Crisil Ltd.

Initiating Coverage
Crisil Ltd.

March 31, 2022

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Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value Time Horizon

Credit Rating Rs 3387 Buy in Rs 3380-3420 band & add more on dips to Rs 3000-3040 band Rs 3703 Rs 3942 2 quarters

HDFC Scrip Code CRISILEQNR Our Take:

BSE Code 500092 Crisil is the oldest and a leading domestic credit rating agency in India. The company has diversified over the years and ventured into
NSE Code CRISIL research and analytics and advisory services. The research segment has grown largely through inorganic acquisitions and accounts for
Bloomberg CRISIL IN ~65% of consolidated revenue. The diversification has been geographic as well with offices in Argentina, Australia, China, Hong Kong,
CMP Mar 30, 2022 3387.1 Poland, Singapore, Switzerland, UAE, UK and USA. It is majorly owned by by S&P Global which is world's foremost provider of transparent
Equity Capital (Rs cr) 7.3 and independent ratings, benchmarks, analytics, data, research, commentary and ESG solution. This helps the company in getting a lot of
Face Value (Rs) 1 business from the parent. Being the best-in-class industry leader it delivers a diversified revenue mix, superior margins, solid return ratios,
Equity Share O/S (cr) 7.3 and free-cash-flow yield.
Market Cap (Rs cr) 24713
Book Value (Rs) 216.5 The outlook of the domestic credit rating agencies has been improving given the low interest rates, incentives by Government to MSME
Avg. 52 Wk Volumes 77,000 sector and easy availability of finance for retail consumers. Corporates have continued their trend of deleveraging for the sixth straight
52 Week High (Rs) 3496.0 year in FY21, uninterrupted by cash-flow disruptions and emergency funding requirements caused by the pandemic. Now as the economy
52 Week Low (Rs) 1742.4 revives on back of favourable macros, we expect aggregate corporate borrowings to increase which bodes well for the rating business.

Share holding Pattern % (Dec, 2021) Diversified revenue mix, levers for margin expansion, and solid return ratios have seen CRISIL's valuation multiplies stay at a premium and
Promoters 66.9
to its peers. Preference for quality has seen investors/lenders prefer CRISIL, propelling it to be the best play in an otherwise crowded
Institutions 13.2
rating space.
Non Institutions 19.9
Total 100.0
Valuation & Recommendation:
CRISIL’s superior rating standards, diversified and innovative product offerings and strong analytics skills has enabled it to emerge as the
strongest credit rating agency (CRA) across business cycles. Improving corporate capex and additional levers with ESG ratings, has
improved the outlook for the domestic ratings business. We expect CRISIL’s revenue/EBITDA/PAT to grow at 13/15/18% CAGR over CY21-
CY23E, led by improving macros, market share gains, cost rationalization, and synergies from acquisitions. It is likely to trade at a premium
to its peers given its strong parentage, return ratios and diversified revenue mix. We believe investors can buy the stock in Rs 3380-3420
* Refer at the end for explanation on Risk Ratings
band and add on dips to Rs 3000-3040 band (38x CY23E EPS) for a base case fair value of Rs 3703 (46.5x CY23E EPS) and bull case fair
Fundamental Research Analyst value of Rs 3942 (49.5x CY23E EPS) over the next 2 quarters.
Atul Karwa
[Link]@[Link]

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Financial Summary
Particulars (Rs cr) Q4CY21 Q4CY20 YoY (%) Q3CY21 QoQ (%) CY20 CY21 CY22E CY23E
Operating Income 706 597 18.2 571 23.7 1,982 2,301 2,608 2,897
EBITDA 193 154 24.9 147 31.4 511 606 694 782
APAT 134 110 22.1 113 19.0 355 431 504 580
Diluted EPS (Rs) 18.4 15.2 21.6 15.5 18.9 48.9 59.2 69.1 79.6
RoE (%) 28.6 29.8 30.5 32.0
P/E (x) 69.3 57.2 49.0 42.5
EV/EBITDA (x) 47.2 39.5 34.3 30.0
(Source: Company, HDFC sec)

Q4CY21 Result Update

CRISIL posted strong growth across the board in Q4CY21. Net Sales increased by 18.2% YoY to Rs 706cr led by 21.5% growth in research
revenue to Rs 494cr. Rating and advisory revenues increased 9.5/17.6% respectively to Rs 165/47cr. EBITDA grew 24.9% to Rs 193cr and
EBITDA margin expanded 147bps YoY to 27.3% on better operating leverage. PAT grew by 53.2% YoY to Rs 169cr and PAT margin stood at
23.9% aided by sale of immovable property. Adjusting for the exceptional item, Adj. PAT was up 22.1% and APAT margin expanded 60bps to
19%.

The Board of Directors have recommended a final dividend of Rs 15 per share and a special dividend of Rs 7 per share taking the total
dividend for the year to Rs 46 per share.

Activity in the lending markets improved in line with economic recovery. Companies increasingly sought to refinance debt and strengthened
their liquidity positions. Ratings business segment saw increased penetration in the mid-corporate segment and traction for stressed asset
offerings. In Research, the Global Research & Risk Solutions (GR&RS) business saw client wins and continued to grow through the December
quarter. Domestic research business witnessed growth following the pick-up in economic activity. The Advisory segment bagged large wins
from multilaterals and expanded its overseas clients’ footprint. The Global Analytical Centre (GAC) business stepped up support for
surveillance, new issuances and transformation projects to S&P.

Key Triggers
Improving macros, low interest rates to drive higher credit demand
Moody’s expects India’s economy to continue to recover in the next 12-18 months, with GDP growing 9.1% in CY22 and projected that the
Indian economy will grow at 5.4% during the CY23. The agency noted that the speed of the recovery from the first lockdown-led contraction

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in Q22020, and subsequently in Q22021 during the Delta wave was stronger than expected, and the economy is estimated to have
surpassed the pre-Covid level of GDP by more than 5% in the last quarter of 2021. With demand picking up across the economy, activity in
the lending markets is improving and there are increasing signs of companies enhancing their bank lines and seeking refinancing.

Credit growth, which had been languishing through 2021 due to Covid-19 and also deleveraging of balance sheets by large corporates, has
been recovering as indicated by the RBI data. Increasing credit would drive higher demand for ratings, benefitting rating agencies like
CRISIL. Amid a spike in credit offtake by the industry, non-food bank credit saw 8.3% YoY growth in January, much above the 5.9% level a
year ago, as per latest RBI data. The RBI said credit growth to industry rose 6.4% in January from 0.7% in the same month last year.

India Ratings & Research expects credit growth to clock 10% in 2022-23 for the first time since 2013-14 when it had hit 14%. It has however,
reduced its estimate for the current fiscal ending March 2022 to 8.4% from 8.9%.

Credit growth has started to pick up across sectors

(Source: RBI, HDFC sec)

Deepening of bond market bodes well for credit rating agencies

SEBI is looking at several reforms to deepen the bond market, including creating a set of "market makers" and setting up a backstop facility
to purchase investment grade debt securities in stressed as well as normal times. The other major reform in the pipeline is setting up of a

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Limited Purpose Clearing Corporation for repo in corporate bonds. As per trends in the corporate bond market, around 97-98% of the
corporate bonds are issued through the private placement route and around 90% of the issuances are of 'AA' and above ratings. Trading in
the secondary market lacks depth and is largely dominated by mutual funds.

SEBI has taken certain initiatives and some more are in the pipeline. The measures taken by the regulator include limiting the number of
ISINs (International Securities Identification Numbers) in a year, mandating certain minimum borrowing through bonds for large borrowers
and introducing RFQ (Request for Quote) platform to improve pre and post-trade transparency.

The reforms will help in bringing liquidity and stability to the corporate debt market, address risk aversion during times of stress specially for
securities rated below AAA, help in building confidence of market participants in the secondary market and create liquidity options for
investors at large.

With higher number of participants and more liquidity, issues in the bond market are likely to increase leading to higher rating business for
rating agencies.

Increasing NPA levels beneficial for the company

After sharp increase in corporate led NPAs and subsequent write-offs, overall NPA levels were on an improving trajectory. However, CRISIL
estimates that Indian banks are likely to see a rise in gross non-performing assets (NPA) to 8-9% of total lending at the end of this fiscal year
from 7.5% last year. The rise will be led by retail clients and the micro, small and medium (MSME) segments. Stressed assets in these
segments are seen rising to 4-5% and 17-18%, respectively. For rating companies this is positive in the long-run, and is likely to increase the
volume of business in the coming years as the number of MSME has been increasing.

Inorganic growth in Research segment

As a natural extension to its ratings business CRISIL had forayed into research and has grown significantly through acquisitions. It is regarded
as India's largest independent integrated research house, providing insights, opinion and analysis on the Indian economy, industry, capital
markets and companies. The research business covers 86 sectors with nearly 1,000 Indian and global clients, including 90% of India’s
banking industry by asset base, 15 of the top 25 domestic companies by market capitalisation, all domestic mutual fund and life insurance
companies, and 4 of the world’s leading consulting firms.

CRISIL operates on asset-light model and generates huge cash. Effective utilisation of cash is vital to ensure earning sufficient RoEs on this
cash. CRISIL has at regular intervals resorted to acquisitions in the research business which has resulted in diversification in revenues while
also being RoE accretive.

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Shift in preference of corporate borrowers

Due to default by many big corporates resulting in liquidity crisis, bank have become stricter in lending to corporates. Close watch is being
kept on risky accounts so that preventive measures can be taken before the account turns into NPA. Consequently, sound corporate
borrowers have found alternate ways to raise funds like non-convertible debentures, company deposits, commercial papers, etc. This has
opened up another source of revenue for the credit rating agencies as these instruments also need to be rated.

Risks & Concerns

Delay in economic revival
Rating revenue of credit rating agencies are dependent on economic growth which would drive higher volumes. Delays in the economic
revival post the pandemic can impact revenue growth from ratings segment.

Rating standards and quality

Rating reports are used by lenders to determine the financial viability of the entity. Failure by the company to maintain the quality of rating
could result in loss of trust and impact growth.

IRB based approach by banks

If Banks whose clients avail Credit Rating Services under the Basel II framework migrate to the internal rating based (IRB) approach for
Credit risk, it could have an adverse effect on the company’s revenue and profits.

Regulatory scrutiny
Credit rating agencies (CRAs) have come under regulatory scrutiny in the wake of loan defaults by leading corporates. To enhance CRAs’
rating process and quality of disclosures, SEBI keeps prescribing higher disclosure of data by CRAs. This apart CRAs come under scrutiny of
regulators and are also fined for lapses that may not be fully attributable to them.

Increasing competition
There are three major established players in the Indian credit rating market and over the last few years many new players have entered the
market, thereby increasing competition. Many clients look for the best deal they can get reducing the bargaining power of credit rating
agencies.

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Retention of employees, a challenge
Employees are the core asset for a credit rating agency and hence retaining them is crucial. While CRISIL remains the best paymaster, the
risk of employee movement can expose it to risks of attrition, retraining and reskilling.

Company Background:
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. It is amongst India's leading ratings
agency and the foremost provider of high-end research to the world's largest banks and leading corporations. CRISIL is majority owned by
S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity
markets worldwide.

With a strong track record of growth, culture of innovation and global footprint it has delivered independent opinions, actionable insights
and efficient solutions to over 100,000 customers. Its businesses operate from India, Argentina, Australia, China, Hong Kong, Poland,
Singapore, Switzerland, the United Arab Emirates (UAE), The United Kingdom (UK) and the United States of America (USA).

Businesses
Crisil Ratings pioneered credit rating in India in 1987, and has emerged as a leader with independent, analytical rigour and innovation in
ratings. Its capabilities span the entire range of debt instruments. Through its Global Analytical Centre (GAC), it provides analytical,
research and data services to S&P Global Inc. GAC operates as a centralised research and analytics hub for S&P Global Ratings Services
(SPGRS) teams spread across the US, EMEA and APAC regions.

CRISIL Research segments

Global Research & Analytics (GR&A) is in the business of providing solutions to leading investment and commercial banks, private equity
players, hedge funds, and asset management and insurance companies globally. It has offshore delivery centres in Argentina, China, India
and Poland and onsite delivery centres in London, Melbourne, Sydney, and New York, supporting clients across time zones and languages.
It has made significant investments in technology and has developed utilities, platforms, tools, and frameworks catering to various client
requirements.

CRISIL Coalition provides objective research and high-end analytics to support strategic and tactical decision-making across four areas:
competitor analytics, financial resources analytics, client analytics, and country analytics.

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Greenwich Associates: Acquired in 2020 Feb’2020 for a consideration of US$40mn, it is a leading global provider of data, analytics and
insights to the financial services industry. It specialises in providing unique high-value data and actionable recommendations to help our
clients improve their business results.

CRISIL Infrastructure Advisory provides a comprehensive range of advisory services in urban, energy and natural resources, transport and
logistics, and infrastructure financing across India and other emerging countries to governments, multilateral agencies, investors, large
public and private sector firms.

Revenue breakup

(Source: Company, HDFCsec)

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Segmental Performance
(Rs cr) Q4CY21 Q4CY20 YoY (%) Q3CY21 QoQ (%) CY21 CY20 YoY (%)
Revenue
Rating Services 165 151 9.5 154 7.4 604 565 6.9
Advsiory Serices 47 40 17.6 36 31.3 153 134 14.0
Research & Information Services 494 407 21.5 382 29.5 1544 1283 20.3
Revenue Share (%)
Rating Services 23.4 25.2 -186 bps 26.9 -354 bps 26.3 28.5 -225 bps
Advsiory Serices 6.6 6.7 -3 bps 6.2 39 bps 6.6 6.8 -12 bps
Research & Information Services 70.0 68.1 189 bps 66.9 315 bps 67.1 64.7 237 bps
EBIT
Rating Services 66 58 13.8 64 2.4 253 226.7 11.5
Advsiory Serices 9 6 37.5 1 990.1 17 10.1 64.8
Research & Information Services 108 71 51.2 84 28.7 324 209.0 55.1
EBIT Margin (%)
Rating Services 40.0 38.5 150 bps 41.9 -194 bps 41.8 40.1 171 bps
Advsiory Serices 18.9 16.1 274 bps 2.3 1661 bps 10.9 7.5 335 bps
Research & Information Services 21.7 17.5 427 bps 21.9 -13 bps 21.0 16.3 470 bps

Peer Comparision
CMP Mcap EPS OPM PATM RoE D/E P/E P/B
(FY21)
(Rs) (Rs cr) (Rs) (%) (%) (%) (x) (x) (x)
CRISIL (CY21) 3387 24713 59.1 26.3 18.7 27.3 0.0 57.2 15.6
ICRA 4102 3959 84.6 26.9 27.1 10.8 0.0 48.5 5.2
CARE Ratings 508 1505 30.2 38.6 36.0 15.2 0.0 16.8 2.6

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Financials
Income Statement Balance Sheet
(Rs cr) CY19 CY20 CY21 CY22E CY23E As at March (Rs cr) CY19 CY20 CY21 CY22E CY23E
Net Revenues 1732 1982 2301 2608 2897 SOURCE OF FUNDS
Growth (%) -1.0 14.4 16.1 13.4 11.1 Share Capital 7 7 7 7 7
Operating Expenses 1276 1471 1695 1914 2114 Reserves & Surplus 1165 1305 1571 1722 1896
EBITDA 456 511 606 694 782 Shareholders' Funds 1172 1312 1578 1730 1904
Growth (%) -3.3 12.0 18.6 14.5 12.7 Minority Interest 0 0 0 0 0
EBITDA Margin (%) 26.3 25.8 26.3 26.6 27.0 Total Debt 3 0 0 0 0
Depreciation 37 121 106 103 100 Net Deferred Taxes -43 -64 -59 -59 -59
Other Income 73 83 82 91 104 Total Sources of Funds 1132 1248 1519 1670 1844
EBIT 492 473 582 682 786 APPLICATION OF FUNDS
Interest expenses 0 14 9 9 10 Net Block & Goodwill 349 763 661 598 539
PBT 492 458 618 673 776 CWIP 12 14 5 3 1
Tax 148 104 153 170 196 Investments 453 476 645 795 970
PAT 344 355 466 504 580 Other Non-Curr. Assets 120 112 149 182 208
Share of Asso./Minority Int. 0 0 0 0 0 Total Non Current Assets 933 1364 1460 1577 1718
Adj. PAT 344 355 431 504 580 Debtors 199 307 399 414 436
Growth (%) -5.3 3.1 21.6 16.8 15.2 Cash & Equivalents 346 279 294 331 449
EPS 47.6 48.9 59.2 69.1 79.6 Other Current Assets 168 193 291 329 361
Total Current Assets 713 779 984 1074 1247
Creditors 75 105 134 135 157
Other Current Liab & Provisions 439 789 792 846 963
Total Current Liabilities 514 895 925 981 1120
Net Current Assets 199 -116 59 93 126
Total Application of Funds 1132 1248 1519 1670 1844

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Cash Flow Statement Key Ratios
(Rs cr) CY19 CY20 CY21 CY22E CY23E CY19 CY20 CY21 CY22E CY23E
PBT 492 458 618 673 776 Profitability Ratios (%)
Non-operating & EO items -14 -21 -70 -31 -26 EBITDA Margin 26.3 25.8 26.3 26.6 27.0
Interest Expenses -7 10 -1 9 10 EBIT Margin 28.4 23.9 25.3 26.2 27.1
Depreciation 37 121 106 103 100 APAT Margin 19.9 17.9 18.7 19.3 20.0
Working Capital Change 84 57 -54 1 85 RoE 29.8 28.6 29.8 30.5 32.0
Tax Paid -146 -125 -197 -170 -196 RoCE 42.5 38.0 40.2 41.3 43.3
OPERATING CASH FLOW ( a ) 446 500 403 585 750 Solvency Ratio (x)
Capex -28 -34 27 -37 -40 Net Debt/EBITDA -0.8 -0.5 -0.5 -0.5 -0.6
Free Cash Flow 418 466 430 548 710 Net D/E -0.3 -0.2 -0.2 -0.2 -0.2
Investments -56 -44 -130 -150 -175 PER SHARE DATA (Rs)
Non-operating income 6 -222 15 0 0 EPS 47.6 48.9 59.2 69.1 79.6
INVESTING CASH FLOW ( b ) -77 -300 -88 -187 -215 CEPS 52.7 65.5 73.7 83.2 93.4
Debt Issuance / (Repaid) 0 0 0 0 0 BV 162.1 180.7 216.5 237.2 261.1
Interest Expenses 0 0 0 -9 -10 Dividend 32.0 33.0 46.0 48.4 55.7
FCFE 368 200 315 389 525 Turnover Ratios (days)
Share Capital Issuance 23 35 44 0 0 Debtor days 51.0 46.7 56.0 56.9 53.6
Dividend -252 -232 -276 -353 -406 Creditors days 14.8 16.7 19.0 18.8 18.4
Others 0 -68 -58 0 0 VALUATION (x)
FINANCING CASH FLOW ( c ) -229 -265 -291 -362 -416 P/E 71.2 69.3 57.2 49.0 42.5
NET CASH FLOW (a+b+c) 140 -64 24 36 118 P/BV 20.9 18.7 15.6 14.3 13.0
EV/EBITDA 52.9 47.2 39.5 34.3 30.0
Price chart EV/Revenues 13.9 12.2 10.4 9.1 8.1
Dividend Yield (%) 0.9 1.0 1.4 1.4 1.6
Dividend Payout (%) 67.3 67.5 77.8 70.0 70.0
(Source: Company, HDFC sec)

(Source: Company, HDFC sec)

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HDFC Sec Retail Research Rating description

Green Rating stocks
This rating is given to stocks that represent large and established business having track record of decades and good reputation in the industry. They are industry leaders or have significant market share. They have multiple streams of cash flows and/or strong balance sheet to withstand downturn in
economic cycle. These stocks offer moderate returns and at the same time are unlikely to suffer severe drawdown in their stock prices. These stocks can be kept as a part of long term portfolio holding, if so desired. This stocks offer low risk and lower reward and are suitable for beginners. They offer
stability to the portfolio.

Yellow Rating stocks

This rating is given to stocks that have strong balance sheet and are from relatively stable industries which are likely to remain relevant for long time and unlikely to be affected much by economic or technological disruptions. These stocks have emerged stronger over time but are yet to reach the
level of green rating stocks. They offer medium risk, medium return opportunities. Some of these have the potential to attain green rating over time.

Red Rating stocks

This rating is given to emerging companies which are riskier than their established peers. Their share price tends to be volatile though they offer high growth potential. They are susceptible to severe downturn in their industry or in overall economy. Management of these companies need to prove
their mettle in handling cyclicality of their business. If they are successful in navigating challenges, the market rewards their shareholders with handsome gains; otherwise their stock prices can take a severe beating. Overall these stocks offer high risk high return opportunities.

Disclosure:
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Any holding in stock – No
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