CRISIL LIMITED Result Update (Consolidated): Q3 CY14 BUY CMP 1822.95 Target Price 2078.00 October 22nd 2014 ISIN: INE007A01025 Index Details SYNOPSIS Stock Data Sector BSE Code Face Value 52wk. High / Low (Rs.) Volume (2wk. Avg.) Market Cap (Rs. in mn.) Financial Services 500092 1.00 2258.00/1010.00 3092 128882.57 Annual Estimated Results (A*: Actual / E*: Estimated) YEARS Net Sales EBITDA Net Profit EPS P/E CY13A CY14E CY15E 11123.40 3971.90 2978.20 42.12 43.28 12602.11 4189.12 2752.45 38.93 46.82 14114.37 4577.18 3019.71 42.71 42.68 Shareholding Pattern (%) CRISIL is India’s leading ratings agency and it is a global analytical company providing ratings, research and risk & policy advisory services. The company has posted a growth in consolidated net sales of 9.47% y-o-y to Rs. 3135.20 million in 3rd quarter of Calendar year from Rs. 2864.00 million in corresponding previous year period. Net profit Stood at Rs. 711.10 million, marginally lower compared to Rs. 1168.10 million in the corresponding quarter ending of previous year, a decrease of 39.12% y-o-y due to adverse foreign exchange movement. During the quarter, operating profit is Rs. 1068.50 million as against Rs. 1114.00 million in the corresponding period of the previous year. The Global Research and Analytics (GR & A) business grew strongly during the quarter with new clients additions in the areas of model validation, stress testing’s and financial research. The Company has declared an interim dividend of Rs. 4.00/- per share on face value of Rs.1.00/- each for the financial year December 31, 2014. 1 Year Comparative Graph For the Nine months ended Sept 30, 2014, consolidated Net sales grew by 14.98% to Rs. 9278.80 million against Rs. 8072.40 million for the nine month ended of Sept of the previous year. CRISIL LTD. BSE SENSEX Net Sales and PAT of the company are expected to grow at a CAGR of 13% & 11% over 2012 to 2015E respectively. PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) 1822.95 1360.00 296.00 767.80 Rs. in mn. 128882.57 39380.80 24570.10 39156.50 (Rs.) 42.12 15.16 6.20 22.75 Ratio 43.28 30.07 47.74 33.75 Ratio 19.11 8.13 2.16 2.98 (%) 1900.00 280.00 20.00 100.00 CRISIL Ltd. Credit Analysis and Research Ltd. Capital First Ltd. Multi Commodity Exchange of India Ltd. Analysis & Recommendation - ‘BUY’ For the 3rdquarter of Calendar year 2014, CRISIL Ltd posted a 9.47% growth in consolidated net sales to Rs. 3135.20 million from Rs. 2864.00 million in corresponding previous year period. Net profit Stood at Rs. 711.10 million, marginally lower compared to Rs. 1168.10 million in the corresponding quarter ending of previous year, a decrease of 39.12% y-o-y due to adverse foreign exchange movement. Operating profit is Rs. 1068.50 million as against Rs. 1114.00 million in the corresponding period of the previous year. During the quarter, within Ratings, Bank Loan Ratings witnessed good growth. Capital market activity was muted. Business environment is improving with initial signs of an uptick in investments demand. The Global Research and Analytics (GR & A) business grew strongly during the quarter with new clients additions in the areas of model validation, stress testing’s and financial research. For the Nine months ended Sept 30, 2014, consolidated Net sales grew by 14.98% to Rs. 9278.80 million and net profit was Rs. 1976.50 million as against Rs. 8072.40 million and Rs. 2269.00 million respectively for the nine month ended of Sept of the previous year, driven by strong growth in financial Research (GR&A), Risk and Analytics (GR&A), coalition and Bank Loan Ratings. The overall operating environment both in India and globally was challenging. However the global industry continues to remain stressed with renew focus on cost management and recovery of industry. The investments slowdown and volatile Capital markets have impacted the India research business. The company continues to closely engage with its customers to provide added value. The overall operating environment both in India and globally was challenging. Both the infrastructure advisory and risk solutions businesses won their largest-ever mandates in India and abroad. Hence, we expect the company to post a CAGR of 13% and 11% in its top-line and bottom-line respectively, over 2012-2015E. Hence, we recommend ‘BUY’ for ‘CRISIL LIMITED’ with a target price of Rs. 2078.00 on the stock. QUARTERLY HIGHLIGHTS (CONSOLIDATED) Results updates- Q3 CY14 Months SEP-14 SEP-13 % Change Net Sales 3135.20 2864.00 9.47 PAT 711.10 1168.10 (39.12) EPS 10.02 16.64 (39.81) 1068.50 1114.00 (4.08) EBITDA CRISIL Ltd. achieved Net sales of Rs. 3135.20 million for Q3 CY14 as against Rs. 2864.00 million in the corresponding quarter of the previous year. The company has reported an EBITDA of Rs. 1068.50 million, a decrease by 4.08% against Rs. 1114.00 million over prior period of last year. In Q3 CY14, Net profit stood at Rs. 711.10 million compared to Rs. 1168.10 million in Q3 CY13. The company has reported an EPS of Rs. 10.02 for the 3rd quarter of CY14 as against an EPS of Rs. 16.64 in the corresponding quarter of the previous year. Break up of Expenditure During the quarter, Total Expenditure rose by 14 per cent mainly on account of increase in Travel Expenses by 21%, Professional fees 24%, other expenses by 15%, Associates services Fees and Staff Expenses by 27% & 17% respectively are the main attribute for growth of expenditure. Total expenditure in Q3 CY14 was at Rs.2300.30 million as against Rs.2019.90 million in Q3 CY13. Rs. Millions Break up of Expenditure Q3 CY14 Q3 CY13 Staff Expenses 1502.80 1279.30 Rent Expense 117.00 116.60 Establishment Expense 103.70 108.60 Professional Fees 156.20 126.10 Travel Expenses 102.80 85.30 Associate Services Fees 95.90 75.60 Other Expenses 131.00 114.10 Depreciation/Amortisation 90.90 114.30 Operating Revenue Segment COMPANY PROFILE CRISIL India’s leading rating agency and pioneered the concept of credit ratings in the country in 1987 headquartered in Mumbai, Maharashtra, India. The offices of the company have its global presence in New York, Argentina, Singapore, Poland, London and China. The company play’s a key role in India's fixed income markets and it is India's largest provider of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. CRISIL is the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. The company Pioneered independent equity research in India and are today India's largest independent equity research house. CRISIL (Credit Rating Information Services of India Limited) is a global analytical company providing ratings, research, and risk and policy advisory services. The company is the foremost provider of high-end research to the world's largest banks and leading corporations. Within India its customers range from small enterprises to the largest corporations and financial institutions; outside India its customers include the world’s largest banks and leading corporations. It also works with governments and policy-makers in India and other emerging markets in the infrastructure domain. The company’s majority shareholder is Standard & Poor's (S&P). Standard & Poor's, a part of McGraw Hill Financial Inc. is the world's foremost provider of credit ratings. The acquisition of Coalition Development Limited in July 2012 gave CRISIL access to proprietary global research and a premium brand. And the launch of ‘Pragati’, a financial awareness initiative targeted at India’s unbanked poor, illustrates the continued innovation that characterises the CRISIL spirit. CRISIL Research, India’s largest independent and integrated research house, estimates that online retailing -both direct and through marketplaces will become a Rs 500 billion industry by 2016, growing at a whopping 5055% annually over the next three years. Businesses Ratings Bond Ratings Bank Loan Ratings SME Ratings Real Estate Star Ratings Global Research & Analytics: (Irevna, Pipal Research) Equity Research Credit Research Risk & Analytics Research INDIA RESEARCH Economy & Industry Research Funds & Fixed Income Research Equity & Company Research CRISIL Risk and Infrastructure Solutions (CRIS), a wholly owned subsidiary of CRISIL Ltd. FINANCIAL HIGHLIGHT (CONSOLIDATED) (A*- Actual, E* -Estimations & Rs. In Millions) Balance Sheet as at DECEMBER 31, 2012A -2015E I. CY12A CY13A CY14E CY15E 70.20 70.70 70.70 70.70 b) Reserves and Surplus 5219.50 6674.30 8409.62 10007.45 Sub Total-Net worth 5289.70 6745.00 8480.32 10078.15 a) Trade Payables 165.10 157.30 151.01 146.48 b) Other Long Term Liabilities 14.40 23.10 45.74 60.37 179.50 180.40 196.75 206.85 a) Trade Payables 1135.30 1122.20 1144.64 1121.75 b) Other Current Liabilities 2503.00 2037.60 1996.85 1916.97 c) Short Term Provisions 723.00 1380.80 1491.26 1938.64 4361.30 4540.60 4632.76 4977.37 9830.50 11466.00 13309.82 15262.37 1517.50 1342.20 1395.89 1465.68 0.00 0.00 17.20 21.33 c) Goodwill on consolidation (net) 3150.30 3150.30 3150.30 3150.30 d) Deferred tax assets 174.80 228.60 278.89 331.88 e) Other non-current assets 47.40 89.90 109.68 128.32 f) 66.40 56.30 53.49 58.83 456.10 480.60 571.91 629.11 5412.50 5347.90 5577.36 5785.45 a) Current Investments 1084.30 2387.20 2486.01 2829.88 b) Trade Receivables 1172.30 1194.90 2019.38 2786.75 c) Cash and Bank Balances 1528.00 1899.50 1956.49 2132.57 d) Short Term Loans and Advances 247.20 210.80 231.88 252.75 e) Other Current Assets 386.20 425.70 1038.71 1474.97 4418.00 6118.10 7732.46 9476.92 9830.50 11466.00 13309.82 15262.37 EQUITY AND LIABILITIES: A. Shareholders’ Funds: a) Share Capital B. Non-Current Liabilities: Sub Total-Long term liabilities C. Current Liabilities: Sub Total-Current Liabilities TOTAL EQUITY AND LIABILITIES (A+B+C) II. ASSETS: D. Non-Current Assets: a) Fixed Assets b) Capital work-in-progress Non Current Investments g) Long Term Loans and Advances Sub Total- Non-Current Assets E. Current Assets: Sub Total- Current Assets TOTAL ASSETS (D+E) Annual Profit & Loss Statement for the period of 2012 to 2015E Value(Rs.in.mn) CY12A CY13A CY14E CY15E Description Net Sales 12m 9793.10 12m 11123.40 12m 12602.11 12m 14114.37 Other Income 284.10 393.20 293.53 328.75 Total Income 10077.20 11516.60 12895.64 14443.12 Expenditure -6597.10 -7544.70 -8706.52 -9865.94 Operating Profit 3480.10 3971.90 4189.12 4577.18 0.00 0.00 0.00 0.00 Gross profit 3480.10 3971.90 4189.12 4577.18 Depreciation -343.20 -379.20 -343.94 -371.45 Exceptional Items 0.00 658.80 0.00 0.00 Profit Before Tax 3136.90 4251.50 3845.18 4205.72 Tax -932.90 -1273.30 -1092.73 -1186.01 Net Profit 2204.00 2978.20 2752.45 3019.71 70.20 70.70 70.70 70.70 5219.50 6674.30 8409.62 10007.45 Face value 1.00 1.00 1.00 1.00 EPS 31.40 42.12 38.93 42.71 Interest Equity capital Reserves Quarterly Profit & Loss Statement for the period of 31 MAR, 2014 to 31 DEC, 2014E Value(Rs.in.mn) 31-Mar-14 30-Jun-14 30-Sep-14 31-Dec-14E Description 3m 3m 3m 3m 3092.30 3051.30 3135.20 3323.31 Other income 28.90 30.60 142.70 91.33 Total Income 3121.20 3081.90 3277.90 3414.64 Expenditure -2064.30 -2163.00 -2209.40 -2269.82 Operating profit 1056.90 918.90 1068.50 1144.82 0.00 0.00 0.00 0.00 Gross profit 1056.90 918.90 1068.50 1144.82 Depreciation -87.10 -91.40 -90.90 -74.54 Profit Before Tax 969.80 827.50 977.60 1070.28 Tax -282.70 -249.20 -266.50 -294.33 Net Profit 687.10 578.30 711.10 775.95 Equity capital 70.70 71.00 71.00 71 Face value 1.00 1.00 1.00 1.00 EPS 9.72 8.15 10.02 10.93 Net sales Interest Ratio Analysis Particulars Charts CY12A CY13A CY14E CY15E EPS (Rs.) 31.40 42.12 38.93 42.71 EBITDA Margin (%) 35.54 35.71 33.24 32.43 PBT Margin (%) 32.03 38.22 30.51 29.80 PAT Margin (%) 22.51 26.77 21.84 21.39 P/E Ratio (x) 58.06 43.28 46.82 42.68 ROE (%) 41.67 44.15 32.46 29.96 ROCE (%) 72.28 64.51 53.45 49.10 EV/EBITDA (x) 36.02 31.37 29.71 27.07 Book Value (Rs.) 75.35 95.40 119.95 142.55 P/BV 24.19 19.11 15.20 12.79 OUTLOOK AND CONCLUSION At the current market price of Rs.1822.95, the stock P/E ratio is at 46.82 x CY14E and 42.68 x CY15E respectively. Earning per share (EPS) of the company for the earnings for CY14E and CY15E is seen at Rs.38.93 and Rs.42.71 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 13% and 11% over 2012 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 29.71 x for CY14E and 27.07 x for CY15E. Price to Book Value of the stock is expected to be at 15.20 x and 12.79 x respectively for CY14E and CY15E. We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs. 2078.00 for Medium to Long term investment. INDUSTRY OVERVIEW India's services sector has always served the Indian economy well, accounting for nearly 57 per cent of the gross domestic product (GDP). Here, the financial services segment has been a significant contributor. The financial services sector in India is dominated by commercial banks which have more than 60 per cent share of the total assets; other segments include mutual funds, insurance firms, non-banking institutions, cooperatives and pension funds. The Government of India has introduced reforms to liberalise, regulate and enhance the country's financial services industry. Presently, the country can claim to be one of the world's most vibrant capital markets. In spite of the challenges that are still there, the sector's future looks good. Market size The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 25. Information technology (IT) services, the largest spending segment of India's insurance industry at Rs 40000.00 mn (US$ 665.78 million) in 2014, is anticipated to continue enjoying strong growth at 16 per cent. Category leaders are business process outsourcing (BPO) at 25 per cent and consulting at 21 per cent. Investments During FY 14, foreign institutional investors (FIIs) invested a net amount of about Rs 800000.00 mn (US$ 13.31 billion) in India's equity market, according to data by Securities and Exchange Board of India (SEBI). Insurance companies in India will spend about Rs 121000.00 mn (US$ 2.01 billion) on IT products and services in 2014, a 12 per cent increase over the previous year, according to Gartner Inc. The forecast includes spending by insurers on segments such as internal IT (including personnel), telecommunications, hardware, software, and external IT services. The Rs 12000.00 mn (US$ 202.47 million) software segment is predicted to be the fastest growing external segment, with overall growth of 18 per cent in 2014. The following are some of the key developments and investments in the Indian financial services sector: • About 75 per cent of the insurance policies sold by 2020 would be in one way or another influenced by digital channels during the pre-purchase, purchase or renewal stages, according to a report by Boston Consulting Group (BCG) and Google India. This report, Digital@Insurance-20X By 2020, predicts that insurance sales from online channels will increase 20 times from present-day sales by 2020, and overall internet influenced sales will reach Rs 3000000.00 mn -4000000.00 mn (US$ 49.9-66.54 billion). • Export-Import Bank of India (Exim Bank) will focus more on supporting project exports from India to South Asia, Africa and Latin America, as per Chairman and MD, Exim Bank. The bank has moved up the value chain by lending support to project exports so that India earns foreign exchange. In 2012-13, Exim Bank had supported 85 project export contracts valued at Rs 242550.00 mn (US$ 4.03 billion) secured by 47 companies in 23 countries. • Private-sector lender IndusInd Bank will soon begin its asset reconstruction business. It plans to partner asset reconstruction companies (ARCs) for this venture. New initiative, which is going to launch in the next two months, is about asset reconstruction. • 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. Government Initiatives In an effort to enable banks to provide greater choice in insurance products through their branches, a proposal could be made which will allow banks to act as corporate agents and tie up with multiple insurers. A committee set up by the Finance Ministry of India is likely to suggest this model as an alternative to the broking model. The Reserve Bank of India (RBI) has simplified the rules for credit to exporters. Exporters can now receive long-term advance credit from banks for up to 10 years to service their contracts. They have to have a satisfactory record of three years to get payments from banks, who can adjust the payments against future exports. The RBI has enabled foreign investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in insurance and related activities via the automatic route. "Effective from February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector," as per the RBI. Road Ahead India is among the world's top 10 economies, driven by its strong banking and insurance sectors. The country is expected to become the fifth largest banking sector in the world by 2020, as per a joint report by KPMG-CII. The report anticipates bank credit to increase at a compound annual growth rate (CAGR) of 17 per cent in the medium term which will lead to better credit penetration. Life Insurance Council, the industry body of life insurers in India, has also estimated a CAGR of 12-15 per cent over the next few years for the segment. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Research: Email – [email protected] C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods B. Anil Kumar Auto, IT & FMCG M. Vinayak Rao Diversified C. Bhagya Lakshmi Diversified B. Vasanthi Diversified G. Amarender Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO’s, QIP’s, F.P.O’s,Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. 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