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Evalueserve news; CRISIL’s rich valuation justified
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December 11, 2012

Rating Accumulate CMP Rs1,030

Previous Reco Accumulate Target Price Rs1,050
NA NA 5,899 19,387 n n n

Unconfirmed media reports suggest that promoter of Evalueserve (EVS), a KPO firm is looking to sell its stake at valuation of 12-15x CY11 EV/ EBIDTA or $250mn CRISIL trades at a higher EV/ EBIDTA of 26x CY11 which is justified, given its presence in more value added analytics, 25% higher rev/ employee, higher margins and RoCE CRISIL runs much profitable model with EBIDTA per employee in research business higher at USD16,500 vs. USD7,000 for EVS At CMP, CRISIL trades at 26x CY13 EPS with RoE/ RoIC in excess of 50%/ 100% respectively. Maintain ACCUMULATE with price target of Rs1,050

EPS Chg FY13E/FY14E (%) Target Price change (%) Nifty Sensex

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

1M 11 6

3M 13 3

6M 12M -4 -17 18 -1

Media reports suggest exit of promoters from EVS
Some media reports suggest that promoters of EVS, KPO firm are looking to sell its majority stake in the company at valuation of 12-15x CY11 EBIDTA or $250mn. Alongside high end analytics products like buy side/sell side research like IREVNA (CRISIL’s analytics business), EVS also offers data and process analytics.

Relative price chart
1100 Rs % 30 1050 20 1000 10

950

0

About Evalueserve
Evalueserve was incorporated in the year 2000 by Marc Vollenweider, a former Mckinsey professional and Alok Aggarwal, a former IBM employee as a knowledge process outsourcing firm. While the promoters hold 75%, 11% is held by Swiss family office IHAG Holdings, and the rest is owned by employees. The company provides a range of knowledge-based professional research and analytics services for clients worldwide, with offices across India, China, Eastern Europe, and Latin America. The revenue over the last five years has grown at a CAGR of 40% to $105mn in CY11. The employee strength as on CY11 crossed 2600.

900

-10

850 Dec-11

Feb-12

Apr-12 CRISIL (LHS)

Jun-12

Aug-12

Oct-12

-20 Dec-12

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector Non Banking Financial Company CRISIL IB 70 1 70 1,262/ 748 72/ 1,328 34,717 0.6
Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

CRISIL’s richer valuation justified
The reports suggest, the promoters are looking for a valuation of 12-15x CY11 EBIDTA or 2.4x Sales. As per media reports, EVS reported revenues of $105mn, with EBIDTA margin of 19%. Even on overall basis, CRISIL which derives ~50% of the revenue from research quotes at significantly higher 26x CY11 EV/ EBIDTA. CRISIL higher valuation is justified given:

Shareholding Pattern (%)
S'12 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg

J'12 53.0 11.1 16.6 1.6 17.7

M'12 53.1 10.9 16.6 1.6 17.9

§ § §

It is present only in high end work for buy side/sell side research for investment banks, brokerages and financial institutions its revenue per employee is 25% higher at $50000 as against $40,000 for EVS It enjoys higher margins (overall research segment) at 32% as against 19% for EVS with EBIDTA per employees at USD16,500 vs. USD7,600 for EVS

53.0 10.6 16.8 1.7 17.9

Financial Snapshot (Consolidated)
Kashyap Jhaveri kashyap.jhaveri@emkayglobal.com +91-22-66121249 Pradeep Agrawal pradeep.agrawal@emkayglobal.com +91-22-66121340 YEDec CY10 CY11 CY12E CY13E Net Sales 6,284 8,070 10,072 12,901 EBITDA (Core) 2,189 2,625 3,247 4,168 (%) 34.8 32.5 32.2 32.3 APAT 1,645 1,877 2,252 2,788 EPS EPS RoE (%) 48.6 58.4 57.4 52.4 P/E 44.4 38.5 32.0 25.9 EV/ EBITDA 32.8 26.8 21.5 16.5

(Rsmn)

(Rs) % chg 23.2 26.8 32.1 39.8 23.5 15.5 20.0 23.8

P/BV 23.4 21.8 15.9 11.8

Emkay Global Financial Services Ltd.

1

Event Update

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CRISIL

3x EV/ Sales.3 17. Assuming the EBIDTA margins between 20-30%.0 11.5 CRISIL* 77 25 32.7 25% 193.0 9.775 40%# Source: Media reports.235 16.104** 38% Pipal CY10 580 363 1. Emkay Research 20% 193.6 289 -20% Coalition CY12 2500 1162* 2.2-2.625 40. which is 2.2 668 NA Evalueserve CY12/13 13750 5775 2. Exhibit 1: Financial snapshot CY 11.0 2. Emkay Research * CY13 revenue assuming 30% annual growth over CY11 Revenues of Rs688mn # last 5 yrs ** Total of all IREVNA subsidiaries *** CAGR has been calculated from year of acquisition to CY11 Emkay Research December 11.5 25. Emkay Research * also includes CRISIL’s domestic research business Exhibit 2: CP's valuations on EBIDTA EBIDTA (%) Deal value (USD mn) EBIDTA (USD mn) Deal value/EBIDTA (x) Source: Media reports.6 30% 193.9 NA Source: Media Reports.4 5.462 NA 3.2 Exhibit 3: Consideration paid by MCO for CP USD Cash paid Put/call option for non-controlling interest Contingent consideration liability assumed Total Source: Company.0 7.8 1. USDmn Revenues EBIDTA EBIDTA (%) No of employees Revenue per employee ($) EBIDTA per employee ($) Deal value/Sales Deal value/EBIDTA Evalueserve 105 20 19. CRISIL has done lot of acquisitions in this space over last several years which have also been valued in the similar range of 2.0 61.4x CY11 sales.8 193. 2012 2 . (MCO) acquired Copal Partners (CP) which is also into similar business as IREVNA in Q4CY11.5 Copal Partners 50 NA NA 1.1x CY11 revenues.0 EVS deal valuation at par with other historical deals As per the media reports EVS’ promoters are looking for valuation of about $250mn.531 50. CRISIL has acquired these businesses in their initial stages and then scaled them up. Company.619 2.3 732 34% IREVNA CY04 771 331 2.CRISIL Event Update Comparable Copal Partners was sold at much richer valuations Moody’s Corp. Companies.4 12. thus valuing the company at 5.3 3. Company.4 20.2 6. the deal would value CP at 17-25x EBIDTA.000 7.300 38. CP’s revenues for CY11 were estimates at USD50mn by various media reports.500 6. Exhibit 4: Comparative valuation of other deals Rs mn Year of Acquisition Acquisition Cost Revenue at the time of Acquisition EV/ Sales CY11 Revenues CAGR*** CrisInfac CY00 70 30 2.9 21. Emkay Research 125. MCO had acquired 75% economic interest in CP for a total consideration of USD193mn including USD60mn for acquiring a call option to buy residual stake from minority shareholders.

405 333 539 3. 2012 3 .8 2.4 39.242 1.674 342 595 938 -1.1 36.0 26.673 3.455 -1.247 2.070 28.534 0 0 0 0 -292 4.587 2.7 87.487 2.815 5.681 CY11 2.4 32 559 3.4 32.611 133 925 1.598 -1.733 1.7 26.048 3.082 2.1 1.029 178 115 293 0 0 0 -886 CY12E 2.0 23.4 85.4 5.139 4.4 CY13E 12.110 -499 1. mn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position -2.79 46.177 CY12E 70 4.3 32.8 1.673 3.1 32.788 0 2.445 935 3.853 2.9 33 298 2.6 86.9 2.0 178 0 2.8 26.7 11.8 21.238 3.977 879 928 539 2.977 CY11 70 3.0 38.2 32.6 CY10 CY11 CY12E CY13E Emkay Research December 11.5 64.0 34.5 25.490 4.8 30.768 1.6 133 0 2.5 23.928 994 2.645 21.4 44.0 32. mn) Net Sales Growth (%) Expenditure Materials Consumed Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adjusted PAT After JV/MI E/O items Reported PAT Growth (%) 1.1 4.064 -0.CRISIL Event Update Key Financials (Consolidated) Income Statement Y/E.524 -1.594 6 159 4.1 11.755 691 25.645 560 2.1 23.5 57.028 5.159 3.252 20.096 793 2.082 48.6 78.319 534 1.4 11.171 31.927 30.430 2.949 Balance Sheet Y/E.625 19.2 22.3 16.481 5.5 23.1 15.0 10.4 117.242 CY13E 70 6.418 2.927 1.0 1.065 262 0 262 -1 0 0 -1.869 318 0 318 0 0 0 -1.581 928 2.189 16.081 1.6 Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Total Assets 1.904 337 -1 -262 255 -934 3.901 28.1 1.0 28.808 2.4 21.119 0 0 0 0 -142 2. Dec (Rs.291 2.424 1 262 3.222 Key Ratios Y/E Dec Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) 44.109 33.8 47.825 1.0 2.677 462 1.5 262 0 3.8 5.669 587 22. Dec (Rs.927 559 0 -318 288 -1.222 CY13E 3.4 108.177 1.5 33.308 0 0 0 0 -131 3.072 24.491 213 -3 -559 -194 -650 2.4 107. mn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities CY10 71 3.9 22.2 CY11 8.2 26.3 81.3 26.788 21.0 22.921 2.536 789 1.493 298 -3 -164 665 -689 3.2 20.223 -431 938 507 -1.443 6 159 4.622 6 159 5.3 21.9 35 213 2. Dec (Rs.287 10.275 -851 1.086 587 510 1.2 64.4 58.168 28.173 4.2 15.284 22.494 1.976 3.058 0 0 0 -1.222 -174 507 333 CY10 2.808 Cash Flow Y/E.478 -314 910 595 -1.097 507 539 2.5 1.0 2.7 48.8 2.011 -1.139 29.9 CY10 6.293 -264 3.5 1.7 32 337 3.8 8.552 -1.9 21.616 687 2.4 318 0 3.877 250 2.1 39.575 3.877 14.788 23.030 6.464 4.100 0 0 0 0 -292 5.252 50 2.505 31.8 6.1 52.247 23.326 2.221 934 29.3 CY12E 10.9 6.1 8.139 1.3 32.428 4.484 4.

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