Basically takes money to give you scores. Give more money, get a better score.
Hey guys, what would you all do if you wanted a good movie recommendation? Ask a friend, colleague, or family member? But they may have their personal favorites, and maybe their liking would differ from the genre you want to watch a movie in. So, what do we do now? Well, we can go to IMDb or Rotten tomatoes to find the perfect movie and the perfect genre for ourselves, and most of the time, these movie ratings don’t disappoint us.
Similarly, what if I told you that there are rating agencies that rate debt instruments like bonds, debentures and grade them according to their returns and risk associated? Wouldn’t that be helpful? These ratings give us a clear picture of how much risk is associated with which instrument and what are the returns that one can expect. Credit Rating Agencies (CRAs) do all this tiresome work for us. Have you ever thought you could invest in them too??
But before making any decision, let’s see how one such rating agency works. Yes, today we are going to talk about CRISIL, the largest CRA by Market capitalization in India.
CRISIL stands for Credit Rating Information Services of India Limited. The company is India’s foremost provider of ratings, data, research, analytics, and solutions. CRISIL became India’s first CRA in 1987. Back then, it was backed by ICICI ltd, UTI and other financial institutions.
After a decade, S&P, one of the top global CRA, started getting interested in CRISIL by acquiring 9.68% of its stake. Until 2005, S&P had acquired a majority stake in CRISIL. S&P global brings value to CRISIL by bringing its global market perspective into the picture. Although CRISIL is now a subsidiary of S&P, it has its own subsidiaries too. CRISIL has 13 overseas and 3 Indian subsidiaries. This paints us a picture about how the company allocates capital and taps into inorganic growth opportunities.
Sources of Revenue
Let’s talk about the sources of revenue for this company. Earlier CRISIL was just a rating agency, but later it diversified into research and advisory too. So now they have revenues coming in from 3 business divisions
CRISIL Ltd transferred its entire rating operations to CRISIL ratings ltd. As a full-service rating agency, the company rates the entire gamut of debt instruments and covers manufacturing companies, banks, NBFCs, PSUs, financial institutions, state governments, urban local bodies, and mutual funds. This way, the issuers of instruments get improved access to funding, investors get to reevaluate their assumptions, and regulators get to know credit risk at the systemic level.
Global analytical centre (GAC) operates as a centralised research and analytics hub for the S&P Global Rating Services team spread across the US, Europe, Middle East, and Africa (EMEA), and Asia Pacific (APAC) regions.
b) Research – The research segment company has 4 main divisions viz Global research and analytics (GR&A), India research, CRISIL coalition, and Greenwich Associates.
GR&A – Here, the company provides global research to 140 global and regional financial institutions. Mostly this division deals with risk and analytics. The company helps clients to make key strategic and tactical business decisions like cost optimization etc.
India Research – This division researches on 77 sectors in India and has 1200 clients, including top Indian banks and large domestic institutions. The company maintains 98 indices for India, 13 in Sri Lanka, and has 100+ other customised indices. Can you imagine, until FY2020, CRISIL had valued debt instruments of value $1.83 trillion in India.
Greenwich Associates – Greenwich is a recent subsidiary of CRISIL which it acquired in 2020. Greenwich is a global provider of data, analytics and insights to the financial services industry.
CRISIL Coalition – In 2012, CRISIL acquired Coalition, a UK based high-end data analytics company that provides solutions to investment banks. Coalition is an expert in competitor analytics, financial resources analytics, client analytics, and country analytics.
c) Advisory – Under the advisory segment, the company again has 2 major divisions viz CRISIL Infra Advisory and CRISIL business intelligence and risk solutions (BIRS).
CRISIL Infra advisory – Infra advisory provides guidance in shaping policies related to sectors like energy, natural resources transport, and logistics, public finance and urban development.
CRISIL BIRS – BIRS offers regulatory and business analytics solutions to banks and financial institutions.
Well, now we know that CRISIL is engaged in various businesses related to ratings, research, and advisory. If this is not diversification, then what is???
CRISIL keeps on conducting various seminars, webinars, discussions, meets, debates etc to educate and update the public about markets.
NOTE- Below begins some numbers and graphs. If the figures appear like dancing ants, do not fret. Every image redirects to Ticker, where you can analyse it properly.
If you have a look at the shareholding pattern of CRISIL we see that S&P is the majority stakeholder in its business, with 66.99% holdings. S&P has diluted its stake in CRISIL recently in accordance with new rules introduced in the Union Budget. new maximum shareholding norms. We can say that the shareholding pattern is pretty stable, and promoters are confident about their business.
ROE & ROCE- Coming to the Profit and Loss statement, if you have a look at the standalone business, then the revenues have declined. The decline was due to muted credit growth in the Indian economy, followed by a pandemic and lockdown in 2020. Prior to 2020, too we can see that the standalone business wasn’t expanding at a great pace which is why the company seeks inorganic growth opportunities. On the other hand, global subsidiaries have started to contribute to the business.
From here on, we will look at consolidated figures because all the subsidiaries of CRISIL are wholly owned. 5-year sales growth of consolidated business is around 7.51% which is a pretty handsome figure for a company this big. Although revenues have been increasing, profit growth is lagging. ROCE and ROE tell us how efficiently a business is using its funds. Talking about ROCE and ROE, anything above 20% is considered a very good number.
To conclude, the company is growing at a medium pace but is managing its capital very efficiently. There aren't any abnormal expenses or revenue sources that would have been an outlier.
Reserves and assets should increase in a business, whereas borrowings should decrease. A CRA doesn’t need many heavy assets and heavy machinery. Its real assets are employees and computation devices like laptops etc. and it also doesn’t need much borrowing to run its business.
Whatever is needed to run the business, the group uses reserves for this purpose. Hence reserves have been stagnant for years. All they majorly pay is for lease rentals which is included under non-current liabilities. Having a birds’ eye view of CRISIL's B/S we can say that it’s a good balance sheet as assets are increasing and the company has no borrowings.
Mr John L. Berisford is the chairman of the company. He is also the president of S&P global ratings and has corporate experience of more than 3 decades. Ms Ashu Suyash is the Managing Director and CEO of CRISIL. Ms Suyash has spent 30+ years in the financial services sector. Ms Suyash is a C.A herself. Both the heads have a good experience in this business.
Peers and relative valuation –
CRISIL has 2 listed peers viz ICRA and CARE ratings and several other unlisted players like ONICRA, Fitch India, BWR, SMERA, India Ratings.
On all the valuation matrices, whether it be P/E, P/B, EV/EBITDA, CRISIL is treated at a premium compared to peers except for P/S, where ICRA has a higher valuation. If you compare the size of CRISIL compared to the other 2 CRAs, the revenues of CRISIL (standalone) are 5 times greater than theirs. This is the early mover’s advantage that CRISIL has. Now, CRISIL is a trusted brand in India when it comes to credit rating.
Fun fact: CRISIL has 8.9% stake in its rival, CARE ratings.
Points to be noted, Milord!!!!:
A company needs to get registered under SEBI to get in this business of CRA. This brings in barriers to entry.
If you have a look at the 2008 crisis or IL&FS crisis, rating agencies have failed to timely update their assigned rating to certain instruments. Even though they have failed, they are in business. We think that this business can’t get disrupted that easily unless they do something very horrible mistake.
As the Indian economy expands, there will be more and more companies and these companies will be required to earn a rating from any CRA of funding or any other purpose. So, as the economy, as well as credit in the economy grows, CRAs will be the ultimate beneficiaries.
CRISIL covers different indices, mutual funds, and different sectors under its purview. Also, it has well-diversified its business by just not limiting itself to credit rating but also by starting research and advisory services. Finally, the clientele of CRISIL is diverse, so the company is not dependent on a few clients.
CRISIL has a high promoter stake and a very strong promoter group which adds value to the company by giving it a global market view.
Keeping the forward-moving approach in mind, the company is constantly investing in technology and working on automation and digitization of credit ratings.
The company provides support to S&P Global Ratings Services on surveillance activities, coverage of environmental, social, and governance (ESG) diagnostics, and evaluations. These ratings affect the goodwill of a given company.
As the company operates in different countries, it faces currency risk. That risk is mitigated by currency hedging.
Policy risk is the utmost risk that a CRA faces. SEBI and other regulating bodies continuously keep on adding new rules and regulations regarding different disclosures to bring more transparency into the system. Although this is good for general retail investors, it adds on to trouble for CRAs.
Finally, legal compliance and statutory risk: As the nation or region differs CRISIL has to keep track on changing governmental policies and reassess the ratings given to companies.
To conclude, we would like to quote,
“In a gold rush, sell shovels.”
So, if you are optimistic about India’s future prospects and expect that there will be more companies in the future than there are today. Then don’t forget that these all-new companies would require funding and to get better access to funding they would be required to be rated by a CRA. So further extend your research to other CRAs and see if anyone is worth your penny.
Till we meet again. Happy Investing!