Crisil: Buy

Recommendation: Buy

Sanjiv Shankaran

CRISIL should see a significant increase in rating income over the next year.

The volume of debt rated by the company in the first nine months of this year was Rs 456 crore, up 144 per cent compared to the corresponding previous period. Since Crisil's accounting policy distributes the income evenly over 12 months, the impact of the sharp increase in its core business will be evident over a period of time.

With income expected to rise, the profit margins may increase because the nature of operations provide the company with an opportunity to conduct a significantly higher volume of business without a proportional increase in cost. Crisil's expertise in relatively new areas of operations such as private participation in infrastructure and its willingness to innovate in rating services hold the promise of a brisk growth in income. In addition, if the proportion of non-rating income grows, the risk associated with Crisil's income stream should decline because of increased diversification.

Crisil's annualised earnings per share (EPS) is Rs 19, leading to a price-earnings multiple (PEM) of about 10, at the current market price of Rs 190. The nature of the company's operations and its dominant position in its core business provide opportunities to register significant long-term growth in its EPS. At the current price, investors may consider an exposure to the stock.

A huge increase in operating expenditure in the first nine months of this financial year (2000-2001) had an adverse impact on Crisil's net profit for the same period. Crisil's net profit for this period was Rs 9 crore, down by Rs 0.92 crore in relation to the corresponding previous period.

Steady income growth: Crisil's business income comprises fee income from credit rating services, advisory services and income from vending information. Income from credit rating services comprises the major source -- about 75 per cent of the total income. The total income rose 24 per cent to Rs 32 crore in the first nine months of this financial year. A look at different components of income revealed that income from rating services increased by the same proportion, as total income, to Rs 24 crore.

The growth in income accruing from advisory services was noteworthy, an increase of 74 per cent to Rs 2.33 crore. Though the contribution of advisory services income is relatively insignificant, the possibilities are bright. Crisil's advisory services division appears to be eyeing the opportunities arising out of the boom in infrastructure projects. A sustained growth in this source of income will reduce the total risk associated with the income stream.

Staff costs shoot up: The benefits of the growth in income was more than offset by the sharp increase in operating expenditure, up 52 per cent to Rs 19 crore in the first nine months of this financial year. Unlike a typical finance company that lends money, Crisil's operations revolve around providing advisory inputs. Thus, the major item in operating expense is the cost incurred on staff, about 45-50 per cent of the total operating expenditure.

Staff cost rose 34 per cent to Rs 9 crore. Increase in other operating expenditure such as communication and travel was higher than that of staff expenditure. The outcome was a huge increase in operating expenditure that offset the benefits of the brisk growth in income.

The bottomline: The operating profit for the first nine months of this financial year, thus, dropped marginally to record Rs 12.53 crore. The operating profit margin took a blow and dropped to 39.66 per cent for this year as against the 50.64 per cent recorded the previous year.

Depreciation comprises the only non-operating expense. Following the purchase of the information vending brand, INFAC, last year and shift to new premises, Crisil's depreciation provision increased sharply to Rs 3.94 crore (Rs 1.94 crore).

The company's net profit for the first nine months of this financial year was Rs 9 crore, down by about 9 per cent compared to the previous corresponding period. The net profit margin for this year dropped to 28.48 per cent from the previous year's level of 39 per cent.