Sunday, March 9, 2014

CRISIL

BSE: 500092|NSE: CRISIL|ISIN: INE007A01025

Another Sensex and NIFTY beating name - CRISIL is the largest rating agency in India with 65% market share. It is uniquely positioned to take advantage of India's knowledge economy to export financial services and to provide world class financial services with the experience of S&P in India.

Keep it on your radar and buy when its cheap. Currently a bit rich.



1. How big is the Moat?


A+ Grade moat.


CRISIL has the first mover advantage in India and the backing of S&P. They research and analytics wing is the largest money spinner - services which are easier to sell if you have a massive ratings brand. As the securitized markets grow in India (which they have to with the bank lending system increasing credit yearly) CRISIL's earnings have to go up - and they are the gold standard.



2. Performance during recessions

Financial research of the type CRISIL is in is required for Banks to function and for funds to make bets on Bonds and other instruments. This is pretty much as recession proof as it gets (short of being Coke, Pepsi, Proctor and Gamble or something like that)


3. Financials


  • CFO vs Net income - checks out. Barely any large differences
  • Exceptional items - none.
  • Inventories are irrelevant - Rent 
  • Margins: Have shrunk a bit from 27% to 22% (without extraordinary items)
  • ROE/ROCE: Has shrunk from 50%+ to 37% based on ROE on balance sheet invested capital. But rent should be considered as per cap rate so that actual invested capital can be derived. After assuming a cap rate of around 9% the ROE becomes 25%.
  • Debt: Zero. Cash rich company. If you consider rent as a Cap rate payout on the real estate value Debt would be derived to be around 500 Crores which would put it at a Debt to EBITDA of 0.9 which is not high either.
  • Debtors as % of sales have gone down from aroudn 15% to 11% which is excellent. Implies a credit period of around 30 to 45 days. Debtors % of EBITDA has gone down from 43% to 33% which is fairly healthy too.
  • There is 35 Crores or so of goodwill that has been recognized which sounds like some financial shenanigans to me - as they are capitalizing brand value, customer relationships and non-competes - which are all good but in my opinion should be written down. Rest of the good will on acquisition of subsidiaries is probably ok. (315 Crores or so)



4. Soft factors & growth


  • Promoter shareholding - S&P group & Mcgrawhill own 52.98% which is good.
    • Individuals hold 17%+, FIIs own 10%+ which means that the stock volatility might be high.
    • Mutual funds only own 7%
    • Many of the directors dont own shares which is not a good sign.
    • This is a large position for RARE enterprises which is great news for cloning.
  • Employee relations and training seems to be done well
  • Growth - this company is going to grow rapidly. The opportunities in front of it are immense. As the financial markets in India develop the indian sales will go up. As the talent pool grows they will be able to export their services as well.

5. Pricing


Current prices on CRISIL are very high relative to historic prices. Without extrodinary items profit in CY 2013 was 251 Crores and current market cap is around 8400 crores which gives it a P/E of 33 - which is high even for a stock like CRISIL. The reason for this is probably because the stake sale of IISL is being accounted for as actual operating margin by the market. I would be buying this at around 900 INR/share. This is a great company which is too expensive for my liking at the moment. That said people owning this stock are probably going to continue to make good returns - I just feel that the downside risk is not very protected and that the risks are more than what they seem for the price.

Just as an afterthought it feels weird to compare the performance of the maker of the NIFTY to the NIFTY.