NEUTRAL

NBFCs
India FEBRUARY 21, 2017
UPDATE
BSE-30: 28,662

CRISIL: Analyst meeting notes- Research drives growth; ratings subdued. Weak
capex, low growth in mid-corporate segment, stricter norms in implementation of SME
ratings and strong competition have affected the prospects of CRISIL’s ratings business.
Momentum in its fast-growing research business (65% of revenue) through Irevna and
Coalition was tempered down declining global IB revenue pool and competition from
captive offshore research. Development of the corporate bond market in India and
mandate for higher rating requirements will boost domestic business over the medium-
term.

QUICK NUMBERS
Key takeaways from CRISIL’s analyst meeting

Research drives growth. CRISIL delivered 13% revenue and 10% earnings CAGR during  Ratings business has
CY2011-16. Research drove this growth with 18% revenue CAGR compared to 7% for the 29% revenue
ratings business. Contribution of the research business has increased to 65% of revenues contribution;7%
compared to ~50% five years ago, with the share of ratings declining to 30% from 40% five revenue CAGR
years ago. during CY2011-16
Margin headwinds persist. CRISIL’s overall margins have steadily declined over the past few
 High (18%) revenue
years to 31% in CY2016 from 36% in CY2011. Notably, ratings and advisory businesses have
CAGR during
seen maximum margin pressures likely due to the ongoing strong competition. Margins in
CY2011-16) in
research have been relatively stable between 30-34% over the past five years.
research business
Ratings business – Well-positioned to benefit from revival in CAPEX and credit growth
 Overall margins
CRISIL’s ratings business (29% of revenue and 30% of segmental PBT in CY2016) broadly down to 31% in
comprises three traditional lines – bond ratings, bank loan ratings and SME ratings. CRISIL does CY2016 from 36%
not provide the break-up between the three lines; domestic bond ratings make the highest in CY2011
margins, followed by bank loan ratings and SME ratings. This also includes some rating’s
outsourcing business for S&P. During CY2011-15, the business for S&P was 30-33% of income
of its ratings business.

 Weak capex has put pressure on growth; competition on margins. Rating revenues
grew by 8% in CY2016 and 7% CAGR over CY2011-16, with margins declining to 31% in
CY2016 from 40% in CY2011. This is explained by declining credit growth in the large/mid
corporate as well as SME segments and competition as follows: (1) We have seen growth in
bond issuances over the last few years, but this growth is led by NBFCs/HFCs segment where
fees are capped beyond a particular size, in our view. (2) Market sources indicate that
margins in mid-sized corporate ratings are higher than ratings of large companies. (3) Low
credit growth environment along with higher competition from new entrants (like Brickwork Nischint Chawathe
nischint.chawathe@kotak.com
Ratings) has added to pressure on rating margins.
Mumbai: +91-22-4336-0887

 Lower margins in S&P business. Nearly one-third of rating revenues are generated by M B Mahesh CFA
mb.mahesh@kotak.com
providing services to the parent S&P. The contribution has remained around 30-33% over
Mumbai: +91-22-4336-0886
CY2011-15. Margins in the segment of ratings business are likely to be lower than overall
rating margins. S&P is expanding the scope of outsourcing beyond credit ratings and with Abhijeet Sakhare
abhijeet.sakhare@kotak.com
part of the Platts (S&P’s commodities business) work also being outsourced to CRISIL. Mumbai: +91-22-4336-0889

Kotak Institutional Equities Research
kotak.research@kotak.com
Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

(7) bankruptcy code will lead to further development in bond markets and increased investments by institutional investors.320 11 1. sharp reduction in subsidy will lead to near-term pressure on revenues and margins from this segment until rating agencies are able to redeploy staff and cut their costs. the actual allocation was only `557 mn.130 25 2.  Several measures will drive ratings business over the medium-term.798 100 Ratings 4. Over the medium-term. Last year’s union budget (FY2016) had increased the allocation to `2 bn for FY2017 from `370 mn spent in FY2016.341 31 S&P 1. (4) Ministry of Finance has encouraged rating agencies to introduce expected loss. ratings business will benefit from a number of structural changes aimed at developing the corporate bond market and the ratings industry: (1) RBI’s norms to limit bank borrowings by large borrowers. (2) increase in credit enhancement for bond issuances. partly due to stricter implementation norms.439 43 6. Our interaction with industry players suggests investments by rating agencies towards sales staff and analytics to benefit from higher budget allocation last year.904 21 Advisory 635 5 660 5 Reseach 7. Kotak Institutional Equities 72 KOTAK INSTITUTIONAL EQUITIES RESEARCH . (6) RBI’s recent draft for CP market mandates ratings by minimum two rating agencies. Exhibit 1: High contribution of research in CRISIL’s income CRISIL’s income break-up.945 16 2.449 59 8.967 50 Pipal 282 2 265 2 Coalition 1. calendar year-ends.797 64 Irevna 5. (5) measures to accept corporate bonds under RBI’s liquidity window (LAF).450 36 4. However. 2014-15 (Rs mn) 2014 2015 Rs mn (% of total) Rs mn (% of total) Total income 12.533 100 13.437 10 Domestic 3. Recent Union Budget has further reduced the budgetary allocation to only `100 mn. (3) enhanced standards for credit rating agency leading to enhanced disclosure by rating agencies.India NBFCs  SME ratings division is expected to remain under pressure. Growth in SME ratings is driven by government budgetary allocation towards subsidizing rating fees by SMEs. (EL) ratings to enable infra projects to borrow from bond markets.092 15 Adjustments (217) (2) (528) (4) Source: Company. However.

Over the past few years. Regulatory changes such as Dodd-Frank. etc.  Risk & analytics is another business segment. Growth in this business is linked to growth in the number of analysts in the front offices and penetration i.e.  Sell-side support drives financial research. model development and validation and actuarial services. Coalition. Kotak Institutional Equities Source: Company. number of analysts getting support from an outsourcing location (India. We await CY2016 annual report for latest disclosures.200 20 3. This segment contributed to about 75% of the research income or 50% of CRISIL’s total income in CY2015. Risk & analytics remains a focus area for the company. stress testing. quantitative research. December 2008-16 (Rs mn) Rating services Advisory services Research Rating services Advisory services 18. regulatory compliance.600 10 . Identifying these trends early. - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Company. corporate research.NBFCs India Exhibit 2: 13% revenue CAGR over FY2011-16 Exhibit 3: 31% PBT margin in CY2016 Segment-wise revenues. 2008-16 (Rs mn) Segmental PBT margins. CRISIL has diversified client profile to cater to some of the largest asset management firms.400 40 10. etc.800 30 7. Credit risk is another area where the company has increased its focus. KOTAK INSTITUTIONAL EQUITIES RESEARCH 73 . December year-ends. business intelligence and India research. with multi-year growth prospects. research business is transitioning towards differentiated research and high-end risk & analytics model from purely head-count driven growth model. primarily in equity research and diversifying to other asset classes. Risk & analytics services include risk management.  Irevna is the key driver in the research division. stable growth but faces few headwinds Research (65% of revenue and 67% of segmental PBT) broadly comprises outsourced financial research. This division started as an offshore research service provider for sell-side clients. risk & analytics. Key challenges in the sell-side support businesses are (1) decline in global IB revenue pool impacting the additions of headcount at front offices. This business has reported 25-28% income growth in CY2014-15. Business intelligence is carried out by an acquired subsidiary. India research and corporate research are likely to be small contributors with majority contribution likely coming from outsourced financial research and risk & analytics. Kotak Institutional Equities Research – strong. (2) possibility of greater number of sell-side firms setting up captive research support units. compliance reporting.). Argentina. Basel III and Solvency III are driving need for analytics.000 Research Overall 50 14. Financial research and risk & analytics are provided through Irevna.

analytics and solutions to financial institutions.India NBFCs  Coalition (business intelligence) contributes to 22% of research revenue. Pipal was headquartered in Chicago and has centers in Gurgaon. This segment is relatively much smaller and unlikely to be a major growth driver for the company. Coalition is a UK-based business intelligence service provider catering to global financial services/ IB firms using proprietary analytics and algorithms to provide intelligence on market size. and investors. Kotak Institutional Equities Advisory is small Advisory business (5% of revenue and 3% of segmental PBT) comprises infrastructure advisory and risk solutions services. 74 KOTAK INSTITUTIONAL EQUITIES RESEARCH . 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Company. December 2008-16 (Rs mn) Rating services Advisory services Research Rating services Advisory services Research 100 100 80 80 60 60 40 40 20 20 . multilateral agencies. industry and companies across all major sectors. Revenue growth declined to 8% yoy in CY2015 from 22% in CY2014. inflexible cost base. Margins in the segment have contracted sharply to 2% in CY2016 from 27% in CY2011. revenue opportunities. in our view. Kotak Institutional Equities Source: Company. Risk solutions segment provides a range of risk management tools. Noida and Bangalore. contributing to 22% of research revenues. This is possibly due to lower demand for advisory services and high. competitor gap analysis. large public and private sector firms. We await CY2016 annual report for recent revenue trends.5 bn with CY2015 revenues of `2.000 stocks. It is the world's largest provider of equity and fixed income research services supporting around 90% of global market or over 2. banks.1 bn and PAT of `532 mn. This segment provides research services to corporates for operations and strategy. and corporates. Exhibit 4: Research contributes to 65% of revenues Exhibit 5: Research contributes to 70% of PBT Segment-wise revenue break-up. Infrastructure advisory advices governments. December 2008-16 (Rs mn) Segment-wise PBT break-up. this is done through Pipal. CRISIL acquired Pipal in FY2010 for `580 mn. This segment provides independent research services covering economy. Coalition was acquired by CRISIL in CY2012 for `2. The business remains small with revenue of `265 mn in CY2015 (down 6% yoy).  India Research is small.  Pipal (corporate research) remains small.

000 large and mid-sized corporate customers and over 100.0 2. Bloomberg KOTAK INSTITUTIONAL EQUITIES RESEARCH 75 .1 NA ICRA 4.0 2.0 2.967 28 Pipal 327 282 265 (6) Coalition 1. China and Argentina. Exhibit 7: CRISIL trades at 30X CY2018E EPS Valuation comps of rating agencies. Kotak Institutional Equities About CRISIL CRISIL. Its finacials reflect CY2016-2018E respectively. India’s premier rating agency.1 2.324 22 Irevna 79 696 404 (42) Pipal 43 37 35 (5) Coalition 498 514 633 23 Total PBT 620 1. March fiscal year-ends. CRISIL operates across seven countries with delivery centers in India.439 6. (2) We have considered Bloomberg consensus for the above.000 SMEs.666 9. 2013-2015 (Rs mn) 2013 2014 2015 YoY (%) Irevna 4.327 5.060 45 55 68 46 37 30 37 38 37 133 157 200 15 13 10 27 29 NA 2.054 85 99 113 48 41 36 17 18 19 515 575 649 8 7 6 27 27 31 2.5 2.113 934 (16) Source: Companies.073 (14) Irevna 76 676 378 (44) Pipal 30 25 24 (2) Coalition 368 413 532 29 Total PAT 474 1.595 1. It has rated over 23.092 8 Total income 6.249 7.2 Notes: (1) CRISIL follows calender year-ends.2 CRISIL 2. Source: Company. 2017-19E CMP EPS (Rs) PER (X) RoE (%) BVPS (Rs) P/B (X) DPS (Rs) Dividend yield (%) (Rs) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E CARE 1. research and analytics focused business along with strong linkage to domestic investment cycle and development of capital markets. has positioned itself as a global.379 52 60 69 27 23 20 35 37 38 155 174 198 9 8 7 21 29 31 1.246 1.NBFCs India Exhibit 6: Key financials of CRISIL's subsidiaries Calendar year-ends.945 2. Poland.