Crisil Ltd.
Target Price:-Rs4,800
CM Price:- Rs 5,900.00
- CRISIL’s Q2CY10 operating revenue grew by 11.3% inline with expectations, however adjusted for 5.5% depreciation in GBP Vs Rupees, the growth would have been higher.
- 9.1% qoq growth in rating and 3% qoq (even after 5.5% rise of INR/GBP) in research segment respectively. IREVNA may have witnessed high single digit growth sequentially
- OPMs declined by 121bps qoq to 31.0% as headcount went up by ~11% in H1FY10. Frontloading of staff and premises investment has resulted in lopsided cost structure
- CRISIL has done most of the investment in human capital and the revenues are likely to be strong. But valuations steep at 25.5x CY10E/20.7x CY11E PE. Maintain REDUCE rating Revenues growth inline with expectations CRISIL’s revenues for the quarter grew by 11.3%yoy to Rs1.5bn inline with expectation.
The growth mainly came from rating and research business, which reported growth of ~16% each.
Outlook seems promising for revenues
We expect the momentum in the revenue growth to sustain in coming quarters driven by rating and research over CY10E/CY11E. The momentum in the rating business will be driven by bank loan rating and the implementation of the base rate. The initial activities post the base rate implementation has been promising.
Within research, the impact of revenue momentum was limited by appreciation of INR vs GBP. If one adjusts for ~12% rise in INR, the growth momentum in the IREVNA would be 10-11% for H1CY10. We expect the growth in research revenues to be at 17% for CY10.
Frontloading of expenses impacted margins – worst may be behind
During H1CY10, CRISIL has added 200 (~10%) employees on roll which along with 10-11% increase in salaries has resulted in sharp rise in employee costs. CRISIL has also added premises (shifting to new rented place) resulting in sharp rise in the rental costs. As a result, the operating margins have contracted by ~665bps yoy.
We believe that the worst is behind in term of operating margins as the expenses have been frontloaded and the revenue outlook seems promising.
Net profit dips 13.7% yoy
The reported net profit declined by a higher 13.7% yoy to Rs333mn. However, adjusted for foreign exchange loss of Rs6.3mn and gratuity expense of Rs36.4mn, net profit declined by a lower 6.2% yoy to Rs370mn.
Valuation and view
We expect CRISIL’s revenue growth to gain pace going forward benefiting from base rate and pick up in research business. Moreover with all the inputs in place (premises and employee force), we believe the benefit of leveraging will start kicking from here on. At the current market price, the stock is quoting at 25.2x its CY10E core EPS of Rs223 and 20.4x CY11E core EPS of Rs260. We believe the current valuations are little over stretched looking at the fact that CRISIL’s peak valuations were at 28x one-year forward EPS. Hence, we maintain our REDUCE rating on the stock, with price target of Rs4,800.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 28.18 | 22/07/10 |
| EPS (Rs) | 208.08 | Dec, 09 |
| Sales (Rs crore) | 119.41 | Mar, 10 |
| Face Value (Rs) | 10 | |
| Net profit margin (%) | 33.05 | Dec, 09 |
| Last dividend (%) | 1250 | 13/07/10 |
| Return on average equity | 36.46 | Dec, 09 |
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