CRISIL: Analyze the prime rating agency before Investing

CRISIL (Credit Rating Information Services of India Ltd), incorporated in 1987, is a Global Analytical Company providing Ratings, Research, and Risk and Policy Advisory Services.

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(A) About The Company

  • CRISIL is headquartered in Mumbai. It is India’s leading Ratings Agency and also the foremost provider of high-end Research to the World’s largest Banks and leading Corporations.
  •  S&P, the World’s leading credit Rating Agency by Market Share, is its major shareholder.
  • Company’s Clients range from Large Corporates to Investors and top Global Financial Institutions.

(B) Journey Since Inception

(C) Executive Board Members of Crisil

(i) Mr. John L Berisford  (Chairman)

Mr John Berisford is the President of S&P Global Ratings. He has the ultimate responsibility of all aspects of the business, including commercial, analytical, control, technology and operations. Mr Berisford holds a Bachelor’s degree in Political Science from West Liberty College in West Virginia. He also has a Master’s degree in labour and industrial relations from West Virginia University.

He is also a Director of two of S&Ps largest legal Entities, S&P Global Ratings Europe Limited and Standard & Poor’s Financial Services LLC. Previously, Mr Berisford was the Executive Vice President of Human Resources for S&P Global Inc. In this role, he was instrumental in creating and executing the Company’s growth and value plan, resulting in the creation of McGraw Hill Financial and also the sale of McGraw Hill Education.

Before joining S&P Global in 2011, Mr Berisford spent 22 successful years at PepsiCo. In Pepsico he spearheaded a no. of important global initiatives and transformations. Among other strategic projects, he led the integration after PepsiCo acquired the independent Pepsi Bottling Group into its overall corporate structure.

(ii) Ms. Ashu Suyash (Managing Director and CEO)

Ms. Ashu Suyash is the Managing Director and CEO of CRISIL and is a member of the CRISIL Board. She also serves as a member of the Operating Committee of S&P Global. She is a Chartered Accountant and also holds a bachelor’s degree in commerce.

Ms Suyash leads CRISIL’s Indian and global businesses, steering its efforts to deliver high-quality analytics, opinions and solutions to corporations, investors, financial institutions, policy makers and governments.

She has spent 30+ years in the financial services sector. Before joining CRISIL in 2015, she served as the CEO of L&T Investment Management Limited and L&T Capital Markets Limited. During 2003-12, she was Country Head and Managing Director of Fidelity’s Indian mutual fund business, which she helped set up.

Previously, she held several key positions across the corporate, consumer and investment banking divisions during her 15+ years’ tenure at Citibank.

Over the years, she has been featured among the Top 50 Women in business in India & Asia by various publications. She is also a member of the Primary Market Advisory Committee of SEBI. And also the Advisory Committee on Corporate Insolvency and Liquidation of Insolvency and Bankruptcy Board of India.

She is also a member of the Corporate Governance Council of The Confederation of Indian Industry. Miss Ashu is also a member of the governing board of the National Institute of Securities Markets, established by SEBI.

(D) Shareholding Pattern

Crisil stock research with details of shareholding pattern
Crisil stock research with details of major promoter shareholders
Crisil stock research with details of shareholding pattern

(E) Revenue Segments

CRISIL provides a wide range of services. These Services include independent equity research, bond ratings, Credit research, Risk and analytics, Economy and industry research, Bank loan ratings fund research etc.

CRISIL mainly operates through its 3 Operating Segments – Ratings, Research, Advisory.

(a) Ratings

  • The Company rates all kind of organization such as industrial companies, banks, SMEs, non-banking financial institutions, insurance providers, mutual funds, infrastructure entities, state governments and urban local bodies.
  • Issuers and borrowers leverage CRISIL’s Ratings for enhancing their access to funding, widening range of funding alternatives & also optimizing cost of funds. 
  • Investors and lenders also use its ratings to supplement their internal evaluation process and benchmark credit quality across investment options.
  • Moreover, CRISIL’s ratings act as benchmarks for pricing and trading of debt instruments for markets at large.

(b) Research

  • CRISIL is a global research analytics company providing off shoring services to several large global clients like global investment banks, consulting groups, insurance companies consulting groups and insurance companies.
  • It is India’s largest independent integrated research house, which offers an in-depth research on the Indian Economy – Industry – Capital Market and Company spectrum.
  • Moreover, CRISIL is the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country.
  • Moreover, Irevna a division of the company provides an offshore investment research to world’s leading investment banks and financial institutions.

(c) Advisory

  • Company provides advisory services on risk, policy, infrastructure and energy through its subsidiary CRISIL Risk and Infrastructure Solutions (CRIS).
  • Moreover, CRISIL is the leading advisor to governments and regulators, multilateral agencies, investors and large corporates.
  • Thus, it works in the areas of policy and regulatory, project advisory, public private partnership frameworks, infrastructure financing mechanisms and implementation support to large infrastructure programmes.

(i) Revenue Segmentation

Company’s segment-wise revenue as on 31.March.2021 is as follows –

Crisil stock research with details of segment wise revenue classification

(ii) Year on Year Revenue Classification

Ratings

CRISIL’s Rating Segment has shown a stable growth over the years. This Segment grew at a CAGR of 6% over last 9 Fiscal years i.e. from INR 326 Crore in 2011 to INR 565 Crore in the F.Y. 2020

During Q-1 of F.Y. 2021, despite Lower Debt Issuers and issuance and uneven recovery in Domestic Economic Activity, Ratings segment posted a growth of 11.8%. This is driven by strong surveillance fees, new client additions and Global Analytical Center, deepening coverage across practices including ESG (Environmental, Social, and Governance).

Research

On the other hand, Research is the main Revenue contributing Segment of the Company. This Segment has shown an average growth over the years. Research Segment grew at a CAGR of 13% over last 9 Financial years. This is mainly due to the Lower Demand of Regulatory-related research opportunities during F.Y. 2017-19.

However, in the F.Y. 2020, this Segment of CRISIL has shown a Strong growth. This is mainly on account of Global Research & Analytics (GR&A) performance and acquisition of Greenwich.

Crisil stock research with details of year on year segment revenue

In 1st Quarter of F.Y. 2021, Research Segment shown a healthy Revenue growth by 18.1%. This is mainly on the account of Research and Risk Solutions (GRRS) growth during this Period. GRRS growth was due to existing and new mandates across transformation, change and regulatory offerings and increased demand from buy-side for research in the areas such as distressed and private debt.

Advisory

On the other hand, the Advisory Segment of CRISIL has shown a constant and considerable growth over the years . Over last 9 Fiscal Years, Revenue of Advisory has grown at a CAGR of 10% i.e. from INR 57 Crore in 2011 to INR 134.1 Crore in F.Y. 2020.

In Q-1 of F.Y. 2021, Advisory Segment’s also Revenue increased from INR 30.2 Crore in Q-1,2020 to INR 34 Crore in F.Y. 2021. This growth is on the account of increased Demand of Infrastructure advisory across government and multilateral-supported programs.

(iii) Revenue By Geography

Geographical Classification of the Revenue of CRISIL as on 31.December. 2020 is as follows –

Crisil stock research with details of revenue as per geographical segments

(iv) Year on Year Geographical Classification

The company has its presence across the globe i.e. Europe, North America and Rest of the World.

Crisil stock research with details of growth in geography wise revenue segments

In India Company’s Revenue grew at a CAGR of 2% over last 3 years. Also, CRISIL’s Europe Revenue grew at a CAGR of 3% over last 3 Financial years.

CRISIL’s Revenue in North America grew at a CAGR of 12% over last 3 years, showing a good and significant growth. Moreover, CRISIL’s Revenue in Rest of the world grew at a CAGR of 4%, showing a moderate growth over last 3 years.

(v) Segment Profit

CRISIL’s segment wise profit contribution as on 31.March.2021 is as follows –

Crisil stock research with details of segment wise profit contribution

(vi) Year on Year Segment Profit

The Profit of Rating Segment grew at a CAGR of 6% in last 9 years. On the other hand, Research Segment profit grew at a CAGR of 5%. The growth declined FY17 onwards.

Crisil stock research with details of growth in segment wise profit in last 10 years

On the other hand, Advisory Segment of CRISIL has also shown an irregular PAT growth over last 4 Fiscal years. Moreover, in year 2018, Advisory Segment of the Company post a loss of INR 8.1 crore. This is because the segment’s results in that year were impacted by an additional provision for receivables of INR 16.84 crore.

(vii) Segment-wise Margins

CRISIL’s Advisory Segment’s Margins have shown a volatile growth over last 10 Fiscal years. On the other hand, Ratings as well as Research Segment’s Margins have shown an average trend in last 10 years.

Crisil stock research with details of segment wise margin

(F) Key Operational Factors for Crisil Ltd

(i) Bank Loan Ratings (BLR) year wise

CRISIL assigned 1,209 new BLRs and 7,000 SME gradings and assessments during the year. With this, CRISIL has assigned ratings to more than 34,000 large and mid-sized corporates and assessed the performance of 150,000 SMEs till 31st December 2020.

Crisil year wise BLR volumes data

(ii) Small & Medium Enterprises (SME) Ratings

Crisil year wise SME ratings data

(iii) Bond Market and Credit Growth

Bond Market fluctuations as well as overall credit growth impacts ratings business of rating agencies. Slowdown on bond issuances because of regulatory changes or otherwise change in credit raising due to reduction in private sector capital expenditure and consequent demand for credit. BLR market also suffers slow down on account of sluggish demand for wholesale bank credit.
For instance, in the year 2020, corporate bond issuances remained tepid and declined by
~8%. Issuances were concentrated among large and highly rated issuers, especially those with strong parentage.

(iv) Regulatory Changes

On the regulatory front, SEBI announced certain changes also affecting CRISIL’s performance-

  • The BLR market affected by the guidance from 5 large banks, increasing the minimum exposure threshold for rating requirements to INR 30-50 crore from INR 5-10 crore.
  • SEBI announced certain changes aimed to address the issue of issuer-non-cooperation with CRAs at the beginning of the year. CRAs are required to downgrade investment-grade ratings with issuer-not-cooperating (INC) to non-investment grade after 6 months and to not assign any new ratings to issuers who have INC ratings outstanding for more than 12 months with other CRAs.
  • In addition, post-March 2020, regulatory changes aimed at providing regulatory forbearance to corporates affected by the pandemic and lockdown. Thus, SEBI granted temporary relaxations from default recognition and regulatory timelines for publication of rating rationale.

(F) Group Structure

CRISIL Limited has 3 Indian Subsidiaries and 13 Overseas Subsidiaries.

Acquisition of Greenwich Associates LLC

Crisil acquired Greenwich Associates LLC and its subsidiaries in CY20. Greenwich Associates is a leading provider of proprietary benchmarking data, analytics and qualitative, actionable insights that helps financial services firms worldwide to measure and improve business performance.

Accordingly, Greenwich Associates LLC, Greenwich Associates International LLC, Greenwich Associates Singapore Pte. Ltd, Greenwich Associates Japan K.K., Greenwich Associates Canada ULC, Greenwich Associates UK (Holdings) Ltd and Greenwich Associates UK Ltd became subsidiaries of CRISIL with effect from February 26, 2020.

(H) Financial Parameters

*2021 is for the 1st Quarter of Current Year 2021.

Crisil stock research with details of key financial performance highlights

*2021 is for the 1st Quarter of Current Year 2021.

  • CRISIL’s Operating Income has shown stable growth over the years and has grown at a CAGR of 10% over last 9 years.
  • On the other hand, PAT of CRISIL has shown an irregular growth over the past years. Its PAT grew at a CAGR of 6% over past 9 Fiscal years.
  • Over last 10 years, PBIDT Margin and PAT Margin of the Company have also shown volatile growth.

(I) Management Discussion & Concall Highlights Q1 CY21

Financial Highlights

  • CRISIL overall Revenue in the 1st Quarter of F.Y. 2021 grew by 15.8% YoY.
  • However, CRISIL’s PAT de-grew to INR 83.5 Crore from INR 88.1 Crore in Q-1, F.Y. 2021.

(a) Ratings Services

  • During this Quarter, Ratings segment of the company registered a strong revenue growth of 11.8% and stands at INR 148.90 Crore against INR 133.2 Crore in Q-1 2020.
  • On the other hand, the Profit earned by this Segment in Q-1 is at INR 70.3 Crore as compared to INR 57.6 Crore.
  • Also, the Margin of this Segment, grew to 47.2% from 43.2% in the same Quarter of previous Fiscal year.
  • As per the Management, Global Analytical Centre (GAC) also reported strong growth in the First Quarter of Fiscal year 2021.

(b) Research Services

  • Research segment posted healthy revenue growth of 18.1%. This growth is driven by Global Research and Risk Solutions (GRRS) and Greenwich.
  • On the other hand, Profit of the Research Segment of CRISIL de-grew to INR 53.2 crore in Q1 CY21 from INR 55.7 Crore in Q-1 CY20.
  • Also, Margin decreases from 21.1% in March 2020 to 17% in March 2021.

Other Key Highlights

  • Management stated that the company believed that the second half of this year, it should see a positive traction.
  • Management also added that two budget announcements – First, a good amount of traction on setting up of the development finance institution (DFI) in the Bond Market. And the Second announcement is ARC plus AMC for stressed assets in the banking sector. Thus, company believes that these two announcements lead to a positive traction for the demand for Ratings.
  • Management also stated that Company has seen headwinds in its research business over the last few years between 2017-18 and even into 2019. But that was essentially on account of certain of CRISIL’ s products & services. It is mainly due to tapering of demand on the regulatory remediation side.
  • It also added that even as that happened, CRISIL started seeing demand on the risk side, which is mostly on the traded risk and the model risk.

(J) Opportunities and Strength

(i) Strong Name In Rating Space

Over the decades, company has maintained a strong growth momentum by focusing on new client acquisition and maintaining traction in securitization market led by strong operating leverage benefits. The business saw a growth in corporate bond ratings, which will lead to an increase in market share. Going ahead, CRISIL is expected to strengthen its leadership position by expanding geographically in new markets which will enable them to untap new opportunities.

(ii) Zero Debt Company

CRISIL is a zero debt company since its inception. The Company has been incurring capex through internal accruals. It is also expected that company to continue with the same strategy of being an un-levered firm with consistency in capex across the various business segments.

(iii) Strong Leadership of S&P

The Company has Significant Promoter holding. CRISIL is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

Thus, CRISIL’s association with S&P Global helps blend local and global perspectives in shaping CRISIL’s strategy and governance systems. Representatives from S&P Global also bring value to the CRISIL Board through global insights on governance, risk and controls and experience in leading large businesses.

CRISIL has opportunities to leverage the S&P Global brand through referrals and partnerships in the international market.

(iv) Research Gaining Traction

In the F.Y. 2020, CRISIL arrested the fall in research revenues seen from year 2017 to 2019 caused by shrinking regulatory-related research opportunities. 2020 turned out to be one of the most eventful years of the decade, with changing market trends and business dynamics due to Covid-19 that posed a major challenge for the India Research business.

While Co. continued to maintain dominant position in the flagship Industry Research business. The segment continued to face growth challenges as an after-effect of public sector bank mergers and also difficulties a few key private sector banks and NBFCs faced.

Also, CRISIL has Successfully launched benchmark indices for the domestic Alternative Investment Fund (AIF) industry in the year 2020, to provide relevant products as per market needs and to cater the Increasing demand for analytics platforms, alternative data and automated delivery and wealth management research.

(K) Risk/concerns

(i) IRB Approach By Banks

The Internal Ratings-based (IRB) Approach to credit risk allows banks to model their own inputs for calculating risk-weighted assets from credit exposures to retail, corporate, financial institution and sovereign borrowers, subject to supervisory approval. While CRISIL has diversified its revenue portfolio, risk due to migration to IRB approach by banks can expose CRISIL to loss of revenue. However, industry experts suggest a longer than expected time needed towards implementation of the said approach.

(ii) Slowdown In Economy

Rating revenues for credit rating agencies are directly reflected in the state of the economy and its growth. While COVID-19 derailed the growth prospects in F.Y. 2020, a gradual pick-up in economic activities saw a revival in rating revenue. Any further delay in revival in economic activities either on account of internal/external factors can impact rating revenues and thus overall growth assumptions.

(iii) Policy Risk

Securities Exchange Board Of India (SEBI) is the the regulator for Credit Rating Agencies (CRAs) in India. . The company has to work according to the Rules and Regulation frame by SEBI. Thus, any change in these Regulations will directly effect the operations of the company as a result Revenue also affects.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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