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Solid performance to continue

Our view

CRISIL delivered a robust operating performance in Q1 CY22 (4% Revenue/16-17% EBITDA & Earnings beat) characterized by multi-year high revenue growth of 20% yoy and EBITDA margin of 29.6%. The strong growth performance was driven by a) improved growth momentum in domestic ratings business (continuous market share gains), b) sustained traction in GR&RS business underpinned by strong demand for core offerings in research, risk, regulatory support, and transformation, capabilities to tap new opportunities and new client additions, c) strong performance of India Research business on continued buoyancy in capital markets and economic recovery and d) an integrated approach in GBA business driving wallet share gains within key clients and new client additions. Management remains sanguine about growth momentum in global research/benchmarking analytics businesses and about market share in the domestic ratings business.

EBITDA margin was higher 240 bps qoq and 390 bps yoy and the absolute growth in EBITDA was 38% yoy. Margins were slightly suppressed in Q1 CY21 on account of lower profitability of Greenwich (transitional period). The margin expansion came through despite high people cost inflation on account of operating leverage of nonemployee cost. In our view, healthy growth in domestic ratings, traction in high-margin services within GR&RS and significant profitability turnaround in Greenwich (was profitable for whole 2021 after starting with a loss in Q1) have been key margin drivers in recent quarters. As per management, significant room for operating leverage exists in each business and attrition is being managed within the threshold.

We raise earnings estimates by 4-5% across CY22-24 by lifting growth and margin assumptions on the back of strong performance delivery in Q1 CY22 and positive management commentary about concurrent trends in market/wallet share in various businesses and readiness/capabilities to tap evolving opportunities (related to ESG and others). We estimate 15%/23% consolidated revenue/PBT CAGR over CY21-24 and ~400 bps margin expansion through the period. Improved margin and growth will cause RoE to expand by 6 ppt to 38% in CY24. Stock trades at 41x 1-yr rolling fwd. P/E, and its peak valuation has been around 55x in the past seven years. Multiple is expected to re-rate on prospects of substantial RoE expansion. Reiterate BUY and raise 12m PT to Rs4100 (earlier Rs3750).

KEY CON-CALL HIGHLIGHTS

Domestic Ratings Business

Strong growth for CRISIL despite tepid trends in lending markets - continuance of market share gains that started post the IL&FS event  Corp Bond issuances declined by 22-23% in CY21 and Q1 CY22 on rising and volatile interest rates - issuances from NBFC sector, one of the largest issuer segments, were muted - No. of issuers dipped by 26% in CY21

There has been a reduction in the no. of clients (nearly halved) seeking BLR rating in the past 3-4 years due to increase in minimum exposure threshold by large private banks (to near Rs500mn) – but this headwind has fully played out

CRISIL’s analytical rigor and quality of ratings (reflected in long-run avg default rates) has been much superior than other CRAs across rating categories – this is significantly valued by investors and issuers

Stressed assets ratings business while has been growing at a healthy pace, is yet not a material contributor in domestic rating revenue

Surveillance Fees (SF) were 50%+ of CY21 domestic rating revenue - SF are accounted over the life of the bond/loan - Initial Rating Fees (IRF) accounted in the quarter of assignment win

Rack rates for Initial Rating Fees (IRF) at 10 bps for Bond Rating and 4 bps for Bank Loan Rating - but yields are lower than the rack rate – notably, yields have inched-up marginally over the past few years

The mix of new issuers and existing issuers who could be under fee cap can influence the yields on quarterly basis - if new issuers increase in the market, it would positively influence the yield in general - but in India the large 10-15 issuers dominate the market

In case of fee arrangements with the large issuers, it is difficult to segregate BR and BLR revenues due to composite work and fees

Pricing pressure in ratings business has not gone away – co. driving better margins/profitability through market share gains and operating leverage

Have witnessed migration of large corporates from Bond Ratings to Bank Loan Ratings market in recent years

Capex cycle revival would be a key monitorable.

S&P Ratings Support (GAC)

Added new areas of engagements like ESG assessment and analytics surveillance support – broadening of scope/support will continue driving growth

Global Research & Risk Solutions (GR&RS)

Demand for CRISIL’s capabilities in GR&RS business remain high underpinned by market-led changes and regulatory push

Co. witnessing clients’ spending increasing in the areas of non-financial risk, digitalization, transformation, sustainability (ESG), etc. relating to data, research, intelligence, etc. - these are additional business opportunities over traditional requirements - unlocked new opportunities by working closely with customers

Delivered risk transformation projects for global banks – strong traction for core offerings continue

Multiple factors driving margin expansion like stronger growth, cost focus, focus on risk side, etc.

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