentures/bonds and preference shares, fixed deposits and loans, as well as pass through certificates and structured finance instruments and short-term instruments comprising commercial papers, certificates of deposits, and short-term debts. The company also provides equity and corporate research, industry reports, customized research assignments, subscription to data services, and initial public offer grading services. In addition, it offers fund research, rankings, and ratings to mutual funds industry; infrastructure advisory services in the renewable energy, transportation and logistics, oil and gas, and minerals sectors; and risk management services to banks, financial institutions, and corporations. The company has a joint venture with the National Stock Exchange of India Limited to provide various indices and index-related services and products to the capital markets.

Investment Rationale:

CRISIL witnesses robust growth in credit rating business. CRISIL currently has 60 % market share of the credit ratings business and 51 % market share in bank loan ratings (BLR).  Nearly 20,000 of the 35,000 clients are the clients who have taken loans of less than Rs. 10 crores & are yet to be rated. The growth will come from newer clients as there are enhancements of the limits of the existing clients and annual surveillance fees. More growth is expected from this segment. Basel II norms specify mandatory credit ratings for bank loans above Rs. 5 crores. The recent incidence of scams is also prompting more small and medium companies to get the respectability of an independent credit rating while raising funds. Apart from that, new products like Education ratings will continue to add to growth. The government and the regulators are currently focusing to increase access of the infrastructure sector to the bond market and to do so they have increased the FII limit in corporate bond to US$ 40 billion from US$ 20 billion; increased credit enhancement schemes for infrastructure entities and draft new CDS guidelines issued by RBI. In Dec'2010, CRISIL acquired Chicago-based Pipal Research Corp. - one of the leading players in the knowledge process outsourcing (KPO) industry from First Source Solution for US$13 mn (around Rs. 58 cr).  Pipal has a strong presence in the corporate sector mainly in North America and Europe and reported revenue of US$8 mn (around Rs. 37 cr) in FY2010. Pipal’s client base includes leading telecommunications, technology, consumer packaged goods and industrial companies. Pipal research is of the same size as what was Irevna in 2005 when CRISIL acquired it. Pipal has 30 Fortune 500 clients. The entire integration process is over and CRISIL is bullish on both Irevna and Pipal for CY'11. Infact, there is a significant increase in staff cost during Q1 CY'11 as the headcount of Pipal has increased by more than 1/3rd during the quarter. In Research business, the margins for CY'10 stood at about 32 % as against 36 % Y-o-Y largely due to forex losses. When CRISIL acquired Irevna in 2009, CRISIL’s turnover stood at Rs. 537 crores. Irevna acquired 23 new clients and its total number of clients stood at 63. This business derives its synergies from its tie ups with banks and as a provider of research for its treasury products. CRISIL launched CRISIL Real Estate Star (CREST) Rating, a first-of-its-kind service for retail investors in the real estate sector. It provides a city specific all round assessment of real estate projects and helps buyers benchmark and identify quality project within a city. The product has received an encouraging response from all stake holders, developers, buyers, investors and bankers. CRISIL has already evaluated 29 projects across 10 cities. CRISIL has also expanded operations at Global Analytical Center (GAC) to support Standard & Poor’s (S&P). It has expanded its geographical presence with sales office in Sydney and research center in China. With over 5500 bank loan ratings (BLR) outstanding which is the largest number of BLR in India; 2434 new ratings assigned during the year, the company has crossed one of the milestone of 17,500 small and medium enterprises (SME) ratings; 7800 new SME ratings was assigned in 2010.

Outlook and Valuation: 

CRISIL has been Ranked # 1 firm in the world in financial services research, risk management and actuarial services, corporate finance support and financial services analytics by the Black Book of Outsourcing – a Data monitor company which also assisted the Ministry of Rural Development, Government of India (GoI), in a unique and innovative public-private-partnership project to provide urban services in rural areas (PURA); the pilot project promises to be the first of many such endeavors. Helped the Ministry of Non-Conventional Energy, GoI, design the framework for exchange of renewable energy purchase obligations, and a platform for trading in renewable energy certificates. CRISIL received a renewed mandate from the World Bank to conduct training program in enhancing the regulatory reform capabilities of member regulators of the East Asia Pacific Infrastructure regulators forum (EAPIRF). CRISIL has won key accounts in the public and private banking sector – portfolio of customers now includes 9 of India’s top 10 banks. It also entered the global arena, winning two prestigious mandates including a reputed multilateral development institution in South East Asia. CRISIL has developed a loan origination system to enable automation of a bank’s credit appraisal process as an important module in its internal rating platform. The Company has a downside risk with respect to the slowing down of our economy. However this may get offset by the low value 20,000 odd SME’s accounts it expects to be added in Q3 of CY11. The company stock is trading currently near its 52 week high, in spite of the fact that most other stocks are trading at a huge discount of their inherent strength of the fundamentals of the company. CRISIL always trades at high P/E , the stock is not exactly cheap, but it commands a higher PE because of its strong market share & robust financial numbers that shows immunity to current economic downturn. CRISIL registered strong top-line growth in 2QCY2011. The company’s net sales grew by 35 % y-o-y to Rs. 203 crores led by strong growth in research segment because of addition of Pipal’s.

Recently Company declared split in face value of shares from Rs. 10 to Re. 1.00 on 20^th JULY 2011, stock quoted ex split basis from 28 Sep 2011. Crisil declared its Second buyback program which has already started from NOV 3rd, 2011, The buy back is for the aggregate amount of Rs. 87 Cr & the shares would be bought back up to Rs. 1,000/Share.
CRISIL's average operating cash flow over the last 4 years stood at Rs. 280 Cr. CRISIL completed its previous buy back in Nov, 2010 of 1,28,156 (12,81,560 post split) shares at an average price of Rs. 6,200 (Rs. 620 post split), totaling to Rs. 79.5 Cr. As per the current buy back rule Section 77A(2)(c) - a company can buy back 25 % of its Total paid up capital & free reserves, for CRISIL it amounts to Rs. 86.97 Cr (25 % of 347.87 Cr). At Rs 929.30/shares, CRISIL can buy back up to 9,36,188 shares or 1.31 % of the equity.

Peers comparison

Company	Face Value (Rs.)	EPS (Rs.)	P/E Ratio	RoNW (%)	Book Value (Rs.)
CRISIL	1.00	25.60	36.30	64.70	51.05
ICRA	10.00	33.26	27.71	23.90	242.34
Credit Analysis & Research Ltd*	10.00	31.89	---	30.11	105.92

(* Proposed IPO)
Some Key Financials

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	628.40	809.50	980.70	1173.50
NET PROFIT (Rs. Crs)	164.50	200.10	244.60	293.20
EPS (Rs.)	23.20	28.60	34.90	41.90
PE (x)	36.20	29.40	24.00	20.00
P/BV (x)	19.10	22.70	11.90	8.40
EV/EBITDA (x)	26.50	20.40	16.30	13.30
ROCE (%)	48.60	70.10	65.00	49.20
RONW (%)	64.70	83.30	76.70	65.30

I would buy CRISIL LTD with a price target of Rs. 1000 for the short term and Rs. 1150 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 856.00 on every purchase.