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All eyes on growth in Global Businesses

We interacted with CRISIL to get a closer perspective on its latest quarterly performance and on growth and margin outlook across key business segments. While growth traction has been strong in domestic ratings and S&P ratings support (GAC) businesses, there is near-term uncertainty in global businesses (particularly benchmarking analytics). The latter could weigh on company’s growth in the current year given its large contribution in revenue. Despite factoring stronger growth in ratings segment and inherent hedge from varied offerings in global businesses, we prune revenue growth estimates for CY23/24.

While EBITDA margin in global businesses would be impacted by growth slowdown, the margin expansion in domestic ratings, revenue mix shift towards ratings segment, modularity in employee cost and measured hiring (not filling attrition) would help in managing margins. We still believe that a calibrated margin expansion is possible over the coming years. We now estimate 15% earnings CAGR over CY22-25 with RoE reaching 34-35% in CY25 assuming stable dividend payout. Rate the stock as Neutral and the upside risk to our view will be further uptick in ratings growth and improved growth visibility in global businesses.

Growth in Global Businesses could remain moderate in near term

Adjusted for currency movements, the revenue growth in global businesses (GR&RS and GBA) significantly decelerated to 6-7% yoy in Q2 CY23 versus 10-12% yoy in preceding quarters. The co. attributes this slowdown to sudden spending caution exhibited by global banks, primarily regional and commercial banks, which has impacted execution timelines and pipeline conversion. A bigger impact has been felt in GBA business as against in GR&RS business where main clients are large global banks. Factors like competition, market/wallet share loss, pricing pressure or client loss/attrition has not had any role in growth deceleration seen in the recent quarter. However, weakened sentiments can impact the flow of new assignments and client addition and the pricing of new business and renewals in the short term

Strong growth in domestic ratings and GAC

Domestic ratings business witnessed significant growth acceleration in Q2 CY23 (23% yoy growth v/s 17%/9%/11%/20%/13% in Q1 CY23/Q4/Q3/Q2/Q1 of CY22) aided by 1) higher volumes across sectors (NBFC, HFC, Infra, etc.), 2) robust growth in bond issuances (CRISIL has dominant share in Bond Ratings which is also better yielding) and 3) strong growth in surveillance fees (focus on full realization). While the competition has revived, CRISIL remains steadfastly committed to its distinguished pricing and its pursuit for upping pricing wherever suitable

Revenue growth at Global Analytical Centre (S&P ratings support) has not been far behind the domestic ratings business in H1 CY23 and was markedly higher than 9-10% growth in CY22. The main drivers of growth were significant ratings traction witnessed by S&P Global, increased engagement in newer areas like ESG, risk transformation and few others, and cost inflation/currency movement. GAC’s revenue has grown in high single digits on an average over a longer run.

Overall margin can witness gradual improvement

Notwithstanding the sudden growth slowdown and margin decline (adjusted for forex loss) in global businesses, CRISIL’s EBITDA margin was 1.7 ppt higher yoy in Q2 CY23 owing to significant margin improvement in ratings segment and its higher revenue contribution. Operating leverage from stronger business volumes, revived traction in higher-margin Bond Ratings business, sustenance of pricing premium and focus on surveillance fee realization drove a material expansion in domestic ratings margin. Co. sees further headroom for operating leverage in domestic ratings business. Revenue mix may also keep shifting towards the ratings segment with growth remaining moderate in global businesses. The margin defense in the latter segment can come from modularity in employee cost, re-deployment of the bench and measured hiring (not filling attrition).

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