Accumulate CRISIL; target of Rs 1240: Emkay

Emkay Global Financial Services is bullish on CRISIL and has recommended accumulate rating on the stock with a target of Rs 1240 in its June 04, 2012 research report.

“CRISIL signed an agreement with Coalition (a high end analytics company head quartered in UK), to buy 100% stake in the later for a maximum sum of Rs2.5bn. It will be an all cash transaction with maximum payout of GBP29mn (Rs2.5bn) with earn outs over 2 years, linked to achievement of specified milestones for the company's future revenues and profits. The management has indicated that the deal valuation at Rs2.5bn is done taking significant revenue and pat growth assumption for CY13, and the maximum valuation will be paid only if that milestones are achieved. Assuming a 50% growth in rev for CY13, the deal is valued at 2.4x EV/ Sales, which is inline with what it paid for CrisInfac and Irevna in 2000 and 2005.”

“CRISIL had cash and investment of Rs1.7bn lying in the balance sheet as on Dec 2011, of which majority is in the form of Fixed deposits which yields 7-8%. The company will redeem these investments and deposits to pay for the acquisition of Coalition, which we believe has the potential to generate RoE’s of more than 25%. While this will improve the overall RoE’s of CRISIL from 62%/ 53% in CY12E/13E to 67/56% respectively, the RoIC might come down to 129%/108% in CY12E/13E from 154%/ 176% estimated earlier as Coalition is likely to generate lower RoE ‘s than CRISIL. CRISIL has been doing buyback in the last two years aided by healthy cash position. CRISIL bought back shares worth ~Rs800mn each during CY10/11. However with significant cash outflow over the next two years on account of this deal, likelihood of any buyback in CY12/13 looks grim.”

“While the CRISIL research segment has been growing at a healthy pace (44% in CY11), we believe the acquisition will keep the growth momentum strong going forward as well. Although the acquisition will be EPS accretive, it will also dilute the RoIC to some extent. Hence maintain Accumulate with TP of Rs1,240 valuing it at 26x CY13E core EPS of Rs46 plus cash per share of Rs55/share,” says Emkay Global Financial Services research report.   

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