Crisil Ltd’s research and analytics business continues to prop it up at a time when bank credit growth lags and the investment cycle is yet to recover. In the March quarter, this segment, which accounts for some 65% of the firm’s revenues, grew its sales 21.8% from a year ago. A changing global regulatory environment and newer analytics products seem to be boosting this segment’s growth for Crisil, which started life as a credit rater.
Ebit (earnings before interest and taxes) growth for the research segment was 49.6% from a year ago, helped by expanding margins. Ebit margin grew nearly 6.6 percentage points from a year ago to 35.1% in the March quarter. One part of this rise in Ebit and margins in research could be explained by the depreciation in the rupee. Crisil registered a forex gain of Rs.3.3 crore in January-March compared with a loss of Rs.2.67 crore in the year-ago period.
The rating business didn’t do that well in comparison. Segment revenues increased by 5.2% and Ebit by 10.9%. While margins improved when compared from a year ago to 33.5%, they were still lower than the December quarter numbers. The ratings business has been lagging behind the research unit for quite some time now, simply because of the economic slowdown. Lower credit growth seems to have led to lower growth in bank loan ratings. Add to this factors such as a decline in government subsidy for small and medium enterprise ratings and rising competition in this space, and there is increased pressure on the rating business.
Despite that, the research segment has boosted consolidated profit growth to 40%, the best in eight quarters. While an improving economy and increasing deals will benefit this business, there is some hope for the rating segment too. Declining interest rates could very well lead to an increase in short- to medium-term debt issuance and debt refinancing. That optimistic prognosis doesn’t mean that investors would necessarily make a beeline for the stock. Crisil shares currently trade at 37.73 times their expected earnings for 2016. That is well above its five-year median price to earnings multiple.