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Soft growth in GR&RS and GAC; overall margins were lower too

CRISIL delivered a significant miss on our Revenue/EBITDA/PAT expectations owing to revenue decline in GR&RS, flattish-to-marginal revenue growth in GAC and growth deceleration in Domestic Ratings. Consolidated revenue growth at 3.2% yoy was materially lower than our estimate of 10% yoy, and consolidated EBITDA margin at 26% was significantly below our estimate of 29% (qoq/yoy margin performance was weak even adjusted for currency movements and forex gains/losses). Margins in Ratings segment improved on increased share of Domestic Ratings, while margins in RAS segment declined steeply (essentially driven by GR&RS business and not GBA and MI&A). Lower EBITDA, lower other income (in context of preceding two quarters) and higher tax rate (30% v/s usual 24-25%) caused PAT to be 20%+ lower than our expectation for the quarter.

Tepid spend sentiment impacted GR&RS; GBA had a good quarter

CRISIL ascribed revenue growth weakness in GR&RS to slower decision making and curtailed discretionary spending by global banks and financial institutions, and some impact from the global M&A activity witnessed last year. Management denied any role of market share/wallet share loss and competition in the soft growth trends reported during recent quarters. Spend uncertainty/hesitancy of clients is impacting pipeline conversion/execution, timely renewals and role expansion (new mandate), even as new client addition continues. Though spend sentiments are anticipated to remain moderate for next few months, management alluded that full-year growth performance of GR&RS business could be much better than the first quarter. CRISIL has put in place a business strategy and offering/solution pipeline to mitigate the impact of slowdown, which will help in improving share in existing clients and add new clients.

GBA business witnessed strong demand for its solutions as the macro uncertainty and perceived stress increased clients’ need for benchmarking analytics. CRISIL also has been demonstrating strong progress on its strategy of increasing client penetration and new client addition through existing offerings and new initiatives. Management is reasonably confident of sustaining the growth momentum in this business with underlying dynamics largely immune to macros.

Dominance in Domestic Ratings; no change in GAC’s engagement

Ratings segment (~25% of Consol. Rev.) revenue growth decelerated to 8.4% yoy from 18% yoy in Q4 CY23 and 16% yoy for CY23. Domestic Ratings growth slowed to 12% yoy (15.5% yoy in Q4 CY23 and 17% yoy for CY23) on account of reduced growth in bond issuances and modest corporate credit growth. CRISIL maintained its dominant share in Bond Ratings and its premium pricing. GAC’s growth (analytical support to S&P Global) in Q1 CY24 was much lower (flattish-to-marginal) than preceding quarter (~20% yoy) and full-year CY23 (~15% yoy). Management expects better growth performance for the year as company has expanded its engagement with the parent over the years and structurally nothing has changed.

Earnings estimates undergo material cut; rate Neutral

We have cut CY24/25 earnings estimates by 10%/11% by lowering both revenue and margin expectations, factoring risks of continued soft growth in GR&RS and GAC and consequent margin challenges. However, it is noted that CRISIL performs resiliently over longer timeframes even during subdued macro phases. To mitigate the impact of low growth on margins, the company has some levers like management of headcount addition/backfill, bench utilization and productivity, tech interventions, IP-led offerings, and tweaking pricing if required. Hence, the management harbors expectations of grow margins across businesses on longer timeframes. Stock trades well above its long-term mean valuation and can underperform given the likely persistence of moderate growth in near term

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