Accumulate CRISIL; target of Rs 1050: Emkay

Emkay Global Financial Services is bullish on CRISIL and has recommended accumulate rating on the stock with a target of Rs 1050 in its October 18, 2012 research report.

“CRISIL’s Q3CY12 revenue came in slightly better than expectation at Rs2.7bn (29.2%yoy growth) as against our expectation of Rs2.6bn. The strong growth in revenues came on the back of 1) 37.6%yoy growth in research revenues to Rs1.5bn, aided by consolidation of Coalition numbers which was effected from this quarter 2) strong 22.6%yoy/ 13.6%qoq growth in rating revenues. As new debt issuances as well as bank credit have been under significant pressure, we believe the rating revenues have benefited from low base effect and higher reaffirmation of ratings during the quarter.”

“CRISIL’s operating margins expanded by 109bps to 36.1% led by operating leverage coming into play in rating/research business (+500/800bps qoq each). The Margin expansion in research were also partially aided by consolidation of coalition numbers, as the later enjoys higher margins (although not disclosed by CRISIL) as compared to its existing margins in that segment. Resultantly operating profit (adjusted for Fx loss of Rs68mn) grew by relatively higher 33.2%yoy to Rs977mn. CRISIL has taken an FX loss of Rs68mn during the quarter on its FX receivables driven by 4.6%/2.6% appreciation in INR vs. USD and GBP respectively. Driven by the FX losses, the net profit for Q3CY12 remained flat yoy at Rs597. However, adjusted for FX losses, the net profit would have grown by 23% yoy to Rs645mn.”

“We believe that sequential sharp jump in the rating revenues may have been driven by higher total volume of debt rated (including reaffirmations) which had favorable base effect in Q3CY12. However, with new debt issuances/banks’ loan growth still under significant pressure, we are skeptical of sustaining such kind of growth in future. On the other side, we are quite enthused by the growth in research business (both organic and inorganic) which has been driven by consolidation of CDL and new client additions in existing business. We are quite confident of research business growing at 30% in CY13 as well, on back of organic and inorganic (CDL) client acquisitions. At CMP the stock trades at 30x CY12 EPS and 24x CY13 EPS with cash per share of 33/46 for CY12/13E. We continue to maintain accumulate rating with price target of 1050,” says Emkay Global Financial Services research report.

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