Buy CRISIL - TP Rs.1240 - Emkay

Buy, Target Price Rs 1,240 Growth momentum to continue

BLR business to remain the main driver of growth in ratings business: Mgmt shrugged off concerns over any loss of BLR business to banks at least till FY16/17, as the IRM based capital requirements will be applicable from 2014 and for another 2 years they will be required to run their systems parallel to rating agencies, before doing independent ratings.

'Coalition' acquisition to further accelerate growth: Crisil to acquire 100% stake in Coalition (a high end analytics company head quartered in UK) for maximum of GBP29mn (Rs2.5bn). While the CRISIL research segment has been growing at a healthy pace (44% in CY11), we believe this acquisition will further accelerate the growth momentum.

Overall profitability to improve further: CRISIL had cash and investment of Rs1.7bn lying in the balance sheet, which yields 7-8%. The company will redeem these to pay for the acquisition, which we believe has the potential to generate RoE's of more than 25%. This will further improve the RoE's of CRISIL from 62%/ 53% in CY12E/13E to 67/56% resp.

Strong cash generation capabilities: With not much capex required, CRISIL adds ~Rs25bn cash each year. CRISIL has been doing buyback in the last two years aided by healthy cash position. CRISIL bought back shares worth ~Rs800mn each during CY10/11.

Near term catalyst and earnings performance: earnings performance at 30% CAGR in CY11-CY13E period led by continued traction in BLR and strong growth in research (aided by recent acquisitions- Pipal & Coalition)). Emkay's earnings forecast are Rs40.2/share and Rs 49.4/share for CY12E and CY13E respectively. With more than 55%/ 108% RoE/ RoIC, valuations attractive at PER of 23.9x CY13E.

Source : Equity Bulls

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