CREDIT ANALYSIS AND RESEARCH LTD : HAS A GOOD POTENTIAL !!!

Scrip Code: 534804 / CARERATING

CMP:  Rs. 1,389.35; Market Cap: Rs. 4,029.12 Cr; 52 Week High/Low: Rs. 1,590.00 / Rs. 666.00.

Total Shares: 2,89,99,122 shares; Promoters : Not Defined – 00.00 %; Total Public holding 5 % or more : 84,96,066 shares – 29.30 %; Total Public holding 1 % or more : 1,76,25,415 shares – 60.78 %; Public holding : 28,77,641 shares – 9.92 %; Book Value: Rs. 167.01; Face Value: Rs. 10.00; EPS: Rs. 45.16; Dividend: 280.00 % ; P/E: 30.76 times; Ind. P/E: 43.38; EV/EBITDA: 19.31.

Total Debt: ZERO; Enterprise Value: Rs. 4,005.70 Cr.

CREDIT ANALYSIS AND RESEARCH LTD: The Company was founded on 21st April, 1993 and is based in Mumbai, India. Credit Analysis and Research Limited is a credit rating agency, providing rating and grading services for various sectors in India. The company came with an IPO of 71,99,700 equity shares of Rs. 10 each at Rs. 750.00 to the general public in December, 2012. Its rating services include corporate rating services, such as corporate debt, bank loan, issuer, corporate governance, and recovery rating services; financial sector rating services, which cover banks, mutual funds, capital protection oriented schemes, insurance, NBFCs, securitization, and housing finance companies; and public finance ratings that cover ratings of state government entities and urban local bodies, as well as project finance, infrastructure sector, and small and medium enterprises rating services. The company also offers grading services for educational institutes, IPOs, construction companies, shipyard companies, maritime training institutes, renewable energy service companies and system integrators, micro finance institutions, and energy audit, as well as real estate star rating services. CARE has entered into collaboration with four credit rating agencies from emerging markets like in Brazil, Portugal, Malaysia, and South Africa each to provide ratings in those countries, set up ARC ratings in those countries. CARE also provides research services and it has been expanding its product portfolio to include newer services. The company is exploring opportunities to provide risk management solutions and acquired 75.1 % stake in Kalypto, a firm providing risk management software solutions in Nigeria in Nov 2011. Credit Analysis and Research Ltd is locally compared with CRISIL INDIA LTD, ICRA and Globally with Asukanet Company Ltd of Japan, Eprint Group Ltd of Hong Kong, ZWEI Co Ltd of Japan, McGraw Hill Financial Inc of USA, Standards & Poors of USA, Moody's of UK.

Investment Rationale:

Credit Analysis and Research Ltd (CARE) is a leading credit rating company in India offering rating and grading services. It also provides research services and risk management solutions through its subsidiaries. CARE is the second largest rating company in India and it enjoys a strong parentage of marquee banks and large financial institutions like SBI, Canara Bank, IDBI Bank and IL&FS. CARE has over 19 years of experience in this business and has a significant rating coverage of Indian banks and financial institutions. Its experience and knowledge has enabled it to rate a wide range of instruments and has created a strong customer base of 7,754 clients as on March 2014. CARE has rated debt instruments of entities in various sectors like manufacturing, services, banks and infrastructure. It also has provided debt and issuer ratings to corporates, banks, financial institutions, public sector undertakings, state government undertakings, sub-sovereign entities, NBFCs, SMEs and microfinance institutions. In FY14 CARE reported completed assignments of 7,865 nos as compared to 7439 no.s last year. CARE has also launched ARC Ratings in London on 16th January 2014 while it has commenced operations in Advisory Services through its subsidiary company CARE Kalypto Risk and Advisory Services Private Limited. Credit rating business is a niche segment in the financial services arena. In the post-reforms era, with increased activity in the Indian Financial sector both existing and new companies are opting for finance from the capital market. Presently, the India can claim to be one of the world's most vibrant capital markets. In spite of the challenges that are still there, the future of this sector's looks good. The market size of banking assets in India have reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 2025. According to the data provided by SEBI, during FY 14, Foreign Institutional Investors (FIIs) invested a net amount of about Rs. 80,000 Cr (US$ 13.31 billion) in Indian equity market. Association of Mutual Funds in India (AMFI) has reported that the mutual fund industry's assets under management (AUM) have gone past the Rs. 10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian mutual fund industry rose to Rs. 10.11 trillion (US$ 168.19 billion) in May from Rs. 9.45 trillion (US$ 157.21 billion) in April. A strong capex cycle in Indian economy, lower penetration of corporate bond market and regulatory push due to implementation of Basel II norms are likely to help credit rating agencies ahead. Also Credit Agencies are likely to benefit from increased penetration by pension funds and insurance companies and multiple initiatives taken by the Government of India to develop the bond market. In India, Rating is a more recent phenomenon, but the changing global perspectives on the subject do impact the financial system. India was perhaps the first amongst developing countries to set up a credit rating agency in 1988. The function of credit rating was to institutionalized when RBI made it mandatory for the issue of Commercial Paper (CP) and subsequently by SEBI, when it made credit rating compulsory for certain categories of debentures and debt instruments. In June 1994, RBI made it mandatory for Non- Banking Financial Companies (NBFCs) to be rated. Also earlier there was severe under-cutting in the BLR (Bank Loan Rating), which impacted the margins of credit rating business, however, over the past six months, SEBI has came out with its guidelines under which a credit rating agency (CRA) has to disclose its minimum rating fees on a new BLR assignment. Around 50 % to 60 % is surveillance income and 70 % to 80 % of the business comes from existing clients with the balance coming from new clients. Therefore, this provides a hedge against a downturn even if CARE does not get any new client. However, old clients are still enjoying discounted fees in the BLR segment. Consequently, the full impact of SEBI guidelines on minimum rating fees is also not visible. CARE is trying to gradually increase its fees going forward, which is expected to improve the margins of the BLR segment and partially negate the effect of lower margins in SME rating business. CARE has also started increasing its presence in the SME segment. For this, CARE has expanded its reach to 60-70 locations, the results of which will be visible in the coming years. This should surely benefit CARE.

Outlook and Valuation:

CARE is the second largest rating company in India in terms of rating turnover. CARE also enjoys a strong parentage of marquee banks and large financial institutions of India like SBI, Canara Bank, IDBI Bank and IL&FS. CARE has over 19 years of experience in this business and has a significant rating coverage of Indian banks and financial institutions and financial instruments. CARE is primarily engaged in rating services which accounts for around 98 % of the total revenue of the company as of FY13. CARE has achieved a steady growth in its ratings business having rating relationships with 7,754 clients and with number of assignments of 7,865 and it has cumulatively rated around Rs. 7.7 lakh Crs of debt in FY14. In the last few years, the company has begun expanding itself internationally and is now providing technical assistance services to countries like Maldives, Hong Kong, Nepal and Mauritius. Globally and in India also Credit Rating business will continue to be an niche business making existing players in India thrive on the upturn expected in the economy over the medium term. This is because credit rating agencies all across the globe are a business based on trust, long relationships and hence from the market point of view also there is unlikely to be any excess supply of paper in this space. Also one important and noteworthy aspect in the Indian Ratings space is that global rating players have shown strong interest in the Indian ratings players with S&P holding 75 % in CRISL and Moodys holding 50.8 % in ICRA which has resulted in a sharp rise in credit rating counters. After CRISL and ICRA, CARE is now the second largest player in the rating space which is now available going ahead. While any kind of strategic tie up cannot be ruled out, it is quite clear that in future such a development cannot be ruled out. Added to this CARE is atleast twice as large and more profitable to ICRA and enjoys better financials and return ratios but still trades at 20x FY15E as compared to 34x FY15E for ICRA. From performance side, CARE’s income from operations increased 14 % yoy to Rs. 74.3 Cr in Q2FY15 despite sluggish growth in bank credit. This higher income came mainly from surveillance cases. The sequential strong growth was seen mainly due to cyclical nature of rating business. Total operating expenditure increased to 28 % yoy to Rs. 22.70 Cr mainly due to 43 % yoy increase in the staff cost which was Rs. 16.70 Cr. Higher staff cost was due provision for ESOP cost and also increase in the staff count on account of continued focus on building the business team especially in the SME space. CARE’s EBITDA increased 8 % YoY to Rs. 51.5 Cr, and its EBITDA margin reduced to 69.4 % from 72.9 % in Q2FY15. However, it was much ahead than EBITDA margins of its listed peers ICRA which has EBITDA margin of 40.1 % in Q2FY15 and CRISIL with 33.3 % in Q2FY15. As CARE declared special dividend of Rs. 65.00 per share in the last quarter, the company had to sell its some of the investments and booked the gain on investments to P&L a/c. As a result, the company’s net profit increased 50 % YoY to Rs. 52.40 Cr and its Net Profit margin increased to 54.1 % from 49.6 % in Q2FY15. Modified credit ratio (MCR) has increased from 1.0 in Q1FY15 to 1.3 in Q2FY15 which is a good sign for the economy and it also suggests improvement in credit environment during the recent quarters. It was 1.1 in Q2FY14. MCR is the ratio of upgrades against downgrades in ratings of the companies. An increase in MCR means stable and improving financials of the rated companies. CARE continued with its liberal dividend pay-out policy and the company had announced a special dividend of 650 % in Q2FY15 with the purpose of sharing the cash surpluses with the shareholders. Combining this with the interim dividend announced in Q1 of 60 %, the total dividend paid so far is 710 % or Rs. 71. In Feburary 2014, the stake holders of CARE namely IDBI holding 16.62 %, Canara Bank holding 11.95 % & SBI holding 5.19 % invited bids for selling their 33.76 % or approx 97,88,041 Cr shares of their holding in CARE. However the bids did not went through at that time due to valuation issues. It is now heard that CARE is likely to revive the stake sale of its investors again, now it should be noted here that if at all this stake went through, will also trigger an open offer for an additional 26 % shares facilitating the new investor to corner over 70 % in CARE. So if this stake sale goes successful then there would be a very good upside for the stock. CARE’s Q2FY15 performance was better and one can have a positive view on the huge long term opportunities for the credit rating sector on the back of development in debt market over next two to three years and CARE should be a good pick among the listed credit rating agencies. CARE is the best placed for cyclical recovery in corporate capex and bank credit growth. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	198.80	229.50	265.80	319.00
NET PROFIT (₹ Cr)	113.00	128.70	148.20	179.10
EPS (₹)	40.80	44.00	51.00	62.00
PE (x)	18.90	30.70	26.60	22.00
P/BV (x)	5.10	8.10	12.10	9.80
EV/EBITDA (x)	15.80	26.70	22.80	18.60
ROE (%)	28.30	27.70	36.50	49.00
ROCE (%)	167.30	164.50	101.50	111.60

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Credit Analysis and Research Ltd IPO : A MUST SUBSCRIBE !!!

Price Band: Rs. 700 - Rs. 750.

Retail Discount : NA .

Face Value: Rs.10.

Minimum Lot Size: 20 Shares.

Issue opens on: 07th December 2012, Friday.

Issue closes on: 11th December 2012, Tuesday.

Listing Date on: by 21st December 2012.

Total No. of Shares offered: 71,99,700  shares or 25.22 %

Employee Reservation: NA.

Net Public Offer: 6,61,15,000 shares.

QIB Book: 35,99,850 shares or 50 % of issue.

Non – Institutional Bidders: 10,79,955 shares or 15 % of issue.

Retail Book: 25,19,895 shares or 35 % of issue.

Equity Shares outstanding prior Issue: 2,85,52,812 shares.

Equity Shares outstanding post Issue: 2,85,52,812 shares.

Total Size of the Issue: Rs. 503.97 Crs - Rs. 539.97 Cr.

IPO GRADING: Exempted for Grading by SEBI.

KEY FINANCIALS (Consolidated)	31 Mar 2009	31 Mar 2010	31 Mar 2011	30 Sept 2012 6 month
Total Income (Rs. Crs)	103.15	153.79	176.62	104.00
Net Profit (Rs. Crs)	54.67	87.04	91.05	49.76
Net Profit Margin (%)	53.00	56.59	51.55	47.84
EPS (Rs.)	19.15	30.49	31.89	17.43

CREDIT ANALYSIS AND RESEARCH LIMITED : Credit Analysis & Research Ltd (CARE) was incorporated in 1993. CARE is the second largest full service credit rating company among six players in India. They offer rating and grading services across a diverse range of instrument and industries including IPO grading and grading of various types of enterprises, including shipyards, maritime training institutes, construction companies and rating of real estate projects among others. They also provide general and customized industry research reports. It is also has international presence in Maldives, Nepal, Mauritius, Hong Kong, Eucador, Mexico & has non-binding MOU with credit rating agencies in Brazil, South Africa, Malaysia & Portugal. CARE is professionally managed has no identifiable promoter & its existing share holders include domestic banks and financial institutions such as IDBI Bank, Canara Bank, SBI and IL&FS etc. Company's list of clients includes banks and other financial institutions, private sector companies, central public sector undertakings, sub- sovereign entities, Small and Medium Enterprises ("SMES") and micro-finance institutions. They are also leading credit rating agency in India for IPO grading having graded the largest number of IPOs since the introduction of IPO grading in India. CARE ratings has completed over 19,069 rating assignments as of September 2012 since its inception in April 1993. It has a rating relationships with 4,644 clients as o 30th September 2012.

CARE, being a credit rating company in India, is exempted by SEBI from obtaining IPO grading for its Initial Public Offer. None of the rating companies including CRISIL, FITCH or ICRA graded CARE IPO.

Valuations:

The company has fixed the price band at Rs. 700-750 per share. Based on FY12 annual EPS of Rs. 40.55, CARE will be trading at P/E range of 17.27 x to 18.5 x. This is at a significant discount to peers like ICRA & CRISIL which are trading at 27 x and 35 x respectively. For FY12 the consolidated revenues from operation stood at Rs. 190 Cr with Net Profit of Rs. 116 Cr resulting in Net Margin of 61.05 % with EPS of Rs. 40.55 CARE has consistently maintained high PAT margin of 53 % with strong ROE of 34 %. It is a debt free company. 85 % of its revenue comes from ratings business. At the IPO price the P/E is in range of 17.27 x to 18.5 x & P/B is in the range of 5.3 x to 5.6 x. Net worth o the company as on 3oth September 2012 is Rs. 427 Cr with Book Value of Rs.  149/share. Company has cash equivalents of Rs. 260 Cr. CARE is expected to post FY13 profit of around Rs. 100 Cr which can lead to EPS of close to Rs. 35. 

Retail Investors can subscribe up to maximum of Rs. 2,00,000 per application. CARE has strong financial position and is high cash-generating business and which is available at very reasonable valuations.

The object of the offer is to carry out sale of 71,99,700 Equity share by selling shareholders & to achieve the benefits of listing the Equity Shares on the Stock Exchanges. The Promoters will dilute 25.22 % of their holding in the company through the stake sale. The company CARE will not receive any proceeds from the offer and all proceeds will go to selling shareholders.

Out of the Offer of a total of 71,99,700 equity shares -  24,54,400 equity shares are being offered by IDBI Bank; 21,71,200 equity shares are being offered by Canara Bank. 9,14,500 equity shares are being offered by SBI; 8,55,500 equity shares are being offered by IL&FS; 5,84,100 equity shares being offered by Federal Bank. 58,605 equity shares being offered by IL&FS Trust held on behalf of Milestone Fund. 1,395 equity shares being offered by Milestone Trusteeship held on behalf of Milestone Army Trust; 60,000 equity shares being offered by ING Vysya; 1,00,000 equity shares being offered by TATA Investment. 

The Equity Shares being offered by the Selling Shareholders under the Offer have been held by such Selling Shareholders for a period of more than one year prior to filing of the Draft Red Herring Prospectus with SEBI. CARE has mandated six bankers for managing the IPO, with Karvy Computershare Private Limited as its registrar & DSP Merrill Lynch Ltd as lead banker, other bankers managing the share sale are Edelweiss Capital Limited, ICICI Securities Limited, IDBI Capital Market Services Limited, Kotak Mahindra Capital Company Limited, SBI Capital Markets Limited. 

According to me one should look for subscribing for CARE IPO, having 85 % o its revenue coming from rating business which earns better margins is thus being offered to public at very attractive valuation. CARE will be third listed company after CRISIL & ICRA - the rating agencies India Ratings (formerly Fitch), Brickworks & SME rating are unlisted. CARE can have Market Cap of around Rs. 2,141.46 Cr with cash of Rs. 260 Cr which brings its Enterprise Value of around Rs. 1,881.46 Cr at an Upper band of Rs. 750. 

Thus, with attractive pricing & strong fundamentals with good institutional holdings the Long term investors should look into subscribing the IPO for good opportunity. Short term investor can subscribe for listing gains.

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CRISIL LTD : A VALUE PICK !!!

Scrip Code: 500092 / CRISIL

CMP:  Rs. 917.45; Buy at current levels.
Short term Target – Rs. 1000; Medium to Long term Target - Rs.1250; STOP LOSS – Rs. 844.00; Market Cap: Rs. 6,437.59 Cr; 52 Week High/Low: Rs. 1,150.30 / Rs. 731.75

Total Shares: 7,01,68,390 shares; Promoters : 3,72,09,480 shares –53.03 %; Total Public holding : 3,29,58,910 shares – 46.97 %; Book Value: Rs. 52.05; Face Value: Rs. 1.00; EPS: Rs. 28.30; Div: 1100 % ; P/E: 32.41 times; Ind P/E: 26.67; EV/EBITDA: 24.04.

Total Debt: ZERO ; Enterprise Value: Rs. 6,205.73 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 LLC. 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 and policy advisory services primarily in India, the United Kingdom, and the United States. It offers services for a range of debt instruments, in the areas of credit ratings; research on India's economy, industries, and companies; financial research and analytics outsourcing; fund services; risk management; and 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. CRISIL is compared with Nice Information Services Co. Ltd, Korea Ratings Corporation and Koryo Credit Information all of these are from South Korea.

Investment Rationale:

CRISIL’s rating businesses like outsourcing from S&P and SME rating have done well during the quarter and helped it to post 7 % growth in the overall rating business. However, with margins in those businesses are at fairly lower level than the bond/bank loan rating business, the growth in revenues in these businesses hasn’t helped the margins with rating business margins declining by 3.30 % YoY. While the debt market activity has been lackluster for quite some time, it slowed down considerably in the last quarter with fresh debt issuances falling to Rs. 48,320 Cr as against Rs. 1.1 trillion in Q4FY12. Rating revenues grew by just 7.2 % YoY (-3.2 % QoQ) to Rs. 90.7 Cr, lowest in more than five years. With no new projects coming up & with given poor investment climate, the debt issuance as well as credit demand are likely to remain low over the next couple of quarters, thereby keeping the ratings revenue under pressure. CRISIL Q2CY12 results were significantly below expectation with operating revenue growing by just 6.5 % YoY (-2.6 % QoQ) to Rs. 220 Cr. The sluggish growth was led by slowdown in all the three segments like Rating, Research and advisory with major disappointment coming from research business which grew by just 10.2 % YoY, lowest since Q3CY09. The other segments rating and advisory also reported dismal numbers with rating growing by just 7.2 % YoY and advisory revenue declining by 21.6 % YoY. The management has attributed the lower growth in research to slowdown in domestic piece which has reported negative growth. Domestic piece which is mainly CRISINFAC broadly constitute 18-20 % of the total research revenues

Outlook and Valuation:

CRISIL House - the 2,11,610 sq.ft
 Corporate Head Office
Powai, Mumbai 

CRISIL has assigned ratings to 31,000 SMEs over last six years which it believes will gradually migrate over next few years as Crisil’s bank loan rating and bond rating customers. Within Crisil’s research business, despite having weak financial conditions globally, IREVNA and Pipal have added significant number of customers over last 6-9 months. Over and above that, merger of CDL will result in further inorganic client additions into the kitty. It is believed that significant addition of clients in research (organically and inorganically through acquisition of coalition) will reflect in research revenues in H1CY13. The pace of growth for CRISIL in research has cooled off from high of 44 % in CY11 to 24 % in Q1CY12 and further to 10 % YoY in Q2CY12. The management has attributed lower growth in research due to the slowdown in domestic price. Moreover with a significant number of new clients addition in Coalition Development Ltd, which was acquired last quarter, will further give traction to the research revenues. CRISIL’s staff costs have gone up by 11% for H1CY12 while other operating expenses have remained flat. While operating expenses remained flat reflecting CRISIL’s ability to keep the costs under check, it is believed that the rise in staff costs reflects further strong additions to employee base. CRISIL has hedged almost 55 % of its revenues as against 40 % in CY10. Of the USD revenues, approximately 70 % of the revenues are hedged against 51 % in the previous year. The hedging of the revenues has capped the revenue as well as EBIDTA expansion despite INR depreciating significantly vis-à-vis USD as well as GBP.  It is expected that Crisil could have earnings cut by 16 % to 17 % for CY12/13E taking into the account the disappointing Q2CY12 numbers. However, CRISIL has gradually put building blocks for strong growth in revenues and profitability in its key businesses. CRISIL could be bought at a target price of Rs. 1000 and should be accumulated at every dip. In my view CRISIL could report FY13E EPS of Rs. 41.30/sh. The stock could be bought for the target price of Rs. 1250 and recommend Accumulate on the stock. 

KEY FINANCIALS	FY10	FY11	FY12	FY13E
SALES (Rs. Crs)	628.40	807.00	1018.30	1,273.30
NET PROFIT (Rs. Crs)	164.50	187.70	226.10	289.00
EPS (Rs.)	23.20	26.80	32.30	41.30
PE (x)	37.10	32.10	26.70	20.90
P/BV (x)	19.60	18.20	13.00	9.60
EV/EBITDA (x)	27.40	22.30	18.30	13.50
ROE (%)	48.60	58.40	57.00	52.90
ROCE (%)	64.70	81.40	82.50	76.60

I would buy CRISIL LTD with a price target of Rs. 1000 for the short term and Rs. 1250 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. 844.00 on every purchase.

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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.