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Triple-A Stock

Crisil, India’s oldest rating agency derives its moat from reputation & parentage. Should you invest in it?

Crisil is one of India’s leading credit rating agencies. It was the first company to commence credit rating operations in this country. The company has a market share of over 50 per cent and rates two-thirds of the bonds issued in India. It has also diversified into research and infrastructure risk and policy advisory services.

Crisil is a subsidiary of Standard and Poor’s (S&P), the world’s foremost provider of credit ratings.

Sources of moat
Credit rating is an exclusive profession. In India rating agencies need to obtain a licence from SEBI to start operations. Since this licence is not easily granted, there exists a regulatory barrier for those wanting to enter the industry.

The company’s longevity and its international lineage also make it a powerful brand name in India.

Can the moat be breached?
The company’s competitive advantage arises from the regulatory barrier (mentioned above), and also partly from market dynamics. Its strong parentage helps nullify competition since the rating business banks heavily on reputation.

Crisil enjoys the highest market share in the industry. However, growing competition from players such as ICRA, CARE, Fitch Ratings and Brickwork has led to erosion in its market share, which has dipped from 55 per cent in CY09 to 51 per cent in CY10. Nonetheless, being the market leader and having the first-mover advantage, Crisil is well-placed to fend off competition. For all these reasons, breaching the company’s moat will be difficult, if not impossible.

Concerns
Crisil’s rating business depends on growth in credit demand, which is closely linked to the economy’s growth. A major part of research revenue is generated from the outsourcing of research services by foreign corporates and institutions, which may be affected if the economic crisis continues.

Growth drivers
Since 2005, Crisil has been growing at a rate that is twice the rate of credit growth in India. It is expected to benefit from Basel-II norms, as a large number of entities are still to be rated.

Financials
Crisil is a debt-free company. It has registered a five-year average return on net worth of over 40 per cent. Over the same period its dividend payout ratio has averaged 38 per cent. Its five-year average operating profit margin has declined but still stands at an attractive 37.3 per cent.

Valuation
The prevailing price-earnings (P/E) multiple of 31.81 is at a 37 per cent premium to its five-year median P/E of 23.25. Crisil’s P/E has risen around 35 per cent over the past six months. The stock’s price to book value of 13.21 and enterprise value to sales ratio of 8.11 are also at significant premiums to their historical averages. Despite these high valuations, Crisil still made it to our ‘attractive bluechips’ list. Why? That is because its earnings per share grew at a CAGR of 50 per cent, which translates into a compelling PEG ratio of 0.63. A dividend yield of 2.1 per cent provides the much-needed cushion against volatility.

Though Crisil’s valuation is slightly on the expensive side, given the potential for sustained growth, we recommend that you buy this stock in a staggered manner with an investment horizon of at least three to five years.