Why Crisil Stock is Falling?

Introduction

CRISIL Ltd is a globally diversified analytical company having Ratings, Research and Advisory services under its fold. In this article, we will do a detailed 4 point stock analysis of CRISIL Ltd.

Crisil Ltd – 4 Point Stock Analysis

1.Company Overview – Business Segments

• CRISIL (formerly Credit Rating Information Services of India Limited)  is India’s leading credit rating, research, risk & policy advisory company having pioneered the concept of credit rating in India in 1987. S&P, the world’s leading credit rating agency by market share, is its major shareholder (67.5% stake).
• CRISIL is a globally diversified analytical company having ratings, research and advisory services under its fold.

A. Rating

• CRISIL is having market leadership in corporate bonds, bank loan ratings and SME ratings etc. It is strongly poised to gain from cyclical and structural uptick in domestic ratings segment.
• The Company rates all kind of organisation 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, and optimising cost of funds. 
• Investors and lenders use our ratings to supplement their internal evaluation process and benchmark credit quality across investment options. 
• 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 and 37 Fortune 500 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.
• CRISIL is the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country. Thus the company plays a key role in India’s fixed income markets, . It is the sole provider of debt and hybrid indices to India’s mutual fund and life insurance industries.
• Currently, CRISIL caters research needs of over 1000 Global as well as Indian clients which includes more than 90% of India’s Banking Industry by asset base, 15 out top 25 Indian companies by market capitalization, entire mutual fund industry, entire life insurance industry in India.
• Irevna a division of the company provides an offshore investment research to world’s leading investment banks and financial institutions.
• CRISIL Fund Services, another division of company provides fund research, rankings, and ratings to India’s mutual funds industry. Thus, the company is expected to continue its strong momentum in research revenues.

C. Advisory Services

• Company provides advisory services on risk, policy, infrastructure and energy through its subsidiary CRISIL Risk and Infrastructure Solutions (CRIS).
• CRISIL is the leading advisor to governments and regulators, multilateral agencies, investors and large corporates. 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.
• The company is operating in 22 emerging economies in Asia, Africa, and the Middle East.

Segment-wise Performance

• Reserach is the main revenue contributing segment of CRISIL, contributing almost 65% of the company’s total revenue in Q2 calendar year 2019 ie. from April-19 to June-19. But the EBIT % margin in Q2 is decreased to 19% from 29% in Q2 previous year.
• Ratings vertical is having 29% revenue contribution to the company, with consistent rise in EBIT % margin from 35% to 36% in Q2 CY2019. Though the % revenue contribution is lower than research vertical, improvement in EBIT margin indicates the demand and the future business growth of ratings vertical which is becoming a very popular.
• Advisory Services offer contribution of merely 6% to the total revenue of the company. Since this vertical is launched recently and will require a time to attain the desirable margins. But the improvement in the EBIT % margins from -0.8% to 3.8% is a positive sign for the segment. Negative EBIT margins means investments were going on in the Advisory services vertical.

2.Shareholding Pattern

• Promoters group is having a significant stake in the company almost 67.5% as on June 2019.
  1. S&P Global Asian Holdings Pte. Ltd. = 15.95%
  2. S AND P INTERNATIONAL LLC = 8.30%
  3. S AND P INDIA LLC = 43.19%
• Mutual fund is holding 1.1% as on June-19. While Insurance companies hold around 10.5%
• General Public is holding around 15% stake in CRISIL Ltd

3. SWOT Analysis

4.Valuation

• Current PE Ratio = 26.05
  • 3-year AVerage PE Ratio = 47+
  • 5-year Average PE Ratio = 51+
  • 10-year Average PE Ratio = 39+
• So as compared to earlier premium valuation, CRISIL Ltd stock is currently trading at fair discount at PE of 26.05.
• Historical high PE ratios were on account of no alternative credible credit rating agency to CRISIL. But since last 1 year, company has seen credibility loss after IL&FS defualts.
• CRISIL’s Profitability is at CAGR of 8-10%. The company has delivered a poor growth of 9.50% over past five years.
• The stock has fallen almost 40-50% because of trust deficit, re-rating and muted profit growth compared with its earlier premium valuation.
• So the stock has corrected over a period of time due to muted/negative growth of the financials.