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 August 7, 2012 research report.

"CRISIL’s Rating revenues are likely to remain under pressure given sluggish debt issuance and muted credit growth. Debt issuance fell from Rs1.1tn in Q1CY12 to Rs483bn in Q2CY12. Healthy client addition in Q2CY12 in Pipal/ Irevna/ Coalition to drive growth in research in CY13. Expect research revenue to grow at a CAGR of 32% over CY11-13. The hedging of the revenues (40%/55% of rev in CY10/11) has capped the revenue as well as EBIDTA expansion despite INR depreciating significantly vis-à-vis USD as well as GBP. Cut our TP on the stock to Rs1050 (-15%), in line with our cut in earnings (-16%/-17% for CY12/13E). However retain ACCUMULATE rating on the stock."

“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 Rs483.2bn as against Rs1.1tn in Q4FY12. Resultantly Rating revenues grew by just 7.2%yoy (-3.2%qoq) to Rs907mn, lowest in more than five years. With no new projects coming up given poor investment climate, the debt issuances 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 Rs2.2bn. The sluggish growth was led by slowdown in all the three segments viz 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”

 “We have cut our earnings for CRISIL by 16%/17% for CY12/13E taking into account disappointing Q2CY12 numbers. However, CRISIL has gradually put building blocks for strong growth in revenues and profitability in its key businesses. CRISIL has assigned ratings to 31,000 SMEs over last six years which it believes will gradually migrate as its bank loan rating and bond rating customers over next few years. Within research business, despite 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 to the kitty."

"We believe significant addition of clients in research (organically and inorganically through acquisition of coalition) will reflect in research revenues in H1CY13. We are cutting our TP on the stock to Rs1050 (-15%), in line with our cut in earnings. Retain ACCUMULATE rating on the stock,” says Emkay Global Financial Services research report.

FIIs holding more than 30% in Indian cos

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