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Superlative performance raises outlook

* Our bullish stance on CRISIL is predicated on a) strong market position in domestic rating business ensuring greater participation in likely cyclical revival, b) diversified revenue mix with significant contribution of resilient high-margin analytics, risk and research services, c) improving margins (estimate ~250 bps improvement over CY20-23), d) estimated escalation of dividend payouts and RoE, and e) robust corporate governance. We recently raised CY21-23 revenue growth and margin assumptions on the back of superlative performance in Q3 CY21 and positive feeds from our latest management interactions. The revenue, EBITDA and earnings are estimated to witness a CAGR of 14%, 18% and 21% respectively. Despite the recent run-up in stock price, CRISIL’s valuation (39.7x 1-yr roll. fwd. P/E) is well below its trailing 5-6 year peak and thus we expect re-rating to continue with strong visibility of growth and margin expansion. Estimate CRISIL to deliver decadal high RoE of 37-38% in CY23. Have a BUY with 12m PT to Rs3750.

* Management is cautiously optimistic on domestic rating revenue growth on the back of improving consumption/demand, investment sentiment and capital appetite. Retail credit growth has been picking up and activity in Bond, CP and Securitization markets has been improving both in terms of quantum and the no. of issuers. CRISIL is a significant market leader in the non-Bank Loan Rating segment and has been comfortably holding on to the market share gained in the past three years. It does not envisage any threat to its premium pricing as well. The scope of work done for the parent SPGI has been expanding beyond rating support to arears like transformation projects; providing legs for faster growth.

* All three businesses in the Research segment, GR&RS (Global Research & Risk Solutions), GBA (global benchmarking analytics i.e. Coalition and Greenwich) and Domestic Research are witnessing strong growth. Management expects GR&RS business to keep growing in double-digits driven by sustained traction in services like model risk, traded risk, non-financial risk, etc. CRISIL has started cross-selling/offering end-to-end benchmarking analytics services (provided by Coalition and Greenwich combined) to clients (Global & Tier-1 Banks), and the adoption of this value proposition would be a significant growth and margin lever for the GBA business. The targeted offshoring of Greenwich operations would be complete by end CY21, and the co. has achieved PAT breakeven in past two quarters.

* As per CRISIL, sustainability and ESG would open significant medium term growth opportunities for most of its businesses. The company-level EBITDA margin is expected to improve in each of the coming years (already 9m CY21 margin is up 130 bps yoy) with significant scope for operating leverage across business segments. Dividend payout has been increased in the past three years and the co. is not looking at another acquisition at this point. We estimate RoE expansion of 600- 700 bps over CY21-23.

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