INITIATING COVERAGE

Diversified Financials
India
Sector View: Attractive NIFTY-50: 17,555 November 02, 2023

CRAs: Beneficiaries of credit cycle but valuations misplaced Valuation summary

We believe credit rating agencies (CRAs) are well-placed to benefit from credit
Market cap. FV Upside
expansion in the medium term, given the strong correlation the ratings (Rs bn) Rating (Rs) (%)
business has with corporate credit growth. While we are positive on ratings, we ABSL AMC 128 ADD 450 1

are cautious about the non-ratings businesses of both CRISIL (~85%/70% of HDFC AMC 583 ADD 2,900 6

revenues/EBIT) and ICRA (~45%/55% of revenues/EBIT), which have global Nippon AMC 240 ADD 400 4

market linkage. Reasonable valuations and more confidence in the profitable UTI AMC 96 ADD 840 12
CAMS 110 ADD 2,600 16
growth of non-ratings businesses could make us revisit our stance. Initiate with
Kfintech 77 ADD 465 3
a SELL rating on CRISIL (21% downside) and REDUCE on ICRA (8% downside).
360 One 188 BUY 590 11
Rating agencies are the quintessential play on credit expansion CRISIL 304 SELL 3,300 (21)

We believe that credit rating agencies (CRAs) are well-placed to benefit from the ICRA 53 REDUCE 5,100 (8)

broad-based credit expansion in the next 3-5 years, resulting from (1) increased
Source: Bloomberg, Company data, Kotak Institutional Equities estimates
supply of credit from all sources (banks, NBFCs, credit funds, etc.); (2) deleveraged
corporate balance sheets that are well-placed for the next investment cycle; and Prices in this report are based on the market close of
(3) potential growth optionalities (ESG ratings, corporate bond market and October 30, 2023
secondary loan market). We forecast a 13-15% ratings revenue CAGR in the next
3-4 years. Rating revenues have shown a strong correlation with credit growth in

Private Circulation Only. This document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities A ct of 1933
the past two decades, which augurs well given the high operating margins as well
as stronger guardrails of regulation and reputation after the IL&FS saga.

CRISIL: Steady and consistent but expensive; initiate with SELL

We initiate coverage on CRISIL with a SELL rating and an SoTP-based FV of Rs3,300.
CRISIL is the largest rating agency in terms of revenue, with a proven track record of
rating quality. Its revenue diversification efforts in the past decade have helped deliver
10-11% revenue CAGR, helping wade through the ratings business downturn. This, in
turn, led to a much lower exposure to credit ratings (~15% of revenue). While we build
a positive view for the ratings business given the tailwinds, there is less confidence in
building similar organic revenue growth for the non-ratings business due to its high
linkage to global investment banks and capital markets. Overall, we forecast 14%
earnings and 16% EBIT CAGRs for FY2023-26E, with EBIT margin expanding by ~300
bps in this period to 26%. Our DCF-based FV implies 31X FY2025E EPS.

ICRA: In a rebuilding phase; initiate with REDUCE

We initiate coverage on ICRA with a REDUCE rating and an SoTP-based FV of
Rs5,100. Compared with CRISIL, ICRA is a relatively direct play on credit ratings
(~55% of revenues. However, the company is coming out of a fairly volatile earnings
performance during FY2015-21 (-5% EBIT CAGR), hurt by muted credit growth and a
decline in securitization volumes during Covid. FY2022-23 has seen a strong
recovery (near doubling of EBIT in FY2023 from FY2021 low). We believe growth
rates are likely to moderate at close to 13-14%, led by similar revenue growth.
Operating leverage benefits for ICRA, unlike CRISIL, could be back-ended due to the
need for catch-up on investments. Our FV implies 26X December 2025E EPS.

Risks: Positive surprise in rating volumes, strong revival in global business

Key risks: (1) While we build a positive view on ratings, significant development of the
corporate bond market can provide a growth lever, leading us to upgrade our estimates;
(2) change in regulations that mandate increased use of CRAs; (3) for CRISIL, growth
revival in businesses linked to IB/global markets (~50% of revenues) is a risk to our
negative view; (4) for ICRA, faster-than-expected margin expansion in ratings.
Full sector coverage on KINSITE

Abhijeet Sakhare Nischint Chawathe M B Mahesh, CFA Varun Palacharla Ashlesh Sonje, CFA
[email protected] [email protected] [email protected] [email protected] [email protected]
+91-22-4336-1240 +91-22-4336-0887 +91-22-4336-0886 +91-22-4336-0888 +91-22-4336-0889

Sidham Jain
[email protected]
 2

Table of Contents

Executive summary: CRAs are beneficiaries of credit cycle but valuations misplaced .............................. 3
Rating agencies: Beneficiaries of a broad-based credit expansion .............................................................................................. 3

Initiate on CRISIL (SELL) and ICRA (REDUCE) .............................................................................................................................. 5

Financial information companies trade at a premium to markets ............................................................................................... 8

S&P and Moody’s: 8-10% rating revenue growth over 2008-21; solid margin expansion during upcycle ................................... 10

Credit rating industry: Playing the leverage cycle ................................................................................. 13

A cyclical recovery in rating revenues after a painful decade..................................................................................................... 13

Corporate India has significantly de-leveraged........................................................................................................................... 15

Broadening of credit market with new players and investment vehicles .................................................................................... 16

Credit rating agencies remain relevant for current size and development stage of markets ..................................................... 17

ESG ratings: Early stages of evolution ........................................................................................................................................ 19

Developing market-based finance: Mix of systematic and idiosyncratic factors ..................................... 20

Bank versus bond-based financing: Merits and weaknesses ..................................................................................................... 20

There is a clear path dependency behind countries having different financing models ............................................................ 22

Role of recovery rates and bankruptcy laws ............................................................................................................................... 24

Role of Asian financial crisis in developing regional bond market ............................................................................................. 26

India’s corporate bond market—a work in progress .............................................................................. 28

Share of corporate bonds have grown to ~35% of overall credit ............................................................................................... 28

Primary hindrances for development of corporate bond market................................................................................................ 33

Companies
CRISIL

ICRA

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 3

Executive summary: CRAs are beneficiaries of credit cycle but valuations

misplaced
We initiate coverage on CRISIL with a SELL rating (FV of Rs3,300) and ICRA with REDUCE (FV of
Rs5,100). Our SoTP-based FVs imply 31X and 26X December 2025E EPS, respectively. We believe
CRAs are well-placed to benefit from credit expansion in the medium term, given the ratings
business’ strong correlation with corporate credit growth. While we are positive on ratings, our
caution comes from the non-ratings businesses for both CRISIL (~85%/70% of revenues/EBIT)
and ICRA (~45%/55% of revenues/EBIT), which are global market-centric. Reasonable entry
valuations and more confidence in the profitable growth of non-ratings businesses could make
us to revisit our stance, though.

Rating agencies: Beneficiaries of a broad-based credit expansion

We believe that credit rating revenues can grow in the range of 13-15% in the next 3-4 years. In our view,
credit rating agencies are potential beneficiaries of a few tailwinds in the next 3-5 years, including: (1)
broad-based credit growth across the lending system (banks, NBFCs, fintechs) and borrower segments
(retail, SME and corporate), driven by low NPLs and a strong intent to lend; (2) sustained recovery in
corporate credit growth (after a severe deleveraging cycle), supported by stronger corporate balance
sheets; and (3) additional factors that can support stronger growth include strong private capex cycle,
wider adoption of ESG ratings and other developmental initiatives (bond market development, secondary
market for corporate loans, etc.).

 Rating revenues strongly correlate with corporate credit growth. Rating revenues have shown a
strong linkage with corporate credit growth in the past two decades. In FY2015-21, corporate credit
growth was severely impacted (~6-7% CAGR) as a result of the stressed balance sheets of banks and
the corporates. As a consequence of this, rating revenues grew in low-single digits. In contrast,
corporate credit saw ~18% CAGR over FY2010-15, driving ~15% growth in rating revenues. Pricing
discipline remains a risk, given that India is a seven-player market (Exhibits 1-2).

Strong correlation between corporate credit growth and… …rating revenues for the past ~20 years
Correlation between ICRA’s rating revenues and Correlation between ICRA’s rating revenues and
corporate credit growth, March fiscal year-ends, 2004-23 (%) corporate credit growth, March fiscal year-ends, 2003-23 (%)

Corporate credit growth by banks Corporate credit growth by banks (LHS)

ICRA - rating revenue growth (RHS) CRISIL - yoy revenue growth (RHS)
45 60 45 55
Start of bank loan Start of bank loan
ratings ratings
36 44 35 41

27 28 25 27

18 12 15 13

9 (4) 5 (1)

- (20) (5) (15)

2011
2003

2005

2007

2009

2013

2015

2017

2019

2021

2023
2010
2004
2005
2006
2007
2008
2009

2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: Kotak Institutional Equities Source: Kotak Institutional Equities

 Corporate credit growth recovery to play out in the medium term. Corporate credit can potentially
grow at 12-15% in the medium term. Corporate credit growth in India has started recovering after a
painful 7-8 years of balance sheet stress, along with NPL issues of lenders. Relative to global peers,
India is at a low point of a 25-year data on corporate to GDP ratio. While private capex cycle is yet to
conclusively show an upcycle, drivers such as deleveraged corporate balance sheets, well-capitalized
lending system and healthy demand environment are in place for stronger trends over the next five
years compared with the past ten years (Exhibits 3-6).

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Corporate leverage in India is at a low point compared to other Corporate leverage in India is at its lowest in over a decade
countries and historical levels
Debt-equity ratio for private non-financial
Private non-financial corporate debt to GDP, 2021 companies, March fiscal year-ends, 2010-22 (%)
(%)

2021 Min (25Y) Max (25Y)

300

240

180

120

60

-
HK

Poland
South Africa
Singapore
France

Korea

Mexico
Malaysia

Indonesia
China

UK

US

India
Japan

Israel
Canada

Thailand
Spain

Italy

Brazil
Germany

Source: RBI
Source: BIS, IMF, Kotak Institutional Equities

Corporate credit growth by banks could reach ~15% Fresh sanctions in FY2023 at decade high, yet below peak
Corporate credit growth for banks, March fiscal year- Corporate loan growth, March fiscal year-ends,
ends, 2007-25E (%) 2007-2023 (%)
30.0 Initial Revised % of bank credit (RHS)
6,000 16.0
22.5
4,800 12.8

15.0
3,600 9.6

7.5
2,400 6.4

0.0
1,200 3.2

(7.5) 0 0.0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024E
2025E

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: RBI, Kotak Institutional Equities estimates Source: RBI, Kotak Institutional Equities

 Growing suppliers of credit augurs well. We believe that the lending system is poised for a broad
participation across lenders, i.e. traditional lenders as well as new entrants. We are seeing credit being
created through new players or lending models. For example, private credit or credit funds are at an
early stage of growth cycle and are playing increasing role in select segments, such as distressed or
high-yield credit. At the higher end of the quality curve, we have REITs and InvITs that have gained
acceptance among investors. This augurs well in terms of the demand for credit ratings for
instruments and companies to be rated. (Exhibits 7-8)

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Number of corporate bond ratings assigned bottomed recently Credit AIFs have grown at a fast pace in the last few years
March fiscal year-ends, 2000-23 (#) Number of credit AIFs registered, March fiscal year-
ends, 2012-21 (#)
5,000
15
4,000
12

3,000
9

2,000
6

1,000
3

0 0
2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

1HFY23
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Source: SEBI, E&Y, Kotak Institutional Equities
Source: SEBI, Kotak Institutional Equities

 Rating agencies remain relevant and embedded in the ecosystem. We believe that credit rating
agencies remain relevant at a system level and the dependence on them is embedded in several parts
of rulemaking across regulators (see Exhibit 36 inside). While the industry suffered a blow to its
reputation after the IL&FS crisis, regulators have stepped in to strengthen the guardrails to improve
the quality of disclosures, corporate governance at management and board (see Exhibit 35 inside).
The lack of liquidity in secondary markets for corporate bonds also limits the credit information in the
market data, thus increasing the reliance on credible third-party validation of credit quality.

 A few initiatives can provide growth optionality. Credit rating agencies can be potential beneficiaries
of regulatory initiatives, such as (1) efforts to grow and broad-base the corporate bond market (see
Exhibit 66 inside); (2) wide-scale adoption of ESG ratings with CRAs being able to capture revenue
share; and (3) the RBI’s push toward developing the secondary loan market for corporate loans
(similar to CLOs in the US). The first and third initiatives are also aligned with the objective of reducing
PSU banks’ dependence on the government for capital needs.

Initiate on CRISIL (SELL) and ICRA (REDUCE)

We initiate coverage on CRISIL with a SELL rating and a FV of Rs3,300 and ICRA with REDUCE and a FV
of Rs5,100. Our FV implies 31X and 26X December 2025 EPS for CRISIL and ICRA, respectively. We value
both the companies using SoTP methodology with separate values ascribed to the ratings (DCF-based)
and non-ratings (pegged relative to the global peer group) businesses. In our view, the SoTP method
appropriately captures the different growth outlook, growth rates, margins and return profiles of the
ratings business compared with the non-ratings business, especially for CRISIL. The higher implied
valuations for the ratings as compared to AMCs or RTAs reflect the stronger entry barriers and lower risk
of disruptions in the medium term.

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We assign a higher target multiple to CRISIL's ratings (~42X) and non-ratings business (~25X) compared to ICRA's ratings (~35X) and
non-ratings (~20X)
12M forward PE and EBIT margins of large global financial information services companies
50
Verisk
45 CRISIL (ratings)

40
ICRA (ratings) Moody's
Gartner FICO
35 MSCI

30 Equifax CRISIL (non-ratings)

PE (X)

25 Factset
Transunion ICRA (non-ratings)
S&P
20
Forrester Experian
15
Towers Watson
10 DNB

0
0 6 12 18 24 30 36 42 48 54 60
Trailing EBIT margin (%)

Source: Bloomberg, Kotak Institutional Equities estimates

CRISIL: Steady, consistent and expensive

Over the years, CRISIL has diversified its business across credit ratings, research and risk solutions,
along with benchmarking analytics, for global commercial and investment banks and investment firms.
The strategy to build diverse revenue drivers has not only helped deliver stronger revenue growth (~11%
10Y CAGR versus ~5% for ICRA), but also—more crucially—safeguarded the ratings business against
competitive pressures (CRISIL’s ratings have exhibited lowest default rates over 10Y).

 Key assumptions: Our FY2024-26E EBIT growth of 14% builds in: (1) Ratings: upcycle assumptions of
15-16% rating revenue growth, with margins (calculated) expanding to ~54-55% from 51-52%; (2)
Research, advisory and solutions (RAS): potential global headwinds could slow revenue growth (~10-
12% CAGR) for the next three years along with margins recovering to 23-24% off bottom (~20%) seen
in FY2020-22, led by stronger focus on costs and pricing.

 Key risks: Around ~65% of CRISIL’s revenues are export oriented, with around ~50% from developed
market corporates and investment banks. This increases the risks of a potential slowdown impacting
discretionary budgets in the RAS segment. That said, almost 35% of RAS revenues are annuity-based
and projects involving credit and non-financial risks, along with proprietary benchmarking data,
potentially facing lower cyclical risks. The ratings business faces the risk of delayed or muted growth
in corporate credit or over-competitive behavior hurting pricing discipline.

 Valuations are expensive given the business mix: We like CRISIL’s top-notch ratings franchise, but it
contributes only about half of the Fair Value we ascribe to the company. We like the trajectory in the
non-ratings business as well, but find the implied valuation unjustified for this part.

▪ Ratings: Our DCF-based FV calculation implies ~42X FY2025E. We value CRISIL’s ratings
business using DCF with assumptions of (1) ~17% revenue CAGR over FY2023-25E and then
12% growth over the subsequent 10Y; (2) EBIT margin to expand to 54% by FY2025E from 51%
in FY2022 and stabilizing at 54-55% over the following decade; and (3) ~11.5% WACC and 6%
terminal growth.

▪ Non-ratings: We assign 25X December 2025E earnings to the research, analytics & solutions,
which we believe captures CRISIL’s position as one of the largest providers of bespoke research,
analytics and benchmarking data, along with the risks emanating from its exposure to global
buy-side, sell-side and asset management industry. The business from S&P remains steady, but
growing only slowly, where we assign a 15X multiple.

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At our FV, CRISIL will trade at ~31X FY2025E earnings

SoTP valuation for CRISIL, December 2025
Value (Rs bn) Valuer per share (Rs) Comments
Ratings 116 1,580 DCF-based; implies~42X Dec-25E earnings
Research, analytics & solutions 98 1,344 Assign ~25X Dec-25E earnings; pegged to peers
Global analytics center (S&P captive) 7 93 Assign ~15X Dec-25E earnings
Cash 18 248
Total 239 3,265 Implies ~31X Dec-25E EPS

Source: Company, Kotak Institutional Equities estimates

ICRA: A work-in-progress toward rebuilding the franchise

ICRA’s performance in the past decade has been much less consistent than CRISIL. The ratings business
witnessed a setback after the IL&FS episode, whereas the non-ratings business is largely focused on
captive work with the parent. ICRA has a higher exposure to the credit ratings business but has a smaller
scale with lower operating margins. Its ratings business is also benefiting from the recovery in bank loan
ratings and bond raising, but the margin recovery is likely to be gradual. Management’s focus on
diversifying the revenue profile is in early stages, with recent pick-up in work from the parent, Moody’s.

 Key assumptions: Our FY2023-26E EBIT growth of 12% builds in: (1) Ratings: 14-15% rating revenue
growth with margins expanding to ~28-29% over 2-3 years from 25% currently; (2) Non-ratings: 12-
13% CAGR, driven by scale-up with Moody’s and lower growth in data and consulting business (lacks
scale) with a moderation in margins to ~40% from ~43% in the next 2-3 years.

 Key risks: ICRA faces lower risks from a global slowdown, as it is not present in the knowledge
process outsourcing space, except for the captive work done for Moody’s. Risks to the rating business
emanate from a cyclical slowdown or delayed recovery in credit growth as well as pricing discipline
during a phase of strong growth in debt rated.

 Valuations – await better entry point: ICRA’s franchise is relatively is relatively weak compared to
CRISIL in both ratings (smaller scale; lower margins) and non-ratings (largely driven by Moody’s,
although with higher margins). While relative valuations capture this, we believe the risk-reward is not
attractive at current valuations.

 Ratings: Our DCF-based FV calculation implies ~35X FY2025E EPS. We value ICRA’s ratings
business using DCF with assumptions of (1) ~14% revenue CAGR over FY2024-26E and then 12%
growth in the subsequent 10Y; (2) EBIT margin expanding to 28% by FY2026E from 25% in FY2023
and stabilizing at 30% over the following decade; and (3) ~12% WACC and 5% terminal growth.

 Non-ratings: We assign 20X December 2025E earnings to the non-ratings business, which reflects
9-10% earnings growth in the medium term. ICRA’s non-ratings business is largely focused on
serving Moody’s, but there is management intent to add more levers of growth such as data and
analytics.

At our FV, ICRA will trade at ~26X FY2025E earnings

SoTP valuation for ICRA, December 2025

Dec-2025E Value (Rs bn) Valuer per share (Rs) Comments

Ratings 24 2,535 DCF-based; implies~35X Dec-25E earnings
Non-ratings 13 1,398 Assign 20X Dec-25E earnings; pegged to peers
Cash 11 1,141
Total 49 5,074 Implies ~26X Dec-25E EPS

Source: Company, Kotak Institutional Equities estimates

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We expect ratings to drive revenue growth in the next 2-3 years for both CRISIL and ICRA
Revenue breakup for CRISIL and ICRA, 2021-2026E (Rs bn)
2021 2022 2023E 2024E 2025E 2026E
CRISIL (December year-end)
Ratings 3.7 4.2 5.2 6.0 6.9 7.7
Global analytics (S&P captive) 2.3 2.4 2.6 2.8 3.0 3.3
Research, analytics and solutions 17.1 21.1 23.9 26.3 29.2 32.7
Revenues (Rs bn) 23.1 27.7 31.7 35.1 39.1 43.7
YoY (%)
Ratings 13 23 16 14 13
Global analytics (S&P captive) 5 10 6 8 8
Research, analytics and solutions 23 13 10 11 12
Revenues 20 14 11 11 12
ICRA (March year-end)
Ratings 1.9 2.0 2.3 2.7 3.0 3.4
Knowledge services 0.9 1.2 1.5 1.7 2.0 2.2
Market data 0.1 0.2 0.2 0.2 0.2 0.2
Consulting 0.1 0.1 0.1 0.1 0.1 0.1
Revenues (Rs bn) 3.0 3.4 4.0 4.6 5.3 5.9
YoY (%)
Ratings 8 14 16 14 12
Knowledge services 30 27 15 13 12
Market data 18 7 8 8 8
Consulting (32) (8) 8 8 8
Revenues (Rs bn) 14 18 15 13 12

Source: Company, Kotak Institutional Equities estimates

Financial information companies trade at a premium to markets

Developed markets, especially the US, offers good perspective of how financial information services
companies are valued by markets in the past 10-15 years. These include a wide range of companies,
such as rating agencies (Moody’s, S&P), credit bureaus (Equifax, Experian, Transunion), index/data
provides (MSCI, Forrester, Gartner, Morningstar) and others (Towers Watson, Verisk).

Financial information service providers, on average, trade at a higher valuation than the broader markets
due to their high share of recurring revenues, healthier margin profiles, cash generation, entry barriers,
etc. Entry barriers get created due to investments required to build databases (e.g., Factset, FICO) or
historical track record (e.g., S&P, Transunion) or simply the administrative burden in changing the vendor
(e.g., MSCI). Once a product is entrenched in client’s workplace, switching is difficult and entails high
costs. This leads to high retention rates and an ability to control pricing, which, in turn, result in attractive
margins and higher valuations compared to the broader markets (Exhibits 13-14).

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Financial information services companies generate healthy margins and trade at high valuations
Key valuation and financial metrics of financial information services companies
Market cap. PE (X) EPS CAGR (%) Revenue CAGR (%) EBITDA margin (%) Net profit margin (%)
Company name Primary business (US$ bn) 2021 2022 2023E 2024E 2017-22 2022-24E 2017-22 2022-24E 2021 2022 2023E 2024E 2021 2022 2023E 2024E
S&P Global Credit ratings 111 28 34 28 24 12 18 12 6 54 55 47 49 36 29 32 34
Moody's Credit ratings 57 26 41 31 27 7 23 4 6 51 42 45 47 36 25 30 31
MSCI Indices 39 56 45 37 33 26 17 9 7 59 60 60 60 36 39 42 42
Verisk Analytics Risk consulting 34 57 39 41 35 12 5 1 5 55 72 54 55 27 38 31 33
Experian Credit reporting 30 30 21 19 18 6 7 7 4 33 33 35 35 15 19 18 19
Gartner Research & advisory 27 37 35 34 31 28 6 7 5 26 25 24 24 17 15 14 14
FICO Credit reporting 23 67 64 45 38 28 29 7 7 42 42 51 52 30 27 34 35
Equifax Credit reporting 22 29 31 26 22 3 20 8 4 34 33 32 35 15 14 16 17
Towers Watson Consulting 22 6 23 15 13 16 32 1 3 34 21 25 26 47 11 15 16
Factset Data & analytics 16 41 41 29 27 10 24 6 6 37 33 37 39 25 22 28 27
Transunion Credit reporting 13 9 47 18 15 (10) 73 10 4 36 32 36 37 47 7 18 20
Morningstar Data, research & ratings 10 50 136 54 42 (12) 81 13 6 26 20 20 22 11 4 6 8
CRISIL Credit ratings 4 63 52 49 43 13 10 11 13 27 26 27 27 20 20 19 19
GBG Identity verification 1 13 24 11 13 (2) 37 16 1 26 21 23 23 12 6 15 14
ICRA Credit ratings 1 44 37 32 29 7 13 5 14 35 35 34 34 30 30 29 29

Notes:
(1) ICRA follows March year-ends, 2021 refers to 2022 financials and so on.

Source: Bloomberg, Kotak Institutional Equities estimates

Financial information services and consulting companies have historically traded in the ~15-30X PE range
12M forward PE (mean and +/- 1 s.d. since 2008) of large global financial information services
companies (X)

Mean Mean + 1s.d. Mean - 1s.d.

45

36

27

18

9
31 30 29 27 26 26 24 23 20 20 20 20 20 14 16
0
Equifax
ICRA

Factset
CRISIL

S&P 500
Moody's
Transunion

Watson
Forrester
Experian
Morningstar
MSCI

Gartner

Verisk

S&P Global

Towers

Source: Bloomberg, Kotak Institutional Equities estimates

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S&P and Moody’s: 8-10% rating revenue growth over 2008-21; solid margin expansion during upcycle
The three leading rating agencies operate like an oligopoly, controlling over 80-90% market share in large
markets such as the US and Europe. The entrenched market position of large players gets reinforced as
they grow given the entry barriers and scale of current incumbents (Exhibit 15).

Big-3 agencies dominate ratings industry across the US, EU and the UK
Market share calculated in terms of debt rated/turnover, 2021 (%)

US EU UK

Others, 7 Others, 8
Others, 19
Fitch, 10

S&P, 34 S&P, 35

Fitch, 27

S&P, 50

Fitch, 20

Moody's,
33

Moody's, Moody's,
27 30

Source: SEC, ESMA, FCA

The rating revenues of S&P and Moody’s have seen 8-10% CAGR over the period from the GFC bottom
(2008) to peak in 2021. This was also a period of expansion in corporate credit and credit
disintermediation seen in the US and Europe, following the GFC. Both the companies also witnessed a
margin expansion in the past 10-15 years, given their strong operating leverage. The rating business’
margins for both S&P and Moody’s expanded to ~60% from 40-45% in 2009-10. Year 2021 probably
marked the peak of the cycle, with interest rate hikes leading to slower growth and a margin decline in
2022. Compared with pre-GFC period, both the companies have seen a decline in the dependence on
securitization-driven businesses (Exhibits 16-19).

Ratings business contributes ~45-50% of revenue for S&P

Financial highlights of S&P Global, 2006-22 (US$ mn)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
S&P Global
Revenues 6,255 6,772 6,355 5,870 3,639 3,954 4,270 4,702 5,051 5,313 5,661 6,063 6,258 6,699 7,442 8,297 11,181
Operating income 1,418 1,663 1,375 1,278 1,041 1,106 1,344 1,570 1,821 2,042 2,306 2,735 2,936 3,302 3,842 4,495 3,832
PBT 1,405 1,582 1,299 1,182 943 1,000 1,089 1,299 54 1,815 3,188 2,461 2,681 2,930 3,228 4,164 4,702
PAT 882 973 799 731 828 911 437 1,376 (115) 1,156 2,106 1,496 1,958 2,123 2,339 3,024 3,248
EPS (Rs) 2.5 3.0 2.5 2.3 2.7 3.1 1.6 5.0 (0.4) 4.3 8.0 5.8 7.8 8.7 9.7 12.6 10.3
Key ratios (%)
EBITDA margin 29 30 29 29 31 30 31 32 5 39 62 46 48 53 53 54 55
Net profit margin 14 14 13 12 23 23 10 29 (2) 22 37 25 31 32 31 36 29
ROIC 27 36 30 26 18 21 26 28 (16) 37 45 30 36 38 35 35 12
Ratings
Revenue 1,537 1,695 1,767 2,034 2,274 2,455 2,428 2,535 2,988 2,883 3,106 3,606 4,097 3,050
Operating income 712 762 720 809 882 (583) 1,078 1,256 1,517 1,530 1,783 2,223 2,629 1,672
Operating margin (%) 46 45 41 40 39 (24) 44 50 51 53 57 62 64 55
Revenue mix
Non-transaction (%) 64 61 63 56 54 54 54 54 48 53 49 45 45 59
Transaction (%) 36 39 37 44 46 46 46 46 52 47 51 55 55 41
Market intelligence
Revenue 916 1,031 1,124 1,170 2,130 2,376 1,661 1,683 1,833 1,959 2,046 2,185 3,811
Operating income 171 214 183 189 518 585 729 457 545 566 569 676 2,488
Operating margin (%) 19 21 16 16 24 25 44 27 30 29 28 31 65
S&P Dow Jones Indices
Revenue 273 323 388 493 552 597 638 728 837 918 989 1,149 1,339
Operating income 144 189 202 266 347 392 413 478 563 632 666 798 927
Operating margin (%) 53 59 52 54 63 66 65 66 67 69 67 69 69

Source: Bloomberg, Kotak Institutional Equities

Diversified Financials
India Research
 11

Ratings business contributes ~60-65% of revenue for Moody’s

Financial highlights of Moody’s, 2006-22 (US$ mn)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Moody's
Revenues 2,037 2,259 1,755 1,797 2,032 2,281 2,730 2,973 3,334 3,485 3,604 4,204 4,443 4,829 5,371 6,218 5,468
Operating income 1,099 1,181 746 705 773 888 1,069 1,235 1,439 1,473 1,515 1,843 1,925 2,104 2,447 2,968 1,997
PBT 1,261 1,117 726 646 714 840 1,024 1,169 1,461 1,380 558 1,787 1,672 1,810 2,229 2,755 1,760
PAT 754 702 458 413 508 582 706 782 910 934 974 1,135 1,358 1,509 1,825 2,309 1,409
EPS (Rs) 3 3 2 2 2 2 3 4 5 5 1 5 7 7 9 12 7
Key ratios (%)
EBITDA margin 56 54 47 42 41 42 43 45 46 46 21 47 46 47 50 51 42
Net profit margin 37 31 26 22 25 25 25 27 30 27 7 24 29 29 33 36 25
ROIC 131 174 138 110 84 61 45 38 39 37 13 26 25 27 29 27 15
Ratings
Revenue 1,780 1,205 1,218 1,405 1,569 1,887 2,072 2,266 2,334 2,371 2,774 2,712 2,875 3,292 3,812 2,699
Operating income 1,011 601 557 649 802 993 1,116 1,277 1,307 1,355 1,646 1,657 1,745 2,053 2,474 1,488
Operating margin (%) 57 50 46 46 51 53 54 56 56 57 59 61 61 62 65 55
Revenue mix
Non-transaction (%) 32 51 50 43 48 38 38 39 39 39 39 38 37 34 31 44
Transaction (%) 68 49 50 57 52 62 62 61 61 61 61 62 63 66 69 56
Analytics
Revenue 479 551 580 627 712 844 901 1,069 1,150 1,233 1,430 1,731 1,954 2,079 2,406 2,769
Operating income 120 148 130 123 165 191 212 258 280 286 355 460 546 614 627 840
Operating margin (%) 25 27 22 20 23 23 24 24 24 23 25 27 28 30 26 30

Source: Bloomberg, Kotak Institutional Equities

EBITDA margins expanded, reflecting strong credit cycle Ratings operating margin expanded in the decade
Overall EBITDA margin for S&P and Moody’s, Operating margin (adjusted for one-offs) for S&P
December year-ends, 2006-22 (%) and Moody’s, December year-ends, 2007-22 (%)

SPGI MCO SPGI MCO

70 70

56 56

42 42

28 28
Litigation
costs
14 14

- -
2008
2007

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2016
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

2017
2018
2019
2020
2021
2022

Source: Bloomberg, Kotak Institutional Equities Source: Bloomberg, Kotak Institutional Equities

S&P and Moody’s have seen strong re-rating in the past decade

Consensus 12M forward PE for S&P and Moody’s have been strongly correlated. Valuations have re-
rated from ~12-15X to almost 30-32X at the peak in this cycle. Valuations also likely reflect the
importance given to the business cycle in the ratings business, especially S&P, for which the ratings
business contributes 45-50% of revenues. Both the companies delivered ~12-14% earnings growth
during 2008-21, which marked the period from post GFC bottom to the likely peak of the cycle.

Diversified Financials
India Research
 12

S&P and Moody’s have seen strong valuation re-rating in the last decade
12M forward PE for S&P Global and Moody’s, 1997-2023 (X)

MCO SPGI
40

32

24

16

Jun-05

Jun-16
Nov-00

Nov-11

Nov-22
Sep-02

Sep-13
Dec-99

May-06

Dec-10

May-17

Dec-21
Jul-04

Jul-15
Apr-07

Apr-18
Oct-01

Oct-12

Oct-23
Feb-98

Feb-09

Feb-20
Jan-99

Jan-10

Jan-21
Mar-97

Mar-08

Mar-19
Aug-03

Aug-14
Source: Bloomberg, Kotak Institutional Equities

Diversified Financials
India Research
 13

Credit rating industry: Playing the leverage cycle

We believe credit rating agencies are the potential beneficiaries of a credit upcycle. In our view,
rating revenues can potentially witness a 13-15% CAGR in the next 3-5 years. This will be driven
by a confluence of drivers such as (1) higher corporate credit growth (already in its initial stages),
led by working capital and capex revival over time; (2) broad-based growth beyond the top-n
corporates will also augur well from a market expansion and pricing point of view; and (3) growth
optionality arising out opportunities such as ESG ratings, experimentations with vehicles and
structures, such as private credit, credit AIFs, NBFC-IDFs and secondary market for corporate
loans.

A cyclical recovery in rating revenues after a painful decade

The past decade has been a challenging one for CRAs due to the strong deleveraging cycle for large
corporate credit in India. Rating revenues have a strong correlation with two underlying drivers, i.e.
growth in outstanding corporate credit growth (banks, bonds, CP) and the number of entities rated.
Rating revenues of top-3 agencies have seen 11% in the last 15 years; however, 10-year CAGR is even
lower at ~5%. These muted growth figures represent a deep downcycle in corporate credit after 2014,
along with recurring shocks such as IL&FS crisis in 2018, followed by the bond market stress in 2020.

Rating revenues have strong correlation with corporate credit Strong correlation between corporate credit growth and rating
growth revenues
Corporate credit growth and rating revenues (top-3 Corporate credit growth and CRISIL’s rating
CRAs) revenues
Corporate credit growth (LHS) Corporate credit growth by banks (LHS)
Rating revenue growth (RHS) CRISIL - yoy revenue growth (RHS)
25 30 45 55
Start of bank loan
ratings
20 22 35 41

15 14 25 27

10 6 15 13

5 (2) 5 (1)

- (10) (5) (15)

2011
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2003

2005

2007

2009

2013

2015

2017

2019

2021

2023

Source: Rating agencies, RBI, SEBI, Kotak Institutional Equities Source: Rating agencies, RBI, SEBI, Kotak Institutional Equities

Diversified Financials
India Research
 14

CRISIL has seen its revenue share grow to ~35% in FY2023 from ~28% in FY2018
Rating revenues for CRAs in India, March fiscal year-ends, 2014-23 (Rs mn)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 10Y CAGR 5Y CAGR
Rating revenues
CRISIL 2,864 3,019 2,885 2,929 3,022 3,245 3,457 3,509 3,863 4,472 5.1 8.2
CARE 2,269 2,549 2,622 2,784 3,196 2,985 2,254 2,165 2,290 2,615 1.6 (3.9)
ICRA 1,643 1,823 1,972 2,135 2,259 2,344 2,143 1,846 2,020 2,295 3.8 0.3
India Ratings 650 890 890 1,170 1,261 1,427 1,367 1,341 1,505 1,740 11.6 6.7
Infomerics ― ― 2 10 41 77 204 258 320 492 NA 64
Brickworks 370 460 520 605 749 792 662 565 485 241 (4.6) (20)
Acuite 300 330 224 246 300 384 320 330 420 454 4.7 8.6
Total 8,096 9,072 9,115 9,880 10,828 11,254 10,408 10,013 10,904 12,309 4.8 2.6
YoY (%)
CRISIL 5 (4) 2 3 7 7 1 10 16
CARE 12 3 6 15 (7) (24) (4) 6 14
ICRA 11 8 8 6 4 (9) (14) 9 14
India Ratings 37 ― 31 8 13 (4) (2) 12 16
Total 12 0 8 10 4 (8) (4) 9 13
Revenue share
CRISIL 35 33 32 30 28 29 33 35 35 36
CARE 28 28 29 28 30 27 22 22 21 21
ICRA 20 20 22 22 21 21 21 18 19 19
India Ratings 8 10 10 12 12 13 13 13 14 14
Infomerics ― ― 0 0 0 1 2 3 3 4
Brickworks 5 5 6 6 7 7 6 6 4 2
Acuite 4 4 2 2 3 3 3 3 4 4
Total 100 100 100 100 100 100 100 100 100 100

Source: Company, Kotak Institutional Equities estimates

CRISIL’s BLR book is smaller but spread across many firms Bond book rating mix is similar but CRISIL has much larger base
Rating mix of instruments other than securities and Rating mix of debt securities and debt rated, March
debt rated, March 2023 (%) 2023 (%)
Rs52 tn Rs15 tn Rs27 tn Rs26 tn Rs5 tn Rs52 tn
Rs18 Rs15 tn
Rs70 Rs27 tn
Rs38 Rs26 tn
Rs21 Rs5 tn
Rs2
100 4 100 3 2
8 6 8 0 3
1 2 4 9
9 7 26 17
5 8 16 18
80 10 80
13 19
15 6
17 9
60 60
22 27
25
87 45
40 40 75 80 77
22
57 33
20 40 40 20
15
23
12 5
- 4 -
CARE CRISIL ICRA India Brickworks CARE CRISIL ICRA India Brickworks
Ratings Ratings
AAA AA A BBB BB B C D AAA AA A BBB BB B C D

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Diversified Financials
India Research
 15

Corporate India has significantly de-leveraged

Indian companies have gone through significant deleveraging in the past 5-6 years. India’s non-financial
corporate debt-GDP ratio has declined versus its own peak while also remaining much lower than most
other large economies in the world. While the timing of the capex revival remains uncertain, there are at
least initial signs of revival. India has one of the lowest corporate debt-to-GDP ratio globally (Exhibit 26-
27) as of 2021. The debt-equity ratio of non-financial firms is also at a cyclical bottom (Exhibit 28).

The RBI’s recent report on project sanctions also noted that improved capacity utilization and improved
business expectations point toward a revival in investment activity as reflected in forward-looking
enterprise surveys conducted by the RBI and other agencies. The sanction amount is at a decade-high,
even though actual capex growth is muted due its lagged nature. While the relevance of sanctions and
capex is now relatively much lower for the banking system credit growth (~2% of overall credit), it
represents a good leading indicator for corporate credit growth and requirement for credit ratings.
(Exhibits 31-32)

Corporate non-financial debt to GDP in India is at cyclical lows

Corporate non-financial debt to GDP across countries, 1998-2022 (%)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Brazil 37 36 33 38 42 38 33 33 35 31 36 37 37 39 42 45 47 54 47 45 46 47 55 54 53
Canada 87 81 83 88 90 85 84 77 78 81 84 89 85 85 90 95 99 109 110 110 113 116 132 123 114
China na na na na na na na na 98 87 88 104 111 109 117 122 132 141 145 142 136 134 139 131 134
France 95 99 104 108 108 106 106 107 109 110 116 120 119 124 128 126 131 136 142 143 146 152 173 166 162
Germany 60 61 69 72 74 74 69 68 69 68 70 72 70 67 67 69 64 64 64 65 68 69 73 72 73
HK 118 108 105 102 101 109 112 119 124 136 141 139 165 178 177 201 218 230 238 272 262 268 292 275 277
India 49 52 57 58 63 62 67 74 81 55 64 65 71 76 75 68 71 66 56 57 48 54 57 51 52
Indonesia na na na 21 18 17 17 16 15 15 15 15 14 15 19 22 23 25 24 23 24 24 25 23 22
Israel 66 70 71 79 83 79 80 85 87 91 84 84 83 80 77 73 70 69 69 68 68 68 70 71 69
Italy 49 54 57 59 60 62 63 66 70 75 77 83 82 81 83 82 81 77 74 71 70 68 77 73 69
Japan 130 125 118 114 112 105 99 100 100 99 104 107 102 101 100 98 97 94 96 96 98 102 116 118 118
Korea 113 100 89 85 82 80 74 73 80 85 97 100 96 96 98 98 100 98 94 93 96 101 110 114 120
Malaysia na na na na na na na na 61 63 59 70 65 68 67 71 70 74 74 76 72 71 82 78 64
Mexico 23 19 17 16 16 16 14 13 14 15 17 17 17 18 18 21 22 25 27 27 26 25 27 25 24
Poland 27 31 32 33 36 35 29 28 32 34 40 38 38 42 43 44 47 48 50 47 47 44 46 44 40
Singapore 115 110 105 118 114 112 96 95 90 95 109 105 95 103 112 125 134 139 138 139 139 152 172 162 131
South Africa na na na na na na na na na na 37 35 33 32 33 35 35 38 39 38 37 37 37 32 33
Spain 51 62 72 80 82 87 93 103 117 128 132 138 140 137 130 124 116 110 105 99 95 93 108 104 93
Thailand na na na na na 91 93 90 85 73 76 75 70 74 74 75 76 78 77 75 76 75 87 90 87
US 60 66 71 75 79 75 73 79 81 82 91 88 84 81 84 79 73 70 74 76 71 71 79 72 78
UK 60 63 64 65 64 62 62 63 65 70 73 70 67 66 67 67 69 71 73 75 76 76 85 81 68

Source: BIS, IMF, Kotak Institutional Equities

Corporate leverage in India is at a low point compared to other Corporate leverage in India is at its lowest in over a decade
countries and historical levels
Debt-equity ratio for private non-financial
Private non-financial corporate debt to GDP, 2021 companies, March fiscal year-ends, 2010-22 (%)
(%)

2021 Min (25Y) Max (25Y)

300

240

180

120

60

-
HK

Poland
South Africa
Singapore
France

Korea

Mexico
Malaysia

Indonesia
China

UK

US

India
Japan

Israel
Canada

Thailand
Spain

Italy

Brazil
Germany

Source: RBI
Source: BIS, IMF, Kotak Institutional Equities

Diversified Financials
India Research
 16

Rating profile of Indian firms has improved in the past decade Annual default rate in India is at close to bottom levels
Shift in the rating distribution of CRISIL Ratings Trends in annual default rates of firms rated by
CRISIL

Source: CRISIL Source: CRISIL

Corporate credit growth by banks could reach ~15% Fresh sanctions in FY2023 at decade-high, yet below peak
Corporate credit growth for banks, March fiscal Corporate loan growth, March fiscal year-ends,
year-ends, 2007-25E (%) 2007-2023 (%)
30.0 Initial Revised % of bank credit (RHS)
6,000 16.0

22.5
4,800 12.8

15.0
3,600 9.6

7.5
2,400 6.4

0.0
1,200 3.2

(7.5) 0 -
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024E
2025E

2007
2008
2009

2018
2019
2020
2021
2022
2023
2010
2011
2012
2013
2014
2015
2016
2017

Source: Kotak Institutional Equities Source: Kotak Institutional Equities

Broadening of credit market with new players and investment vehicles

Credit expansion in India is likely to see a broader participation in this cycle, extending beyond banks and
wholesale NBFCs. While banks and select NBFCs will remain the bellwether of lending in the economy,
we are witnessing specialized players in private credit space participating in India. This is driven by not
just higher risk appetite by these players, but also inherent demand for more flexible lending structures
and regulatory constraints faced by banks. Some of these structures include credit AIFs, REITs, InvITs
and IDF NBFCs. For example, regulations disallow banks from providing structured financing solutions.
Private credit investors, on the other hand, can invest from various onshore and offshore structures.

As per E&Y, private credit transaction worth more than US$5.3 bn were executed in 2022. The share of
global funds was 58%, followed by 33% by domestic funds and 9% by joint investments deals. Further, in
the 1H2023, ~US$2 bn was raised by global and domestic funds to be deployed in performing credit,
stressed credit and special situation opportunities and another US$4 bn deployed across several
transactions. Exhibits 33-34 show the fund-raising progress in credit AIFs and REITS-InvITs.

Diversified Financials
India Research
 17

Credit AIFs have seen healthy launch activity in recent years REITs and InvITs have gained larger acceptance in the market
Number of credit AIFs registered, March fiscal year- Number of funds and fund mobilized by REITs and
ends, 2012-21 (#) InvITs, March fiscal year-ends, 2020-1QFY24

15 Funds mobilised (Rs bn, LHS) Funds (#, RHS)

600 12

12
480 10

9
360 7

6
240 5
3
120 2
0
1HFY23
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

- -
2020 2021 2022 2023 1QFY24

Source: SEBI, E&Y, Kotak Institutional Equities Source: SEBI, Kotak Institutional Equities

Credit rating agencies remain relevant for current size and development stage of markets
Credit rating agencies (CRAs) play the role of removing the information asymmetry between corporates
and a dispersed set of external investors. While the issuer-pays model attracts criticism occasionally, it
achieves an important objective of creating a public good in terms of widely available information and
view on the credit quality of the company. While there could always be a tension between business
requirements and fiduciary duty, it is crucial to note that CRAs have a large reputational capital at risk.
We have seen this play out in India as well during the post-2018 NBFC crisis. Excessive focus on business
needs can have damage the long-term prospects of the business, in turn making the position of
disciplined players even more entrenched.

 Ratings are akin to public good; help in lower monitoring costs. CRAs’ role of information
intermediaries also helps reduce the monitoring cost for the overall system. For example, pension
funds managing retirement money can be cost-effectively tied to an investment objective through
mandates around minimum credit ratings, etc. instead of requiring separate teams. Clearly, the
fundamental assumption remains that credit ratings do a good job of indicating credit risks.

 Weak secondary markets imply a lack of credit information. Bond prices and credit spreads are useful
indicators of market’s perception of the credit quality. However, similar to a few other Asian markets,
India lacks trading liquidity beyond AAA and AA-rated bonds. With the lack of trading in the lower-
rated bonds, CRAs fill the gap of providing timely credit information to market participants.

 Stricter governance norms post 2018 crisis. Following the 2018 NBFC crisis, which put into question
the credibility of credit ratings, the SEBI overhauled the governance of CRAs. Some of the key points
include: (1) not having MD/CEO as part of rating committees, (2) rating committee reporting to chief
ratings officer, who in turn would report to ratings sub-committee of the board, (3) annual meetings
between CRAs and audit committee of the issuer to discuss any concerning issues (Exhibit 35).

 Ratings are hardwired into the financial system. The use of rating agencies is embedded into the
regulatory guidelines and prescriptions. This is true across the spectrum of regulations designed by
the RBI, SEBI, IRDAI and the PFRDA. While this increases the dependence on external ratings, we are
currently not in the phase of growth (or credit cycle), which would warrant a total overhaul of
regulations. Further, regulators are also likely to evaluate the effectiveness of the revised stricter rules
going forward (Exhibit 36).

Diversified Financials
India Research
 18

Regulator has tightened governance norms for CRAs following the NBFC crisis in 2018
Highlights of enhanced governance norms for CRAs (November 2019)

MD/CEOs of CRAs shall not be a member of rating committees.

Rating committees of CRAs shall report to a Chief Ratings Officer (CRO).
One third of the board of a CRA shall comprise of independent directors, if the board is chaired by a non-executive director. In case the
board is chaired by an executive director, half of the board shall comprise of independent directors.

The board of a CRA shall constitute the following committees: (1) Ratings sub-committee and (2) Nomination and Remuneration committee.

The Chief Ratings Officer (CRO) shall directly report to the Ratings sub-committee of the board of the CRA.
The Nomination and remuneration committee shall be chaired by an independent director.
During the rating process, CRAs shall record minutes of the meeting with issuer management and incorporate it in the rating committee
note.
CRAs shall meet the audit committee of the rated entity, at least once in a year, to discuss issues including related party transactions, internal
financial controland other material disclosures made by the management, which have a bearing on rating of the listed NCDs.
Firewall between the rating and non-rating activities with policies on nature and extent of sharing of infrastructure, officials/employees or
resources between the CRA and the non-rating entity.

Source: SEBI, Kotak Institutional Equities

Need for credit ratings is embedded in several regulations

Requirement of credit ratings in different parts of financial system
RBI
The credit rating by external rating agencies is not compulsory from regulatory capital perspective, if the maximum
SME lending aggregate exposure to one counterparty does not exceed the threshold limit of Rs75 mn, subject to meeting certain
other conditions.
Increase the all-in-cost ceiling for ECBs, by 100 bps available only to eligible borrowers of investment grade rating
ECB
from Indian Credit Rating Agencies
RWA calculations Banks have to get ratings from six certified rating agencies agencies to comply with Basel-III capital regulations.
To be eligible for PCE from banks, corporate bonds need to be rated by a minimum of two external credit rating
Partial credit enhancement for corporate bonds
agencies at all times.
NHB
Loans to housing finance companies National Housing Bank requires financing extended to housing finance companies to be rated.
SEBI
Credit rating is required where aggregate consolidated borrowings and deferred payments exceed 25% of the value of
REITs
the InvIT assets
Credit rating is required where aggregate consolidated borrowings and deferred payments exceed 25% of the value of
InvITs
the REIT assets
Monitoring of the end-use of proceeds of equity issues above Rs1 bn (IPO, FPO, rights issue, QIP, preferential issue).
IPO end use
are to be done only by credit rating agencies and not banks as was the requirement earlier.
IRDAI
Corporates bonds or debentures rated not less than AA or its equivalent and A1 for short-term bonds, debentures, CD
Crorporate bonds or CP by credit rating agency
Infrastructure investments, issued by Infrastructure Companies, rated not less than “A” along with an Expected Loss
Rating of “EL1” as part of “Approved Investment” and should be listed under Category Code “IELB” as per Category of
Infrastructure Investments Investment under Master Circular - Investments.
Further, any downgrade of Infrastructure Investment, below “A” or “EL1”, needs to be re-classified as part of “Other
Investments” and reported under Category Code “IOEL” as per Category of Investment under Master Circular –
Investments. The valuation of the above investments, shall be valued “either as per FIMMDA or at applicable market
yield rates published by any Rating Agency registered with SEBI”.
Investment in Asset backed securities, PTCs and SRs ABS must be rated not less than AAA by a Credit Rating Agency
shall be rated not less than ‘AAA’
Debt securities issued by banks and those issued by Banks in Public Sector shall have rating not less than ‘AA’
The REIT /InvIT rated not less than “AA”shall form part of Approved Investments. REIT /
REIT and InvIT InvIT rated less than AA shall form part of Other Investments.
PFRDA (investment guidelines)
Minimum rating AA or better / AA+ for NBFCs
CRAs At least two rating agencies
Tenor Minimum 3Y and maximum 15Y

Source: RBI, SEBI, IRDAI, PFRDA, Kotak Institutional Equities

Diversified Financials
India Research
 19

ESG ratings: Early stages of evolution

The SEBI recently finalized the framework for ESG rating agencies. It will roll out separate licenses for
the entities willing to set up this business. Effectively, the incumbent CRAs will need to set up separate
subsidiaries that will operate akin to a standalone and separate business. Both CRISIL and ICRA have
announced that they are setting up subsidiaries to carry out ESG rating. To enable information availability
that will support the growth of ESG ratings, the SEBI has introduced the Business Responsibility and
Sustainability Report (BRSR) Core, which contains the KPIs for listed entities.

A glidepath has been prescribed for the applicability of BRSR Core, beginning with the top-150 listed
entities (by market capitalization) from 2023-24, which shall be gradually extended to the top-1000 listed
entities by 2026-27. ESG disclosures and assurance (BRSR Core) will be introduced for the value chain
of listed entities for better view. The business or the revenue model is yet to be established, and we will
need to see if CRAs have an inherent advantage in this domain.

Secondary loan market for corporate loans

The RBI has been taking steps to develop an active secondary market for corporate loans in India. In
2019 it constituted a task force (link) to make recommendations on this topic along with associated
issues such as standardization of contracts, market structures, intermediaries, etc.

Markets such as the US, Europe and parts of Asia Pacific have seen development of a secondary market
for corporate loans. While corporate lending over many decades has matured and frequently involves
multiple lenders via syndicated lending, secondary markets that help in trading of loans have also grown
strongly. Secondary loan markets allow better liquidity and risk management in corporate credit
portfolios of lenders along with capital optimization. In India, while there have been transactions in the
stressed loan portfolio, interbank bilateral transactions have been less frequent. Few factors that have
impeded growth include absence of a systematic loan sales platform, lack of standardization in
documentation and legal factors and lack of active participants and effective price discovery
mechanism.

Task force committee indicated that development of secondary loan market could be a precursor to
developing corporate bond markets given better establishment of acceptable market prices of loan
assets. Progress seen in markets like the US and Europe indicate that a vibrant secondary market with
involvement of multiple borrowers, lenders and investors will support demand for independent credit
assessment by rating agencies.

Diversified Financials
India Research
 20

Developing market-based finance: Mix of systematic and idiosyncratic factors

A review of the financing systems across major economies has a few takeaways: (1) Capital
markets for funding develop with the coming together of legal, economic and financial structures;
(2) banks generally thrive in markets with weak contract enforcement apart from country-specific
regulations (e.g., US versus Europe); (3) market-based systems are better equipped to spread risk,
helping avoid systemic risks from large, overleveraged banks; (4) even with a wide variance in the
starting point, the share of bond financing has increased in most markets in the past decade; and
(5) strong bankruptcy laws and recovery rates are the key inputs to widen the bond market beyond
AAA/AA.

Bank versus bond-based financing: Merits and weaknesses

Most countries can be classified into bank-based or market-based financing systems on the basis of the
predominant way of raising debt capital. The US stands out as a country with highly active and efficient
debt markets even when compared with large developed economies of Europe and Japan. While most
advanced economies have large government bond debt markets, there are differences in the level of
sophistication of these markets. For example, repo markets are very large in the US, but much smaller in
Germany even though both are large and well-developed capitalist economies.

Corporate bond markets are difficult to build and often takes lot of time. Markets grow from the
participation of corporates, investors and intermediaries and goes beyond just building market
infrastructure. As various research indicates, participation comes from a range of economic and
technical, as well as political and “behavioral”, factors coming together.

We present key arguments put forth by some of the research on this topic.

 Bank-based systems. Banks tend to thrive in countries with weak contract enforcement, wherein they
try to protect their credit by demanding collateral from borrowers. They have developed expertise over
the years in credit intermediation by channeling savings into areas where capital can be deployed
profitably. Banks benefit from long-run relationships with corporates, and hence are better-placed to
exploit scale economies in information processing. They have relatively lesser restrictions on their
credit policies, which allow them to build portfolios across the spectrum of riskiness. Credit events
are also likely better managed within banking relationship compared to market-based borrowings.

 Bank lending works well for a set of borrowers, especially SMEs, where banks are able to reduce
their probability of losses by actively enforcing and monitoring covenants. While borrowers
typically experience restricted output due to these covenants, they benefit from lower borrowing
costs compared to market-based rates due to fixed cost associated with information asymmetry.
In addition, research has found evidence that banks use firms’ deposit accounts as a mechanism
to monitor borrowers. Finally, a bank loan is easier to restructure than bonds. Some companies
may prefer to deal with a bank confidentially rather than face the disclosure requirements of bond
financing.

 Banks are being highly leveraged entities can be subject to economic cycles—for example, during
bad times when asset prices are falling, banks may experience credit losses and could be required
to shrink balance sheets, raise capital and de-risk their incremental lending considerably. High
reliance on banks for credit has the risk of restraining credit to deserving sections of the economy.
In the severe cases, there is systemic risk on account of contagious bank runs.

 Market-based systems. Well-regulated and deep capital markets play a positive role in enabling
information diffusion across a larger set of investors. This helps markets become more efficient in
identifying and allocating capital. The proponents of this view stress that markets will reduce the
inherent inefficiencies associated with the banking system. These include: (1) markets functioning as
‘platforms’, channeling resources between savers and borrowers compared with separate large
balance sheets across banks; (2) markets reduce the dependence on highly leveraged institutions for
credit intermediation; (3) markets have much better asset-liability matching and (4) they are much
less interconnected, including linkages to the payment infrastructure. Ultimately, there are lower
systemic risks. Studies find that firms substituted corporate bonds for bank loans during the financial
crisis of 2008 in the US.

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 Studies (link, link) have found that firms that primarily relied on banks for capital suffered larger
valuation losses during periods of crisis, followed by a higher decline in their capital expenditure
and profitability compared to firms that had access to the public debt market.

 Market-based systems also lower the concentration of financial risks and potential losses in the
local banking system, which are generally heavily supported by public safety nets.

Banks versus bonds: Wide variances across countries

We refer to the last available comprehensive study on this topic by (‘Establishing viable capital markets’
2019 study by the BIS). Bond markets have grown bigger in most markets across the world, even as the
starting point varies a lot. The average share of bank credit is around 60% in both emerging and advanced
economies, down from 80% in 2008. The period between 2008 and 2017 was also marked by relatively
onerous regulatory regime for banks in the US and EU. While the report does not explicitly call it out,
lower interest rates have also likely played a role in the shift of lending from banks to markets. There is
also significant variance across countries covered. In 2017, the most bank-dependent economies were
Hungary, Spain, Sweden and Turkey, while Mexico, the UK and the US were the least bank-dependent.
Most major markets have seen rise in share of non-financial corporate bond (as % of GDP), with China
as a clear outlier in the use of bond markets to tap credit beyond bank lending. (Exhibit 37-39)

The average share of bank credit has declined in both emerging and advanced economies
Share of bank credit to the private non-financial corporate sector (%)

Source: BIS

Bonds have gained share in corporate debt across the world

Non-financial debt as % of GDP and % share in total debt across countries, 2000-2021 (%)

Source: Research paper, Kotak Institutional Equities

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Financial corporations are the dominant issuers of bonds in emerging and advanced economies
Size of corporate debt securities markets (% of GDP)

Source: BIS

There is a clear path dependency behind countries having different financing models
Differences across countries are starker in the corporate bond markets. A lot of factors have likely played
a role, including: (1) regulatory regimes, (2) business traditions and cultures, and (3) path dependencies,
given the varying economic and financial histories. While there are ways to identify/quantify developed
markets, it is not always easy to encourage its development (link to research). For example, secondary
market liquidity is considered a key ingredient of well-developed securities market. However, liquidity is
a function of trading volumes, which itself depends on factors such as liquidity, bid-ask spreads, etc.
Liquidity also depends on intangibles, such as market integrity, safety of market infrastructure and
enforcement abilities of regulators. Finally, even if everything is in place, investor confidence is a key
factor.

US stands out as the most developed bond market compared to Europe, Japan or Asia

The US stands out as a market with an exceptionally strong and vibrant bond market. After 1980s, bond
financing by the US non-financial corporates has far outgrown banks. Bonds have also gained much
larger share in borrowings in the six decades between 1950s to 2010s (Exhibits 40-41). Another feature
of the lending markets in the US is a countercyclical nature of bond markets, i.e., lending from banks
tends to contract during recessions, whereas bond financing tends to be more accommodative during
recessions (Exhibit 42). The last point also suggests that the sort of entities that have much easier
access to the bond markets are also relatively larger, better-rated and less impacted by downturns.
Lastly, bond markets themselves have become deeper with the increasing share of BBB and below-rated
securities (Exhibit 43).

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US: Growth in corporate bonds has far outgrown bank lending US: Share of corporate bonds has grown to ~65% of total debt
Bank loans and bonds outstanding for non-financial Share of bank and bond borrowing in non-financial
corporations, 1952-2012 (US$ bn) corporate financing, 1952-2012 (%)

Source: Bank versus Bond Financing Over the Business Cycle Source: Bank versus Bond Financing Over the Business Cycle

Bond markets have a shown a countercyclical nature, i.e., out- Corporate bond issuance has increased in the lower end of
growing bank loan during recessions investment grade
Growth in bank loans and bonds across cycles, Rating mix of US corporate bond issuance (USD bn)
1952-2012 (%)

Source: What’s in A(AA) Credit Rating?

Source: Bank versus Bond Financing Over the Business Cycle

Exhibit 44-45 shows the breakdown of non-financial corporate debt back in 2010 across the US, Europe
and Asia. It is worth discussing why the US really stands out as a developed bond market from early on.
Research points to a few key drivers, such as (1) restrictions on interstate banking (states restricted
banking as did not receive any charter fees from banks incorporated in other states) and (2) important
role of the private sector in developing utilities such as railways and electricity. These clearly contributed
to the development of a relatively large corporate bond market. While the dominant channels (banks)
still remain dominant in Europe and Asia, but in the past decade, there has been a progress in making
bond markets attractive for both issuing and investing.

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Use of bonds is far greater in North American firms Euro area forms rely less on market-based finance
Debt outstanding, listed nonfinancial corporations, Non-financial corporates funding structure, (% of
by region, 2010 GDP), 2017

Bonds Bank loans Other

4.5

3.6 0.7 1.0

2.7 0.8
0.4

1.7
1.8
1.7
2.4
0.9
1.2
0.7
0.0
North America Europe Asia

Source: A Capital Market Union for Europe, Kotak Institutional Equities

Source: Research paper, Kotak Institutional Equities

For example, the Euro area has seen bond share in funding grow quite well, reaching ~20-25% by 2018
from ~10% in 2002. While it has been a secular rise over 2002-18, growth was faster after the financial
crisis. Further, the increase in the bond market share is not concentrated among the largest firms. There
is progress across the four quartiles of firm size. Same research also indicates that market expansion
is not restricted to historical issuers, but also driven by new firms tapping bond markets (Exhibit 46).

Use of bonds has grown in Euro Area across firms of different sizes
Share of bonds in borrowing by firms in Euro Area, 2002-18 (%)

Source: ECB Research

Role of recovery rates and bankruptcy laws

One of the research studies (Insolvency Resolution and the Missing High-Yield Bond Markets) puts forth
an interesting proposition – variation among countries on use of bank debt versus bonds is not explained
as much by differences in credit monitoring ability, cost considerations or infrastructure differences.
Authors propose that differences in insolvency process and recovery rates probably explain much more
strongly the cross-firm and cross-country patterns in the use of bonds and loans. Bankruptcy recovery
rates vary a lot across countries (negligible to 90%), which can be explained by liquidation decisions by
courts, legal delays, lack of funding while in bankruptcy and direct legal costs (fees to lawyers, etc.).
Because of these issues with in-court procedures, insolvency is largely handled outside the court in many
countries.

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Another point worth noting is that the corporate bond market is well integrated internationally. For
example, many issuers from Europe and around the world issue bonds in the UK and the US. Issuers'
nationality unlikely affects market liquidity and depth. Legal formats around bonds (covenant structure,
debentures, etc.) are largely standardized internationally, along with an investor base that is willing to
invest in bonds of a foreign issuer. However, bankruptcy rules are different across countries and
insolvency is typically resolved in the home country. This makes bankruptcy as a possible source of
cross-country variation in bond market development even if trading is organized in a global market.

The core argument is as follows. Banks do not prefer underwriting large loans for risk-related reasons,
whereas the bond market is indifferent to the size of credit. While this favors bond financing, the risk of
bankruptcy may offset this effect. An insolvent firm resolves the situation either by bankruptcy or out of
court. Out-of-court resolution produces more total value than bankruptcy, but sharing of the additional
value depends on relative bargaining power amongst lenders, favors concentrated lenders (i.e., banks).
This raises the threshold coupon bondholders require to fund risky firms. As a result, the research posits
that that safe firms will issue bonds (to avoid paying high interest rates required by banks), but riskier
firms, for which insolvency is more likely, issue bonds only if bankruptcy is efficient. For less efficient
bankruptcy regimes, risky firms are stuck with bank loans.

Bond penetration in the lower-rated categories shows a starker contrast between the US and other
regions. This indicates that better bankruptcy regimes (i.e., the US) should be associated with more
bonds and that the effect should be stronger for lower credit quality firms. In other words, strong firms
issued bonds everywhere, but weak firms only issue bonds when they are located in a country with a
good bankruptcy system.

Chapter 11 bankruptcy reforms spurred the bond market in the US

Chapter 11 bankruptcy reforms implemented in 1978 likely had a major role in development of corporate
bond market in the US by spurring the growth in junk bond market. With the bankruptcy system capable
of handling large, complex cases and producing high overall value for claimants, it became feasible to
issue large amounts of corporate bonds, even for higher risk issuers. We see this in the above exhibit
(Exhibit 40), wherein growth in bond debt picked up strongly after 1980. Exhibit 47 below shows that,
between an out-of-court restructuring and in-court bankruptcy, bonds are likely to suffer greater number
of violations of absolute priority rule (APR). APR is akin to liquidation waterfall, i.e., a theoretical, fair
distribution of claims. A well-developed bankruptcy regime helps corporate bond holders get a fairer
treatment, resulting in lower APR violations.

Secondly, as Exhibit 48 shows, while the use of bonds declined with the fall in credit quality, it is much
less pronounced for North American firms compared to European and Asian firms. This again indicates
that default risk and recoverability after default is probably a key variable in attracting bondholders.

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A well-developed bankruptcy regime helps corporate bond Use of bonds declined with fall in credit quality but more drastic
holders get a fairer treatment for European and Asia firms
Absolute priority violations in out of court and in- Share of bonds in overall debt across varying credit
court bankruptcy cases, 2010 (%) ratings across Asia, Europe and America, 2010 (%)

Source: Insolvency Resolution and the Missing High-Yield Bond Markets

Source: Insolvency Resolution and the Missing High-Yield Bond Markets

Role of Asian financial crisis in developing regional bond market

Asian crisis (c.1997) put the spotlight on the vulnerability of the financial system, given the fragility of
the banking system to external risks and an underdeveloped bond market. Crisis and its subsequent
initiatives played a key role in developing bond markets in select Asian countries that were highly
impacted, i.e., Thailand, Korea and Indonesia (Research links – 1).

The crisis originated due to larger corporations’ heavy dependence on bank finance in domestic and
foreign currency, while SMEs were almost exclusively reliant on domestic bank loans. Domestic banks
in turn were dependent on short-term dollar denominated funds to finance these domestic currency
loans creating a potential double mismatch of currency and maturity. There was also believed to be a
close relationship among the governments, banks and companies, along with limited ability of banks to
assess and monitor the creditworthiness of companies.

As a response to the crisis, The Asian Bond Markets Initiative (ABMI) was set up in 2002 by the ASEAN
nations along with China, Japan and South Korea (ASEAN+3) — to develop local currency bond markets
and promote regional financial cooperation and integration to strengthen financial stability and reduce
the vulnerability to the sudden capital outflows (link). Local bond markets would be more effective in
mobilizing domestic savings to finance long-term investments.

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Corporate bonds to GDP is one of the lowest in India Relative to its GDP, Indian corporate bond market is still small
Corporate bond to GDP ratio, 2022 (%) Corporate bond share for Asian countries, 2022 (%)
China Japan Korea India
2022 Min Max
100 Malaysia HK Indonesia Philippines
Thailand Singapore Vietnam
100%
80

80%
60

40 87 60%

54
20 47
36 40%
26 28
2 7 8 16 18
-
HK 20%
Indonesia

Singapore

Korea
India

Malaysia
China
Philippines

Japan
Vietnam

Thailand

0%

2013
2009
2010
2011
2012

2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: RBI, Asian Bond Market Initiative

Source: RBI, Asian Bond Market Initiative

Asian Bond Market Initiative – framework for developing corporate bond market
Implementation arrangement, 2008-2016

Source: The Asian Bond Markets Initiative Policy Maker Achievements and Challenges

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India’s corporate bond market—a work in progress

Developing India’s corporate bond market has been a continuous pursuit of regulators for more
than a decade. Wide-ranging initiatives include enabling regulatory framework to spur
demand/supply of bonds, creating robust market infrastructure, liquidity enhancing measures and
developing complimentary markets such as repo and credit derivatives. While these have resulted
in share of corporate bonds rising to ~35% from ~25% a decade back, the market lacks breadth
(high share of AAA/AA and financials) and depth (liquidity).

Share of corporate bonds have grown to ~35% of overall credit

Headline data on India’s corporate bond market in India show strong progress in the past decade or so.
The corporate bond market has grown in absolute terms to reach ~Rs44 tn as of June 2023 from ~Rs8
tn as of June 2010, at a CAGR of 14%. However, the growth rate in the last three years and seven years
are relatively lower at 10-11% CAGR. Issuances have picked up post Covid, i.e., FY2021-23, with an annual
issuance run-rate of Rs11 tn compared to Rs8 tn average over FY2016-20 (Exhibits 52-53).

Corporate bond issuances have grown steadily over the last Corporate bond outstanding has grown to nearly ~Rs45 tn by
decade June 2023
Corporate bonds issuance, March fiscal year-ends, Corporate bonds outstanding, March fiscal year-
2011-24, (Rs bn) ends, 2011-24, (Rs tn)

12,000 50

9,600 40

7,200 30

4,800 20

2,400 10

- 0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
1QFY24

2022
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

2023
1QFY24
Source: SEBI, Kotak Institutional Equities Source: SEBI, Kotak Institutional Equities

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Corporate bonds outstanding have grown at 10-11% in the past 5-7 years
CAGR growth rates across time period, (%)

Issues (#) Issuance amount in a year Bonds outstanding

22
19
18 17 16 17

14
14
11 11
11 10

7
7

-
12Y 7Y 3Y

Source: SEBI, Kotak Institutional Equities

Exhibit 55-56 puts the corporate bond market in the context of the share in overall corporate lending. We
combine the corporate loans, external commercial borrowing and commercial paper, along with
corporate bonds. The share of corporate bonds has increased to ~35% in recent years compared to
~25% a decade back. The share of ECB has been quite stable in the 14-17% range, whereas CP remains
quite low. Growth in the share of corporate bonds also coincides with a banking system and a section
of corporate India that went through a challenging phase of high leverage, defaults and resolutions.

Corporate bonds have outgrown bank lending over the past Share of corporate bonds have grown to ~35% of overall lending
decade market
Sources of corporate funding, March fiscal year- Sources of corporate funding, March fiscal year-
ends (Rs tn) ends (%)

Bank loans Corporate bonds ECB Commercial Paper Bank loans Corporate bonds ECB Commercial Paper
130 100
10 12 14 14 15
17 16 14 15 15 16 16 17 16
104 80
25 24 23
24 24
26 27 30
32 32 33 35 35 35
78 60

52 40
62 62 61 59 58
55 53 51 49
48 47 46 45 46
26 20

- -
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: RNI, SEBI, Kotak Institutional Equities Source: RBI, SEBI, Kotak Institutional Equities

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Issuer base skewed toward financials

The above exhibits indicate a healthy progress in growing corporate bond market; however, the market
lacks breadth, given the high share of borrowing by financial companies. In the past 20 years, the share
of financials has been in the 65% to 90% range. There are a number of reasons why financial companies
(public and private) are major issuers in the market: (1) India has a large and growing NBFC sector, which
is able to attract debt investments from long-term or buy-hold investors such as mutual funds and
insurers; (2) financial institutions are perceived as more creditworthy, given the stronger regulatory
oversight, capital requirements, disclosures, etc.; (2) the size of issuances by financial entities tend to
be large compared to manufacturing or infra businesses given their scale of businesses; and (4) there is
steady supply of paper from financial issuers due to capital requirements.

Financial sector has ~70% share of issuances by number

Industry mix by issuance number (%)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 1QFY24
Banking/term lending 33 31 32 38 45 36 27 19 24 21 14 13 7 7 5 6 6 5 5 5 4 4 5
Financial services 21 26 36 31 30 47 53 56 48 47 62 59 56 53 50 53 51 66 64 62 58 61 60
Housing finance 2 5 3 7 10 10 11 9 8 13 16 14 17 16 16 13 11 8 6 8 6 5 7
Housing/real-estate 2 3 1 1 1 2 2 2 3 3 1 3 6 12 16 12 13 10 10 9 13 11 11
Power generation & supply 6 5 7 4 2 2 1 2 3 3 2 2 4 3 3 4 6 2 4 4 4 4 2
Telecom 1 1 1 1 1 0 ― 0 1 0 0 0 0 0 0 1 0 0 0 0 0 1 0
Oil exploration/refining/drilling 3 ― 1 ― 1 ― ― 0 1 1 0 1 0 0 0 0 0 0 1 1 0 0 ―
Roads & highway 1 1 1 1 0 0 0 0 1 1 0 1 1 1 2 2 1 1 1 1 3 1 2
Shipbuilding 0 ― 0 0 0 ― ― 1 0 0 0 0 0 ― 0 0 0 0 0 0 0 0 ―
Steel 3 1 1 ― 1 0 0 1 2 1 0 1 1 0 0 0 ― 0 0 1 0 0 ―
Diversified 2 5 1 0 ― ― 1 2 1 2 1 1 1 1 0 1 1 0 0 1 0 0 0
Travel & transport 2 1 3 2 2 0 0 ― 2 1 1 1 0 1 1 1 1 1 1 1 2 2 2
Hospital/diagnostics 0 1 0 ― ― ― ― ― 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0
Engineering 1 1 0 ― 0 0 - 0 0 1 0 0 0 0 0 0 1 0 0 0 0 1 1
Hotels & tourism 0 ― 0 0 ― 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0
Pharma 1 1 ― ― 1 0 0 0 1 0 0 0 0 0 1 1 1 0 0 0 1 1 1
Cement & construction 2 3 1 2 1 0 0 0 0 1 0 0 0 1 0 1 0 0 0 0 0 0 ―
Petrochemicals 0 1 ― ― ― ― ― ― ― ― ― ― ― ― ― ― ― 0 0 0 0 0 0
Textiles 1 1 1 2 1 0 0 0 1 0 0 0 1 1 0 1 1 0 1 0 0 0 1
Paper 0 0 1 ― ― ― ― 0 0 1 ― 0 0 ― 0 0 0 0 0 0 0 0 0
Others 18 15 10 10 6 1 3 5 5 5 2 3 4 5 4 5 6 4 5 6 7 7 8
Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Financials 57 61 70 76 84 93 92 84 80 81 91 86 80 76 71 72 68 79 75 74 68 71 72
Others 43 39 30 24 16 7 8 16 20 19 9 14 20 24 29 28 32 21 25 26 32 29 28

Source: Prime Database, Kotak Institutional Equities

Financial sector has ~80% share of issuances by number

Industry mix by issuance amount (%)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 1QFY24
Banking/term lending 37 37 53 52 65 67 59 53 49 48 50 39 34 37 28 29 29 31 36 34 29 37 32
Financial services 7 8 7 9 7 13 13 11 12 7 11 14 15 17 20 21 23 20 17 18 23 21 22
Housing finance 4 4 5 11 9 10 18 7 9 16 16 16 19 16 16 16 18 18 13 13 19 16 24
Housing/real-estate 4 3 4 2 2 2 1 1 2 2 1 3 4 5 6 5 4 8 4 2 4 4 10
Power generation & supply 13 15 14 6 3 6 3 7 9 10 9 6 10 11 12 11 8 4 6 5 6 4 2
Telecom 0.8 0.7 0.6 2.2 0.6 0.4 ― 2.5 1.8 0.3 1.3 1.3 1.1 1.8 3.6 2.2 1.5 1.7 0.8 3.8 2.5 3.5 0.5
Oil exploration/refining/drilling 5.4 ― 2.3 ― 2.7 ― ― 2.3 3.3 2.3 0.5 3.9 1.1 0.7 0.1 0.4 0.1 0.5 3.0 2.9 1.6 2.4 ―
Roads & highway 3.2 12.1 0.8 0.5 1.5 0.6 0.3 0.9 1.8 1.9 1.1 1.8 2.0 1.4 4.0 6.0 5.2 3.9 8.7 6.9 5.7 2.1 1.0
Shipbuilding 0.7 ― 0.3 0.1 0.1 ― ― 0.2 0.3 0.1 1.0 0.8 1.7 ― 0.4 1.0 0.8 0.6 1.5 0.7 0.8 1.2 ―
Steel 3.2 1.2 0.2 ― 0.5 0.1 0.3 2.1 2.9 3.2 0.9 1.4 1.4 1.6 0.8 0.5 ― 0.7 0.5 1.4 0.6 0.8 ―
Diversified 1.7 5.1 0.9 0.3 ― ― 1.9 6.3 0.5 2.4 1.1 1.6 1.8 1.5 1.0 1.3 3.9 3.2 1.1 5.2 0.3 0.7 1.2
Travel & transport 1.0 0.6 2.1 1.7 0.7 0.4 0.1 ― 1.8 0.5 2.8 3.0 0.3 0.9 0.8 1.0 0.7 2.7 1.4 0.7 3.1 0.7 0.8
Hospital/diagnostics 0.0 0.1 0.0 ― ― ― ― ― 0.1 0.1 0.1 0.0 0.0 0.1 0.1 0.2 0.1 0.3 0.0 ― 0.0 0.4 0.0
Engineering 2.0 0.2 0.0 ― 0.1 0.0 ― 0.1 0.0 0.1 0.0 0.1 0.1 0.3 0.2 0.4 0.5 0.3 0.2 0.1 0.3 0.4 0.2
Hotels & tourism 0.7 ― 0.0 0.2 ― 0.3 0.3 0.4 0.4 0.0 0.3 0.1 0.2 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.3 0.2
Pharma 0.2 0.5 ― ― 0.0 0.0 0.1 0.3 0.2 0.1 0.1 0.3 0.0 0.1 1.6 0.9 0.5 0.8 0.7 0.5 0.3 0.3 0.4
Cement & construction 1.6 1.2 0.3 1.1 0.2 0.2 0.1 0.4 0.5 0.3 0.1 0.3 0.2 0.8 0.5 1.1 0.2 0.1 0.3 0.6 0.1 0.3 ―
Petrochemicals 0.4 0.7 ― ― ― ― ― ― ― ― ― ― ― ― ― ― ― 0.1 0.3 0.0 0.1 0.2 0.4
Textiles 0.2 1.4 1.2 1.1 0.1 0.0 0.0 0.1 0.3 0.3 0.2 0.3 0.5 0.3 0.2 0.6 0.6 0.4 0.2 0.4 0.1 0.2 0.7
Paper 0.0 0.4 0.2 ― ― ― ― 0.1 0.0 0.5 ― 0.0 0.1 ― 0.0 0.0 0.1 0.1 0.1 ― ― 0.2 ―
Others 13.6 9.0 7.7 12.7 8.2 0.4 2.0 4.6 5.2 4.1 2.9 6.6 8.0 5.1 4.2 3.7 3.4 3.1 4.1 3.9 3.9 3.5 3.3
Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Financials 48 49 66 71 80 90 91 71 70 72 77 69 68 69 64 65 70 69 67 65 70 75 79
Others 52 51 34 29 20 10 9 29 30 28 23 31 32 31 36 35 30 31 33 35 30 25 21

Source: Prime Database, Kotak Institutional Equities

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Increase in share of bonds for non-financial corporates, but concentrated in AAA/AA rated firms

Exhibit 59 shows data from an RBI study, which looks at corporate bond market development. It is a is
useful analysis as it breaks down the liabilities for non-financial corporates, thereby removing the impact
of bond issuances done by financial entities. The share of bond borrowings has improved in the last few
years at the cost of bank loans, whereas foreign currency borrowings and other non-bank, non-market
sources (loans from promoters and inter-corporate loans) have been stable.

The penetration of market-based borrowings has a disproportionate skew based on the size of the firm.
Larger firms (i.e., decile 1-2) have a 25-30% share of market borrowings in their debt compared to median
and smaller firms (Exhibit 60). The ratings profile of the outstanding bonds is heavily skewed toward
AAA and AA-rated entities. In the past decade, India has seen a general improvement in credit quality,
which is reflected in the rating mix as well (Exhibit 61).

Share of bank loans declined for non-financial firms post 2014

Debt composition of India’s non-financial firms, March fiscal year-ends, 2000-18 (%)

Source: RBI, Kotak Institutional Equities

Use of bonds was highest by larger firms Share of AAA/AA remains high
Sources of debt for non-financial firms across size Ratings mix (assigned to long-term corporate debt
categories, March 2018 (%) securities (maturity ≥ 1 year), March fiscal year-ends (%)

Banks & FI's Bonds & CP FX borrowing Others AAA AA A BBB Non-investment grade
100 100
9 12 10
15 18 13 15 15
19
80 80 23
20 17
20 25
60 60

40 87 84 86
40 81 77 75 82 80 81
65 65 66
57 55
20 20

-
-
Decile 1

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

2016
2017
2011
2012
2013
2014
2015

2018
2019
2020
2021
2022
2023
2024

Source: RBI, Kotak Institutional Equities Source: SEBI, Kotak Institutional Equities

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Investor profile is dominated by institutional, buy-and-hold investors

The investor base for corporate bonds is dominated by institutional investors that largely prefer to hold
securities till maturity. Representation by retail and foreign portfolio investors is also pretty low. The indirect
retail corporate bond ownership through mutual funds is also low. For example, insurers are large players
in the AA and AAA rated bond market, but moving to lower-rated bonds is difficult as it increases investment
risk apart from underwriting risk, which already exists in the business (Exhibits 62).

FII investments in corporate bonds have declined in recent years. Foreign ownership of corporate bonds
has also declined post 2019, reflecting risk aversion in the light of rise in defaults (IL&FS and broader
stress in NBFC sector). Limited liquidity in the market has also likely hurt participation despite increase
in investment limits and reduction in withholding tax (Exhibits 63).

Investor profile is skewed toward preference for hold-to- FPI investment in corporate bonds has declined in absolute
maturity terms and as % of limits utilized
Share in outstanding corporate bonds, March 2022 Investment limit and actual investments made by
(%) FPIs in corporate bonds, March fiscal year-ends, 2019-23
Investment limit for FPIs (Rs bn)
FPI, 2
Others, 5 Investment made by FPIs (Rs bn)
8,000 80

6,400 64
Trust, 11 Institutiona
l investors,
28 4,800 48
Bank, 14
3,200 32

Mutual Body 1,600 16

funds,… corporate,
25
- -
2019 2020 2021 2022 2023 May-23

Source: SEBI, RBI, Kotak Institutional Equities Source: SEBI, Kotak Institutional Equities

Secondary market activity has room to grow

Secondary market trading volumes and turnover velocity are also some of the metrics to assess the
development of any securities market. Average trading volumes for corporate bonds increased
substantially to nearly Rs55-60 bn in FY2018 from Rs15-20 bn in FY2011-13, but have plateaued at those
levels over FY2018-24 (Exhibit 64). The market has gone through a few shocks after 2018, such as IL&FS
default in August 2018 and the subsequent risk aversion in the debt markets, followed by Covid from
FY2021 onward. As compared to equity markets, debt markets clearly have scope to expand and deepen.
However, cross-country suggests that challenges in developing bond market liquidity is not specific to
India. Complimentary markets such as interest rate derivatives and credit default swaps are yet to
mature in a significant way. Buy-and-hold nature of investor base also prohibits liquidity creation not only
in the secondary markets but also in the complimentary markets such as repo and derivatives.

Diversified Financials
India Research
 33

Secondary market trading in corporate bonds yet to pick up Mutual funds and banks are major participants in secondary
meaningfully market
Average daily traded value and number of trades, Participant-wise share in corporate bond trades at
March fiscal year-ends, 2011-24 NSE, 2023

(Rs bn) ADV (LHS) Daily trades (RHS) Foreign Others, 9.6
70 6,000 banks, 1.6
FPIs, 2.8
56 4,800
Primary
dealers, 4.5
42 3,600
Corporates
, 6.4 Mutual
28 2,400 funds, 49.5
Trading
14 1,200 members,
7.1
- - Insurance
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024 (4M)

companies
, 7.2
Indian
banks, 11.3

Source: SEBI, RBI, Kotak Institutional Equities Source: SEBI, Kotak Institutional Equities

Primary hindrances for development of corporate bond market

Our discussions with experts and studies on the subject indicate the below-mentioned reasons as some
of the major reasons for the lack of market development so far. In Exhibit 66, we provide a list of
measures taken for developing the market infrastructure and encouraging participation.

 Involvement of multiple regulators with differing objectives. While the SEBI regulates market
instruments, the development of corporate bonds involves various regulators such as the RBI, IRDAI,
PFRDA apart from the SEBI. Each regulator is focused on and responsible for safeguarding their
respective domains.

 A negative cycle of supply and demand issues. The lack of demand for credit funds (post the recent
NBFC crisis), along with a lack of risk appetite (perhaps justifiably) by other large institutional
investors such as insurers and pension funds, creates a scenario with little investor demand for debt
paper rated below AA. On the supply side, risk premiums and lack of flexibility of bond instruments
(versus loans) make bonds unattractive for lower-rated issuers.

 Dealing with default and recovery rates. Historically, default rates have been higher in India compared
to other markets, leading to risk aversion. While the IBC recourse is available for bond investors,
recourse under SARFAESI and CDR is not applicable to bond investors.

 Absence of market makers. Market makers help in creating market liquidity by quoting bid-ask. The
corporate bond market in India does not have market makers who could add value, depth and diversity
to the market.

 Other miscellaneous factors. (1) Stamp duty rates across the country are not standardized; (2) retail
participation remains low due to a lack of understanding of bonds as an asset class; (3) high
withholding taxes; and (4) use of credit enhancement has not picked-up to support lower-rated bonds.

Diversified Financials
India Research
 34

A range of initiatives have been taken to develop the primary and secondary corporate bond market
Major regulatory initiatives over the years
Primary market
Backstop facility for Corporate Debt A backstop fund "Corporate Debt Market Development Fund"to purchase of investment-grade corporate debt securities
Securities - during times of stress. Fund to have Rs30 bn corpus which can leverage up to 10X along with a soverign guarantee.
Partial credit enhancement (PCE) for Allows banks to extend credit enhancement to improve the credit rating of the bonds to enable corporates to access the
corporate bonds funds from the bond market on better terms.
Aimed at insurance and provident/pension funds given their mandate to invest in bonds of high or relatively high credit
rating.
PCE provided by all banks for a given bond issue shall be 50% issue size, with a limit up to 20% for an individual bank.
PCE can be offered only for bonds with pre-enhanced rating is BBB minus or better.
Enahncing transparency in private Threshold for applicability of 'Electronic Bond Platform' (EBP) process, has been reduced to include all issuances of debt
placement issuances securities of Rs0.5 bn or more. This will bring larger share of the market on the exchanges enhance transparency.
Improving paricipation in 'Electronic Bond Introduction of the concept of 'anchor investor', subject to a maximum allotment of 30% to assist in assessing demand.
Platform' (EBP)
The limit for investment by arrangers on behalf of clients has been increased to Rs1 bn or 5% of the issue size to
facilitate arrangers in garnering response of and assisting larger number of investors to participate in bidding;
Maximum number of ISINs maturing in any year for an issuer has been reduced from 12 to 9 reduce fragmentation and
Restriction on the number of ISIN
deepen liquidity in the corporate bond market.
Face value of each debt security issued on private placement basis was reduced to Rs0.1 mn from Rs1 mn to increase
Reduction in denomination
participation and enhancement of liquidity.
Improving Transparency and Participation Introduction of the concept of Anchor Investor as an option to issuers, subject to a maximum
through EBP Platform allotment of 30 per cent; which would assist issuer in assessing demand for its issuance
Allowing corporate bonds under Held to
Allows banks to hold bonds without the MTM risks; likely to help develop primary and over time secondar markets
Maturity category
Secondary market
Introduction of Futures contracts on Enhance liquidity in the bond market and also to provide opportunity to the investors to hedge their positions.
Corporate Bond Indices Corporate debt securities rated AA+ and above to be included in the index
Stock brokers permitted on RFQ Despite the RFQ platform being introduced in 2020 as a participant-based model, it was observed that the trading through
platform the platform was lean.
To enable wider market participation, stock brokers were permitted to place/ seek bids on the RFQ platform on behalf of
their clients, in addition to the existing option of placing bids in proprietary capacity from January 1, 2023.
Repo market An active repo market is an essential pre-condition for improving liquidity in the corporate bond market.
This is mainly because active players, especially market makers, are in a position to provide finer two-way quotes
(bid-offer spreads), if they are able to finance their inventory of bond holdings through an active repo market.
Operationalization of Limited Purpose
To provide liquidity and deepen the corporate bond market through repo transactions by removing counter-party risks.
Clearing Corporation:

Source: Kotak Institutional Equities

Diversified Financials
India Research
 INITIATING COVERAGE

CRISIL (CRISIL) SELL

Diversified Financials
CMP(₹): 4,163 Fair Value(₹): 3,300 Sector View: Attractive NIFTY-50: 18,989 November 02, 2023

Steady and consistent, but valuations appear misplaced Company data and valuation summary
We initiate coverage on CRISIL with a SELL rating and SoTP-based FV of Stock data
Rs3,300. While we build a positive view of the ratings business, given the
CMP(Rs)/FV(Rs)/Rating 4,163/3,300/SELL
growth tailwinds and margin/return profile, its P&L impact is insufficient
52-week range (Rs) (high-low) 4,284-2,712
(~15%/30% revenue/EBIT). On the other hand, there is increased growth
Mcap (bn) (Rs/US$) 304/3.7
uncertainty in the non-ratings business, given its close links to global
ADTV-3M (mn) (Rs/US$) 169/2.0
investment banks and capital markets. In this context, we believe current
valuations, at ~42X FY2024E, are probably misplaced in ascribing high Shareholding pattern (%)
multiples to both parts of the business.

1.5
Quality at a steep price; initiate with SELL 11.9

We initiate coverage on CRISIL with a SELL rating and DCF-based FV of Rs3,300, 7.1
5.7
valuing the business at 31X FY2025E earnings (December year-end). We forecast
7.2
11% earnings and 14% EBIT growth over FY2023-26E, with the EBIT margin 66.7
expanding ~200 bps over this period to 24%. Our growth assumptions: (1)
Ratings—upcycle assumptions of 15-16% rating revenue growth, with margins
(calculated) expanding to ~54-55% from 52-53%, (2) Research, Advisory and Promoters FPIs MFs BFI s Retail Others

Solutions (RAS)—potential global headwinds could slow revenue growth (~11-12%

Private Circulation Only. This document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933
CAGR) for the next few years, but margins recovering to 23-24% off the bottom Price performance (%) 1M 3M 12M
Absolute 6 7 38
(~20%) seen in FY2020-22, led by a sharper focus on costs and pricing.
Rel. to Nifty 9 11 34
Rel. to MSCI India 9 9 35
Ratings in an upswing; uncertain outlook for global businesses
We like CRISIL’s approach toward building a diversified company that includes Forecasts/Valuations 2024E 2025E 2026E
best-in-class domestic credit ratings and diverse capabilities (with the help of EPS (Rs) 82.8 92.2 104.1
M&As), catering to global banks and financial entities. The ratings business is well- EPS growth (%) 7.2 11.4 12.9
placed to capture a cyclical upside from the recovery in credit growth (+ growth
P/E (X) 50.3 45.1 40.0
optionalities), along with margin improvement (high operating leverage). However,
P/B (X) 15.2 13.6 12.1
we are cautious about the growth outlook in select parts of the non-ratings
EV/EBITDA (X) 36.1 32.2 28.6
business (likely to be ~50% of revenues), with strong links to global financial
RoE (%) 31.9 31.8 32.1
markets.
Div. yield (%) 1.3 1.4 1.6
Sales (Rs bn) 0 0 0
Diverse capabilities built and acquired over the years
EBITDA (Rs bn) 8 9 11
CRISIL pioneered credit ratings in India, with the first corporate sector rating in
Net profits (Rs bn) 6 7 8
1988. Over the years, it has become more diversified in terms of capabilities,
revenue drivers, geographical presence and client segments. Revenue Source: Bloomberg, Company data, Kotak Institutional Equities estimates
diversification has imparted greater stability to revenue growth over the past two Prices in this report are based on the market close of
decades, given the cyclicality in the ratings business. It has acquired companies November 01, 2023
selectively over the years, largely to add new verticals such as benchmarking or to
supplement its research capabilities. Currently, about 65% of revenues are export-
driven, with credit ratings being the major driver of domestic business.

Key risks: Positive surprise in rating volumes, strong revival in global business
Two key risks: (1) While we build a positive view on the ratings business (~18% 3Y
EBIT CAGR), stronger upcycle on corporate credit, along with bond market
volumes, will spur earnings growth, given CRISIL’s higher margin profile. (2) Strong
and sustained growth in global businesses (research and benchmarking) can lead
us to upgrade earnings.

Full sector coverage on KINSITE

Abhijeet Sakhare Nischint Chawathe M B Mahesh, CFA Varun Palacharla Ashlesh Sonje, CFA
[email protected] [email protected] [email protected] [email protected] [email protected]
+91-22-4336-1240 +91-22-4336-0887 +91-22-4336-0886 +91-22-4336-0888 +91-22-4336-0889

Sidham Jain
[email protected]
 2

Table of Contents

Financial snapshot .............................................................................................................................. 3

Valuation: Initiate with SELL and FV of Rs3,300 ..................................................................................... 4

CRISIL is expensively priced at ~40X for ~15% EBIT ................................................................................................................... 4

Ratings in an upcycle; global linkages to non-ratings could pose risk ......................................................................................... 5

CRISIL: Ratings in an upswing; uncertain outlook for global businesses .................................................. 7

Diverse capabilities built and acquired over the years.................................................................................................................. 7

Credit ratings: Entering a period of upswing ................................................................................................................................. 9

Global Analytics Center—gateway to S&P’s rating business ...................................................................................................... 11

RAS: Diverse capabilities across segments ................................................................................................................................ 12

Risks: Pricing discipline, global slowdown, bond market spreads, regulations ....................................... 15

Financials: Mid-teens earnings growth ................................................................................................ 16

Mid-teens core earnings growth ................................................................................................................................................. 16

Higher-margin ratings business to see upswing; overseas revenues to soften ......................................................................... 17

Margins likely to drift up ............................................................................................................................................................. 20

Cost ratios to decline on higher operating leverage ................................................................................................................... 21

Healthy FCF generation .............................................................................................................................................................. 22

CRISIL
Diversified Financials India Research
 3

Financial snapshot
CRISIL’s financial overview
December fiscal year-ends, 2020-26E
Net profit EBIT Dividend
Revenue YoY PAT YoY EBIT YoY margin margin EPS P/E EV/EBITDA RoE yield
(Rs mn) (%) (Rs mn) (%) (Rs mn) (%) (%) (%) (Rs) (X) (X) (%) (%)
2020 19,818 14 3,547 3 3,895 (7) 17 20 49 82 56 29 0.8
2021 23,007 16 4,658 31 5,045 30 20 22 64 62 47 32 1.2
2022 27,687 20 5,644 21 6,263 24 20 23 77 52 39 33 1.2
2023E 31,701 14 6,053 7 7,320 17 19 23 83 48 34 32 1.2
2024E 35,081 11 6,741 11 8,256 13 19 24 92 43 30 32 1.4
2025E 39,060 11 7,612 13 9,354 13 19 24 104 38 27 32 1.6
2026E 43,678 12 8,577 13 10,567 13 19 24 117 34 24 32 1.8

Source: Company, Kotak Institutional Equities estimates

CRISIL’s summary of key financials

December fiscal year-ends, 2020-26E
2020 2021 2022 2023E 2024E 2025E 2026E
Growth rates (%)
Revenue from operations 14 16 20 14 11 11 12
PBT before exceptional items (7) 25 30 7 11 13 13
PAT 3 31 21 7 11 13 13
EBIT (7) 30 24 17 13 13 13
Key ratios
EBIT margin (%) 20 22 23 23 24 24 24
Net profit margin (%) 17 20 20 19 19 19 19
RoE (%) 29 32 33 32 32 32 32
Dividend payout ratio (%) 68 72 62 65 65 65 65
P&L
Revenue from operations 19,818 23,007 27,687 31,701 35,081 39,060 43,678
Employee expense (10,684) (12,869) (15,530) (17,694) (19,623) (21,858) (24,430)
Other expenses (4,028) (2,973) (3,828) (4,455) (4,792) (5,245) (5,869)
EBITDA 5,106 6,105 7,297 8,436 9,461 10,655 11,973
Depreciation and amortisation (1,211) (1,060) (1,033) (1,116) (1,205) (1,301) (1,406)
EBIT 3,895 5,045 6,263 7,320 8,256 9,354 10,567
Other income 832 770 1,225 709 682 732 792
Finance costs (144) (89) (64) (67) (71) (74) (78)
Profit before tax 4,583 6,184 7,424 7,962 8,867 10,012 11,282
Tax (1,036) (1,526) (1,780) (1,909) (2,126) (2,401) (2,705)
PAT 3,547 4,658 5,644 6,053 6,741 7,612 8,577
EPS (Rs) 49 64 77 83 92 104 117
Balance sheet
Shareholder's fund 13,118 15,784 17,920 20,038 22,398 25,062 28,063
Employee related payables & provisions 1,927 2,529 3,490 3,664 3,847 4,040 4,242
Trade payables 1,054 1,337 1,439 1,554 1,679 1,813 1,958
Provisions 976 952 1,159 1,217 1,278 1,342 1,409
Other liabilities 2,751 3,116 3,467 3,641 3,823 4,014 4,215
Total liabilities 8,948 9,255 10,390 10,978 11,600 12,260 12,959
Investment 6,463 8,402 8,742 9,425 10,553 11,850 13,341
Cash and bank balances 2,787 2,944 3,214 3,836 4,982 6,245 7,631
Trade receivables 3,074 3,985 7,588 8,727 9,163 9,621 10,102
Fixed assets 2,501 1,673 1,340 1,273 1,209 1,149 1,091
Goodwill on consolidation 3,759 3,727 3,798 3,798 3,798 3,798 3,798
Intangible assets 1,366 1,208 1,052 1,104 1,160 1,218 1,278
Net assets 22,067 25,039 28,310 30,994 33,976 37,300 41,001
Cash flow statement
Cash flow from operations 5,005 4,031 4,564 5,655 7,168 8,070 9,062
Increase in cash and cash equivalents (875) 238 264 644 1,146 1,263 1,386
Free cash flow 3,976 3,221 3,545 4,553 5,973 6,775 7,660

Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 4

Valuation: Initiate with SELL and FV of Rs3,300

We initiate coverage on CRISIL with a SELL rating and SoTP-based FV of Rs3,300. CRISIL is the
largest rating agency in terms of revenues, with a proven track record of ratings quality. Revenue
diversification efforts over the past decade have helped deliver 10-11% overall revenue CAGR,
helping wade through a downturn in the ratings business without compromising quality. While we
build a positive view for the ratings business, given the tailwinds, we are unsure and more cautious
about the growth trajectory in the non-ratings business, which is closely linked to global
investment banks and capital markets. We forecast 11% earnings and ~15% EBIT growth over
FY2023-26E, with the EBIT margin expanding ~200 bps over this period to 24%. Our DCF-based
FV of Rs3,300 implies 31X FY2025E EPS.

CRISIL is expensively priced at ~40X for ~15% EBIT

CRISIL’s current valuation, at ~40X 1Y forward P/E, is close to one standard deviation over the mean,
~30% premium to average P/E since 2008 and ~10% premium to 10Y average multiple. The company’s
multiples have closely tracked EBIT growth—rising swiftly to ~40X by 2014 from ~10-15X in 2008-09
(~15% EBIT CAGR over 2008-13), thereafter de-rating during 2014-20 (~2% EBIT growth) and again
rerating to ~40X post-Covid, with a recovery in growth (~25% growth over FY2020-23E).

CRISIL is trading at P/E of close to one standard deviation over mean since 2008
CRISIL’s consensus 1-year forward P/E (X), September 2008-September 2023

12M fwd PE Mean +1 s.d -1 s.d

50 47.5

40
40.4

30

20 22.3

10

0
Jun-10

Jun-17
Nov-09

Nov-16
Sep-08

Sep-15

Sep-22
Dec-13

Dec-20
May-20
May-13

Jul-14

Jul-21
Oct-12

Oct-19

Apr-23
Apr-09

Apr-16
Jan-11

Jan-18
Aug-11

Aug-18
Mar-12

Mar-19
Feb-15

Feb-22

Source: Bloomberg

SoTP better suited to value the business; FV implies 31X multiple

We value CRISIL using an SoTP methodology, as we believe SoTP appropriately captures the different
growth outlook, margin and return profile for ratings, compared with the non-ratings business, especially
for CRISIL. Share of revenue from ratings has declined over the years whereas organic revenue growth
in non-rating business has been falling (Exhibits 5-6). Higher implied valuations for the ratings business
compared with AMCs or RTAs reflect stronger entry barriers and lower risk of disruptions in the medium
term.

 Valuations are expensive, given the business mix: We like CRISIL’s top-notch ratings franchise, but
this ends up contributing only about half its Fair Value, in our view. We like the trajectory in the non-
ratings business too, but find implied valuation unjustified for this part.

 Ratings: Our DCF-based FV calculation implies ~42X FY2025E. We value CRISIL’s ratings business
using DCF with assumptions of (1) ~17% revenue CAGR over FY2023-25E and then 12% growth in
over subsequent 10Y, (2) EBIT margin to expand to 54% by FY2025E from 51% in FY2022 and
stabilizing at 54-55% over the following decade and (3) ~11.5% WACC and 6% terminal growth. ▪

CRISIL
Diversified Financials India Research
 5

 Non-ratings: We assign 25X December 2025E earnings to RAS, which we believe captures CRISIL’s
position as one of the largest providers of bespoke research, analytics and benchmarking data
providers, along with the risks emanating from exposure to the global buy-side, sell-side and asset
management industry. Business from S&P remains steady, but slow growing, where we assign a
15X multiple.

At our FV, CRISIL will trade at ~31X FY2025E earnings

SoTP valuation for CRISIL, December 2025
Value (Rs bn) Valuer per share (Rs) Comments
Ratings 116 1,580 DCF-based; implies~42X Dec-25E earnings
Research, analytics & solutions 98 1,344 Assign ~25X Dec-25E earnings; pegged to peers
Global analytics center (S&P captive) 7 93 Assign ~15X Dec-25E earnings
Cash 18 248
Total 239 3,265 Implies ~31X Dec-25E EPS

Source: Company, Kotak Institutional Equities estimates

Share of rating revenues has declined to ~15% over the years Acquisitions have supported revenue growth in non-ratings
Revenue mix, December fiscal year-ends, 2006-21 YoY revenue growth in ratings and non-ratings,
(%) December fiscal year-ends, 2006-21 (%)

Ratings S&P captive Research Advisory/others Ratings Non-ratings (RHS)

100 80 48
Acquired Pipal

80 60 Acquired Coalition
36

Acquired Greenwich
60
40 24

40
20 12

20
- -

-
(20) (12)
2015
2006
2007
2008
2009
2010
2011
2012
2013
2014

2016
2017
2018
2019
2020
2021

2015

2017
2007
2008
2009
2010
2011
2012
2013
2014

2016

2018
2019
2020
2021
2022
Source: Company, Kotak Institutional Equities

Source: Company, Kotak Institutional Equities

Ratings in an upcycle; global linkages to non-ratings could pose risk

Over the years, CRISIL has diversified its business model across credit ratings, research and risk
solutions, along with benchmarking analytics for global commercial and investment banks and
investment firms. Strategy to build diverse revenue drivers has not only helped deliver stronger revenue
growth (~11% 10Y CAGR versus ~5% for ICRA), but more crucially safeguarded the ratings business
against competitive pressures (CRISIL’s ratings have exhibited the lowest default rates over 10Y, see
Exhibit 19).

Our FY2023-26E EBIT growth of 16% builds: (1) Ratings—upcycle assumptions of 15-16% rating revenue
growth with margins (calculated) expanding to ~54-55% from 52-53% and (2) RAS—potential global
headwinds could slow revenue growth (~10-11% CAGR) for the next two years, followed by recovery
(~14%) thereafter, along with margins recovering to 23-24% off bottom (~20%) seen in FY2020-22, led
by stronger focus on costs and contract pricing.

CRISIL
Diversified Financials India Research
 6

EBIT expected to grow at 14-15% over FY2023-26E

EBIT, December fiscal year-ends, 2008-26E

(Rs bn) EBIT (LHS) YoY (%, RHS) (%)

12.0 35
10.6
9.4
9.6 26
8.3
7.3
7.2 6.3 17

5.0
4.8 4.2 4.1 4.3 4.2 3.9 8
3.2 3.5 3.6
2.9
2.3
2.4 1.7 1.8 1.9 (1)

- (10)

2023E

2024E

2025E

2026E
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Source: Company, Kotak Institutional Equities estimates

Key risks: Positive surprise in ratings’ volumes, strong revival in global business
Two key risks: (1) While we build a positive view on the ratings business (~18% 3Y EBIT CAGR), a stronger
upcycle in corporate credit growth could provide growth upside. Additionally, there have been a series of
regulatory reforms and initiatives in recent years to shift large corporate borrowing to the bond market.
Stronger cyclical growth, along with any structural shift in borrowing patterns, could lead to stronger
revenue growth and earnings expansion versus our assumptions. (2) Strong and sustained growth in
global businesses (research and benchmarking) can lead us to upgrade earnings and as a result, ascribe
higher value to this business.

CRISIL
Diversified Financials India Research
 7

CRISIL: Ratings in an upswing; uncertain outlook for global businesses

We like CRISIL’s approach toward building a diversified company that includes best-in-class
domestic credit ratings and diverse capabilities (with the help of M&As), catering to global banks
and financial entities. The ratings business is well-placed to capture the cyclical upside from
recovery in credit growth (+ growth optionalities), along with margin improvement (high operating
leverage). However, we are cautious about the growth outlook in select parts of the non-ratings
business (likely to be ~50% of revenues) due to its strong links to global financial markets.

Diverse capabilities built and acquired over the years

CRISIL pioneered credit ratings in India, with the first corporate sector rating in 1988. Starting off as a
credit rating agency, the company has become much more diversified in terms of capabilities, revenue
drivers, geographical presence and client segments. CRISIL has ~5,000 employees spread across
offices in 12 countries. Revenue diversification has lent much better stability to revenue growth over the
past two decades.

CRISIL has increased its revenues at a CAGR of 11% over the past 10 and 5 years. The company has also
acquired companies selectively over the years, largely to add new verticals such as benchmarking or to
supplement its research capabilities (Exhibit 8). Currently, about 65% of revenues is export-driven, with
credit ratings being the major driver of the domestic business.

CRISIL has steadily grown its revenues over the years organically and through acquisitions
Revenues and yoy growth, December fiscal year-ends, 2001-22

(Rs bn) Revenues YoY (RHS) (%)

30 2004: 2010: 2012: 2019: 50
Acquired Acquired Acquired Acquired
Irevna Pipal Coalition Greenwich
24 38

18 26

12 14

6 2

0 (10)
2001
2002

2005
2006

2009
2010
2011

2013
2014
2015

2017
2018
2019

2021
2022
2003
2004

2007
2008

2012

2016

2020

Source: Company, Kotak Institutional Equities

Revenue reporting is currently under two heads: (1) Rating Services—includes domestic credit ratings
and the Global Analytical Center (S&P captive business) and (2) RAS—includes global research and risk
solutions, along with global benchmarking analytics and market intelligence analytics. Exhibit 9-10
illustrates the revenue mix evolution over the past 20 years, indicating the increasing share of non-rating
revenues over the years. Exhibit 11 provides more details of the different business segments.

CRISIL
Diversified Financials India Research
 8

Share of rating revenues has declined over the years Ratings (incl. S&P captive) contributes ~25% of revenues
Revenue mix, December fiscal year-ends, 2001-21 (%) Revenue mix, December fiscal year-ends, 2022 (%)

Ratings S&P captive Research Advisory/others

100 Ratings,
15

80
S&P
captive, 9
60

40

20

Advisory/others,
- 76
2015
2006
2007
2008
2009
2010
2011
2012
2013
2014

2016
2017
2018
2019
2020
2021
Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

CRISIL has built and acquired diverse capabilities over the years
Overview of business segments
Segment Vertical Service provided Type of clients
Banks, non-bank lenders, mutual funds, insurance
Ratings Ratings Credit ratings for ~7000 large and mid companies.
companies, etc.
Global Analytics Center Global Analytics Centre (GAC) – provides analytics,
(driven by S&P) research and data services to S&P Global.
Research, Global Research & Risk Investment research and support for buy-side and sell-
15 of the top 20 global i-banks
Analytics & Solutions side firms.
Solutions Risk-related services e.g. model risk, credit risk, etc. 19 of the top 35 bank holding companies
3 of the top 15 asset managers
5 of the top 15 insurers.
Global Benchmarking Built through the acquistion of Coalition (2012) and
300 clients in financial services
Analytics Greenwich Associates (2020).

Strategic benchmarking, analytics and insights to the Corporate & investment banks, asset managers,
financial services industry. securities exchanges, governement entities, etc.
Analytics and insights like market share, revenue
performance, client relationship share and quality, return
on equity, industry evolution, etc.
Advisory services on areas includes urban, energy and
Governments, multilateral agencies, investors and
Infrastructure Advisory natural resources, transport and logistics and infra
corporates
financing.
Business Intelligence & Over 100 clients in corporate & i-banks, retail banks,
Helps banks and FI's in their data and analytics needs.
Risk Solutions asset managers, insurance companies.
200+ KPIs and custom templates to provide insights into
data. E.g. Early warning signals (EWS), Regulatory and
Portfolio monitoring
Independent research on the Indian economy, industry, Mutual funds, insurance companies, alternative
Independent research
capital markets and companies. funds, banks, corporates, etc.
Maintain 100+ indices in India and 13 in Sri Lanka.
Provider of valuations for fixed income securities in India.

Source: Company, Kotak Institutional Equities

CRISIL
Diversified Financials India Research
 9

Credit ratings: Entering a period of upswing

We have discussed the credit rating industry in the industry section. While CRISIL does not disclose the
further split of domestic rating revenues, there are two broad ways to understand the drivers: (1) type of
instrument, i.e., bank loan ratings (BLR), bonds and securitized instruments or (2) initial ratings fee
(earned at the time of issuance) and surveillance fee (ongoing fee).

Rating’s revenues have strong links to corporate credit growth and hence, growth has been quite
lackluster for most of the previous decade. Revenue growth accelerates at the time of credit growth
cycles, either through bank loans or corporate bonds. Parallelly, regulatory interventions or policy
changes also support growth. For example, the introduction of Basel-II rules in 2008 and incentive
scheme for SME ratings supported growth.

Rating revenues have gone through cycles linked to credit growth

Domestic rating revenues, December fiscal year-ends, 2001-22

(Rs bn) Rating revenues (LHS) YoY (%, RHS) (%)

5 25
4.2
4 3.7 18
3.5 3.4
3.1 3.2
2.8 2.9 2.9 3.0
3 2.6 11
2.3
2.0
2 1.7 4
1.4

1 0.8 (3)
0.5 0.5 0.5 0.5 0.6

0 (10)
2002
2003
2004

2006
2007
2008

2010
2011
2012

2014
2015
2016

2018
2019
2020

2022
2005

2009

2013

2017

2021
Source: Company, Kotak Institutional Equities

Strong correlation in corporate credit growth and rating Strong correlation in corporate credit growth and rating
revenues revenues
Corporate credit growth and rating revenue growth, Corporate credit growth and rating revenue growth,
March fiscal year-ends, 2010-23 (%) March fiscal year-ends, 2003-23 (%)
Corporate credit growth (LHS) Corporate credit growth by banks (LHS)
Rating revenue growth (RHS) CRISIL - yoy revenue growth (RHS)
25 30 45 55
Start of bank loan
ratings
20 22 35 41

15 14 25 27

10 6 15 13

5 (2) 5 (1)

- (10) (5) (15)

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2011
2003

2005

2007

2009

2013

2015

2017

2019

2021

2023

Source: Kotak Institutional Equities Source: Kotak Institutional Equities

CRISIL
Diversified Financials India Research
 10

 Strong positioning in bond ratings. CRISIL has a much stronger presence in the bond ratings market
as compared with BLR. As of March 2023, it had rated debt outstanding of ~Rs15 tn in BLR compared
with ~Rs70 tn in the bond market (includes capital bonds of banks, CP and other marketable
securities). Although there is no disclosure on the revenue mix, we believe bond rating revenues are
likely to be 1.5-2.0X larger in size, which is explained by higher rating fees for securities versus loans,
apart from the larger size of debt rated.

 BLR supported volume growth in 2022, whereas corporate bond issuance was muted, as rising interest
rates led to large issuers preferring bank loans over bonds. Activity levels in the bond market improved
in 2023, leading to a jump in bond-rated volumes (Exhibit 15-16—this exhibit is based on March fiscal
year-ends).

CRISIL has a stronger presence in bond markets compared with Both bond and BLR markets have seen strong growth in FY2023
BLR Issuances in debt securities (incl. PTC) and
Outstanding rated amount of debt securities (incl. instruments other than debt securities (Rs tn)
PTC) and instruments other than debt securities (Rs tn)
Instruments other than securities Securities
13.0
Instruments other than securities Securities
90
10.7
10.4 9.9 9.9
72 69 8.9
8.5
60
55 7.8
54 48
43 5.2 4.9 4.9 5.2 4.9
5.2 4.6
36
2.9
2.6
18 15
10 10 11
8
-
- 2019 2020 2021 2022 1HFY23 2HFY23
2019 2020 2021 2022 2023
Source: Company, Kotak Institutional Equities
Source: Company, Kotak Institutional Equities

 Market share has improved after IL&FS crisis. CRISIL leads the pack in terms of revenue market share
and bonds rated in recent years (Exhibit 17-18). The company’s revenue market share declined sharply
between 2014 and 2018, led by intense competition and leading to pricing indiscipline. This has
reversed in recent years, with CRISIL’s revenue market share back to ~35%.

 Good record of ratings credibility. CRISIL’s assigned ratings have shown better track record when
measured in terms of rating transition or cumulative default rates. For example, Exhibit 19 reflects the
default rate over the past 10 years for different ratings assigned by large CRAs. Stronger discipline on
ratings has supported the business, in terms of perception and acceptance of ratings quality.

CRISIL
Diversified Financials India Research
 11

CRISIL’s market share in bonds rated has increased recently CRISIL’s rating revenue market share has increased to ~35%
Market share in bonds rated, March fiscal year- Rating revenue market share, March fiscal year-
ends, 2002-23 (%) ends, 2014-23 (%)
CRISIL ICRA CARE CRISIL CARE ICRA India Ratings
India Ratings BWR Infomerics Infomerics Brickworks Acuite
SMERA Not rated/known 100 4 4 2 2 3 3 3 3 4 4
100 5 5 6 6 7 7 6 6 4 2
8 10 10 12 12
80 13 13 13 14 14
80 20 20 22 22 21 21 21 18 19 19
60
60
28 28 21
29 28 22 22 21
40 30 27
40

20 20 35 35 35 36
33 32 30 28 29 33

- -

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023
2006
2002
2003
2004
2005

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: Prime Database, Kotak Institutional Equities Source: Kotak Institutional Equities

CRISIL’s ratings have exhibited lower long-term cumulative default rates

3-year cumulative default rates over 10-year period across ratings, (%)

AAA AA A BBB
10

0
CRISIL ICRA CARE India Ratings Brickwork

Source: Company, Kotak Institutional Equities

Global Analytics Center—gateway to S&P’s rating business

CRISIL has benefited from a synergistic relationship with its parent S&P for over two decades. The Global
Analytics Center (GAC) works for S&P, primarily on the surveillance side, helping primary analysts with
research support required in the production of ratings. GAC also helps them with data and its technology
transformation. GAC also provides ancillary services to other functions such as risk and control.

GAC provides a nice gateway into S&P’s expanding business across verticals. This presents opportunity
to outsource work back to CRISIL. GAC’s revenues have increased at a steady CAGR of 6-7% in the past
10 and 5 years. EBIT margins on the business is determined at ~20%.

CRISIL
Diversified Financials India Research
 12

Steady revenue growth in GAC (S&P’s captive support unit)

Revenue and yoy growth, December year-ends, 2006-22 (%)

(Rs mn) Revenues (LHS) YoY (%, RHS)

(%)
2,500 40

2,000 30

1,500 20

1,000 10

500 0

- (10)
2005

2008

2009

2010

2013

2014

2015

2017

2018

2019

2022
2006

2007

2011

2012

2016

2020

2021
Source: Company, Kotak Institutional Equities

RAS: Diverse capabilities across segments

The RAS segment is a new category of revenue classification (from FY2021), which combines the
erstwhile research division and infrastructure advisory. Given the availability of long-term historical data,
we present the data for the previously reported research segment. Research’s revenues have increased
at a CAGR of 14% over 10 years through FY2021. There are three verticals within RAS—Global Research
and Risk Solutions (GR&RS), Global Benchmarking Analytics (GBA) and Market Intelligence and Analytics
(MIA). Exhibit 21 provides a brief overview of the scope of work and key clients across the three verticals.

Research revenues have increased at CAGR of 14% over 10 years through FY2021, partly helped by M&A
Revenues of research segment, December year-ends, 2006-21

(Rs bn) Revenues (LHS) YoY (%, RHS)

(%)
17.0 15.4 70

13.6 12.8 54
10.8 11.1 10.4
10.0
10.2 8.8 38
7.4
6.4
6.8 5.3 22
4.2
2.9
3.4 2.2 2.4 6
1.6
1.0

- (10)
2007

2008

2009

2011

2012

2013

2015

2016

2017

2019

2020

2021
2006

2010

2014

2018

Source: Company, Kotak Institutional Equities

 Acquisitions have been critical to scale up revenues. CRISIL was early in identifying opportunities to
diversify away from the ratings business. The company’s playbook has been to identify right
companies early, merge it within the CRISIL/S&P ecosystem and expand operations. For example, it
acquired Irevna in 2004, an opportune time, given the growth that followed, driven by outsourcing
tailwinds from global investment banks. The global benchmarking business has been built with the
acquisition of Coalition back in 2012 and Greenwich in 2019 (Exhibit 22-23).

CRISIL
Diversified Financials India Research
 13

 30% to 35% of revenues is recurring. With almost one-third of revenues being annuity based, CRISIL’s
mix of services find relevance both during expansionary phases (through voluntary research and
benchmarking services) and uncertain times, which lead to the demand for risk solutions and
benchmarking of cost/capital efficiency and more. In its last investor meet (April 2023, following the
regional bank crisis), management made an interesting remark: “We haven’t seen a drop-off at all for
the type of insight that we provide. In fact, there’s probably more requirements for what we have. So,
really no impact frankly. And then, obviously for our services business, the current environment is really
conducive to getting, doing more work and increased demand (link).”

Overview of major acquisitions by CRISIL in research and analytics domain

Details of acquisitions
Price /
Price PBT
Company (Rs mn) Stake Year (1Y fwd)
Irevna 310 100 2004 NA
Pipal 580 100 2010 20.5
Coalition 2500 100 2012 5.0
Greenwich 2800 100 2019 4.9

Source: Company, Kotak Institutional Equities

Research vertical’s revenues have become more broad-based with acquisition of Coalition and Greenwich
Revenues, PBT and PAT of key subsidiaries in the research segment, December 2013-22
Contribution (Rs mn) YoY (%)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2014 2015 2016 2017 2018 2019 2020 2021 2022
Irevna 4,327 5,439 6,967 8,243 8,728 7,529 5,384 4,990 5,640 7,103 26 28 18 6 (14) (28) (7) 13 26
Pipal 327 282 265 65 — — — — — — (14) (6) (75)
Coalition 1,595 1,945 2,367 2,349 2,560 3,311 3,714 3,433 3,645 4,320 22 22 (1) 9 29 12 (8) 6 19
Greenwich 2,271 3,455 3,414 52 (1)
Total income 6,249 7,666 9,599 10,657 11,288 10,840 9,098 10,695 12,740 14,837 23 25 11 6 (4) (16) 18 19 16

Irevna 79 696 404 457 991 859 1,383 853 651 731 778 (42) 13 117 (13) 61 (38) (24) 12
Pipal 43 37 35 9 — — — — — — (14) (5) (73)
Coalition 498 514 675 749 756 1,063 1,314 907 573 1,613 3 31 11 1 41 24 (31) (37) 181
Greenwich (320) 297 616 nm nm
Total PBT 620 1,246 1,114 1,215 1,748 1,923 2,698 1,440 1,521 2,961 101 (11) 9 44 10 40 (47) 6 95

Irevna 76 676 378 394 948 683 1,301 861 643 657 783 (44) 4 140 (28) 90 (34) (25) 2
Pipal 30 25 24 7 — — — — — — (18) (2) (72)
Coalition 368 413 565 607 610 878 1,063 743 466 1,319 12 37 7 1 44 21 (30) (37) 183
Greenwich (233) 154 465 (166) 202
Total PAT 474 1,113 967 1,007 1,558 1,562 2,364 1,371 1,263 2,441 135 (13) 4 55 0 51 (42) (8) 93

Source: Company, Kotak Institutional Equities

 Global Research and Risk Solutions (GR&RS). GR&RS provides services to financial institutions on
areas such as fundamental research, quant services, credit and non-financial risk. The Research
business was initially focused on providing offshore support to equity sell-side teams of clients in
front-office locations. Over time, the sell-side business has slowed down due to industry-level
challenges such as fee pressure, regulations (Mifid-2) and shift to captive centers. However, CRISIL
has also progressively transitioned the business by adding (1) client segments such as asset
management firms and commercial banks and (2) scope of work to include areas such as quant
research (includes stress testing, algo trading and operational risk), credit (includes EWS framework
and covenant monitoring) and non-financial risk (includes fraud detection and AML models). A brief
overview of the nature of deals CRISIL won in recent years is as follows:

 2022: Notable deals include (1) a transformation project from a global bank for regulatory
engagements, (2) a new engagement with a European bank for assessing the creditworthiness of
counterparties across corporate and financial institutions, (3) a project that will enable a global
bank to address data inconsistency, incompleteness and inaccuracy, (4) a climate risk modeling
project from an existing client and (5) a mandate from the fixed income team of a leading asset
management firm to provide bespoke ESG research services.

CRISIL
Diversified Financials India Research
 14

 2021. Notable deals include (1) a large mandate in regulatory reporting, product control,
automation and digital transformation space, (2) the successful renewal of large multi-year
contracts with global investment banks in the risk space, (3) risk team added one of the leading
buy-side firms as a new logo in the US for an engagement in the data-engineering domain and (4)
risk team won a new deal in Asia on a fund monitoring solution and the first climate risk RFP for
assessing the credibility of climate transition plans of several entities.

Overview of offerings in the research segment Overview of offerings in the risk solutions segment
Research segment overview Risk solutions segment overview

Source: Company, Kotak Institutional Equities

Source: Company, Kotak Institutional Equities

 Global benchmarking analytics (GBA). GBA’s benchmarking reports are widely quoted in internal
strategy assessments of global IBs, investor presentations of Ibs and publications by industry bodies,
central banks and others. Some services include competitor analytics, client analytics and industry
benchmarks. It has over 300 clients in the financial services space, including corporate, investment
and commercial banks, asset managers, securities exchanges, government entities, and fintechs.

 Insights provided by GBA originate from buyers of financial services who share market share data,
product usage, satisfaction levels and financial/operational information related to revenue, pricing,
client activities, costs, capital and more. The company has a 400-member team working in London,
Mumbai, New York, Singapore and Tokyo for this business.

CRISIL
Diversified Financials India Research
 15

Risks: Pricing discipline, global slowdown, bond market spreads, regulations

Two key risks to our investment view on the stock: (1) While we build a positive view on the ratings
business (~18% 3Y EBIT CAGR), a stronger upcycle in corporate credit growth is an upside risk.
Additionally, there have been a series of regulatory reforms and initiatives in recent years to shift large
corporate borrowing to the bond market. Stronger cyclical growth, along with any structural shift in
borrowing patterns, could lead to stronger revenue growth and earnings expansion versus our
assumptions. (2) Strong and sustained growth in global businesses (research and benchmarking) can
lead us to upgrade earnings and as a result, ascribe higher value to this business.

For a more complete picture, we highlight below key risks to the business over the medium term,
notwithstanding our negative view on the share price.

 Competitive intensity in credit rating. While there are entry barriers in the credit rating industry, India
being a seven-player market, leads to strong competition among players. Competition is likely much
more severe in the bank loan ratings market, which is driven by regulatory compliance to get rated (for
RWA reduction). Tendency to shop for acceptable ratings (due to issuer pays model) leads to dilution
in pricing discipline and quality of ratings. FY2015-18 was such a period, when CRISIL’s market share
declined ~300 bps to 30%.

 Global slowdowns can impact demand for services. Nearly 65% of CRISIL’s revenues are export-
driven, of which ~15% is captive work for S&P and the rest ~50% is focused on serving global
investment banks and other large financial entities. While captive work from S&P is likely to be stickier
(although low margin), the rest of the business could be subject to downcycles.

 Macro risks leading to risk aversion and spread expansion. CRISIL benefits from a benign risk
environment, leading to a reduction in credit spreads and fund-raising from bond markets. A rise in
risk aversion due to macro events (local or global) can temporarily cause a decline in primary bond
issuances and/or greater dependence on bank lending. This is a negative for CRISIL, given higher
margins (like-for-like basis) in bond markets compared with bank loan ratings.

 Regulatory changes that reduce dependence on CRAs. CRAs benefit from regulations that mandate
the use of external rating agencies. Some of these regulations are (i) bank loan ratings for bank loans
under the standardized methodology to determine RWAs and (ii) investment norms for investments
by debt funds, insurance and pension companies and others. Regulatory changes caused by
misconduct or any other reasons can cause regulators to review these rules, leading to lower revenue
potential for CRAs such as ICRA.

 Rise of global capability centers. A large organization deciding to build captive centers and hire local
talent could reduce dependence on buying services from third-party service providers such as CRISIL.
There is also risk of greater competition from other knowledge service providers. Lastly, competition
for talent could rise, leading to sticky wage costs that fail to adjust to slowing revenue growth.

CRISIL
Diversified Financials India Research
 16

Financials: Mid-teens earnings growth

Our FY2023-27E EBIT growth of ~15% builds in the following: (1) Ratings—upcycle assumptions
of 15-16% rating revenue growth, with margins (calculated) expanding to ~54-55% from 51-52%,
(2) RAS—potential global headwinds could slow revenue growth (~11-12% CAGR) for the next
three years, along with margins recovering to 23-24% off bottom (~20%) seen in FY2020-22, led
by stronger focus on costs and pricing.

Mid-teens core earnings growth

We expect the EBIT to increase at a CAGR of ~14-15% over FY2023-26E, which reflects 12% revenue
growth and 11% expense growth. Underlying in our assumptions is (1) a favorable and broad-based
credit cycle that will support demand for credit ratings and (2) the research business (strong global
linkage) goes through a period of slower growth (11-12%), partly supported by demand for non-
discretionary services (risk business) and demand for proprietary and unique benchmarking insights
(Coalition/Greenwich).

 FY2020 marked a bottom in earnings growth. CRISIL’s core earnings have been subdued during
FY2015-20 due to low revenue growth (8% CAGR), whereas operating expense growth was higher
(10%). Earnings growth picked up momentum in FY2021-22, led by revival in ratings and research
revenues. CRISIL also completed the acquisition of Greenwich in 2020, which also supported revenue
growth.

 Low disclosures increase reliance on calculated guesswork. Unavailability of revenue breakups

within ratings such as the mix between BLR and bonds or breakup of revenues within research makes
forecasting difficult. We rely on guesswork around assuming a mix between BLR/bonds and use the
related party disclosures or subsidiary financials for building revenue forecasts. Margin estimates
also involve similar assumptions.

Earnings CAGR of ~11% over FY2023-26E Mid-teens core earnings growth

PAT and yoy growth, December fiscal year-ends, EBIT and yoy growth, December fiscal year-ends,
2015-26E 2015-26E

(Rs bn) PAT (LHS) YoY (%, RHS) (%) (Rs bn) EBIT (LHS) YoY (%, RHS) (%)
10 40 12.0 40
8.6 10.6
7.6 9.4
8 30 9.6 28
6.7 8.3
6.1 7.3
6 5.6 20 7.2 16
6.3
4.7
5.0
4 3.6 3.4 3.5 10 4.8 4.2 4.1 4.3 4.2 3.9 4
3.3 3.0 3.6
2.9

2 - 2.4 (8)

0 (10) - (20)
2023E
2024E
2025E
2026E
2015
2016
2017
2018
2019
2020
2021
2022
2023E
2024E
2025E
2026E
2015
2016
2017
2018
2019
2020
2021
2022

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 17

Core PBT growth to accelerate over next 3-4 years compared with ~10% CAGR over 5Y
CAGR growth rates for PAT, core PBT, revenues and expenses, (%)

5Y CAGR 3Y CAGR Next 4Y

20
18 18
17
16 14 14
13
12
11 11 11
12 11
9
8

-
PAT (LHS) EBIT (LHS) Revenues Operating expense

Source: Company, Kotak Institutional Equities estimates

Higher-margin ratings business to see upswing; overseas revenues to soften

In terms of broad revenue assumptions, we expect (1) increased momentum in the ratings business
(~15% CAGR), driven by higher corporate credit growth through banks and new bond issuances, (2)
muted growth (~8% CAGR) in the global analytics segment (S&P’s captive business) and (3) slower
growth in RAS’s revenue streams, with developed market linkages (research, risk and benchmarking),
partly offset by domestic/EM revenue streams (infra advisory, indices, data).

Higher-margin ratings business to see upswing; overseas revenues to soften

Revenue break-up, December fiscal year-ends, 2018-26E (Rs mn)
CAGR
2018 2019 2020 2021 2022 2023E 2024E 2025E 2026E 2018-22 2022-26E
Reveues
Ratings 3,171 3,466 3,431 3,741 4,229 5,199 6,012 6,873 7,742 7 16
GAC (captive S&P) 1,902 1,982 2,219 2,300 2,405 2,646 2,805 3,029 3,271 6 8
Research, analytics & solutions (new segment) 12,412 17,083 21,053 23,856 26,265 29,158 32,664 14 12
Research (old segment) 11,060 10,444 12,827 15,437
Advisory (old segment) 1,352 1,425 1,341 1,529
Total 17,485 17,317 19,818 23,007 27,687 31,701 35,081 39,060 43,678 12 12
YoY (%)
Ratings 7 9 (1) 9 13 23 16 14 13
GAC (captive S&P) 4 4 12 4 5 10 6 8 8
Ratings, analytics & solutions (new segment) 23 13 10 11 12
Research (old segment) 2 (6) 23 20
Advisory (old segment) 38 5 (6) 14
Total 5 (1) 14 16 20 14 11 11 12
Mix (%)
Ratings 18 20 17 16 15 16 17 18 18
GAC (captive S&P) 11 11 11 10 9 8 8 8 7
Ratings, analytics & solutions (new segment) 74 76 75 75 75 75
Research (old segment) 63 60 65 67
Advisory (old segment) 8 8 7 7
Total 100 100 100 100 100 100 100 100 100

Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 18

 Ratings: ~15% revenue CAGR with growth optionality. As highlighted in the industry and business
sections, we believe there are drivers in place for corporate credit growth to accelerate, driven by
higher credit utilization and capex-related credit requirements. The lending system in India is well-
placed to become broad-based, with a strong capital position, well-provided NPLs and healthy
demand for credit. We are likely to see a greater number of lenders becoming active in onward lending,
benefiting from stronger banks and the bond financing market. (Exhibit 30)

 Over FY2023-26E, we expect Rating’s revenue to increase at a CAGR of ~15%, with similar growth
across both BLR and bond ratings. Revenues from bond ratings are likely to contribute nearly two-
third of Rating’s revenues. CRISIL has a much larger presence in the bond market versus the more
price-competitive BLR segment. Growth in debt rated will also likely support margin improvement
(Exhibit 31-32).

Rating’s revenues likely to increase at CAGR of ~15%

Rating revenue growth, December fiscal year-ends, 2002-26E

(Rs bn) Rating revenues (LHS) YoY (%, RHS) (%)

9.0 25
7.7

7.2 6.9 18
6.0
5.2
5.4 11
4.2
3.7
3.5 3.4
3.6 3.1 2.9 2.9 3.0 3.2 4
2.6 2.8
2.0 2.3
1.7
1.8 1.4 (3)
0.8
0.5 0.5 0.5 0.5 0.6

- (10)
2002
2003
2004
2005
2006
2007

2012
2013
2014
2015
2016

2021
2022
2023E
2024E
2025E
2008
2009
2010
2011

2017
2018
2019
2020

2026E
Source: Company, Kotak Institutional Equities estimates

We expect bonds and BLR revenues to grow… … with growth in debt rated across instruments
Rating revenue mix, December fiscal year-ends, Rated debt mix, December fiscal year-ends, 2018-
2018-26E (Rs bn) 26E (Rs tn)

Bond revenues BLR revenues Bond rated BLR rated

8.0 30

6.4 2.7 24
2.4
4.8 2.1 18 16.7
1.8 14.8
1.5 12.8
3.2 12 10.8
5.1 8.7
4.5 4.9
3.9 6 4.8 4.9
1.6 3.4
2.7 8.3 9.7
6.0 7.1
4.4 4.7 4.2 4.8
- 0
2022 2023E 2024E 2025E 2026E 2019 2020 2021 2022 2023E 2024E 2025E 2026E

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 19

 S&P captive support unit (GAC)—slow and steady growth. We expect a revenue CAGR of about 8%
over FY2023-26E. This business is unlikely to see a material change in trends, given that the source
of revenues is linked to surveillance fees earned by S&P, which tends to be relatively steady.

 RAS—expect moderate slowdown. Forecasting revenues of this vertical remains a challenge. We

expect revenues for this vertical to face slight moderation (11-12% CAGR) over the next couple of
years. This reflects a view that CRISIL’s global clients such as investment/commercial banks and
asset management firms could potentially face greater revenue and RoE pressures (Exhibit 34-35).

 CRISIL’s pivot toward risk and benchmarking has helped the business reduce consistent revenue
pressure facing the sell-side industry. It is unclear how the next slowdown in the US and Europe
will impact the demand for services such as risk and benchmarking. Some projects could be
voluntary in nature and may face budget cuts. However, the phase of consolidation also arguably
increases focus on cost reductions and risk management. As a result, we build some moderation
in growth rates.

 The third sub-segment within RAS, i.e., Market Intelligence and Analytics, potentially has better
growth tailwinds than research and benchmarking. This includes infrastructure advisory,
international mandates with bilateral and multi-lateral agencies, indices and AIF benchmarking.

Revenue growth has been strong in recent quarters… … but we build moderation in next few years
Quarterly revenues in Research segment, Revenue growth in Research segment, December
December fiscal year-ends, 1QCY22-2QCY23 (Rs bn) fiscal year-ends, 2021-26E (Rs bn)

7.0 (Rs bn) Revenues (LHS) YoY (%) (%)

6.5
40 30
5.8
5.6 5.1 5.1 5.3 32.7
32 29.2 24
4.3 26.3
4.2 23.9
24 21.1 18
17.1
2.8
16 12

1.4 8 6

- 0 0
1QCY22 2QCY22 3QCY22 4QCY22 1QCY23 2QCY23 2021 2022 2023E 2024E 2025E 2026E

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities estimates

Research segment’s revenue growth could see moderation in discretionary spends

Revenue break-up for Research Analytics & Solutions, December year-end, 2021-26E (Rs bn)
2021 2022 2023E 2024E 2025E 2026E
Global research & risk 5.6 7.1 7.8 8.4 9.1 10.0
YoY (%) 26 10 8 8 10
Global benchmarking 7.1 7.7 8.9 9.6 10.6 11.8
YoY (%) 9 15 8 10 12
Market intelligence & analytics 4.3 6.2 7.1 8.2 9.5 10.8
YoY (%) 43 15 15 15 14
Total revenues 17.1 21.1 23.9 26.3 29.2 32.7
YoY (%) 23 13 10 11 12

Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 20

Margins likely to drift up

 CRISIL’s operating profit margin, i.e., EBIT (% of revenues), has declined from ~30% to ~19% during
FY2010-FY2020 (Covid year). Subsequently, margins have improved to ~22% in FY2022. We believe
operating profit margins can drift up to 23-24% owing to the support from the ratings and research
verticals.

 Ratings margin (estimated) have moved from ~60% to ~40% levels over the past 15 years (Exhibit
37). The ratings business is likely to have stronger operating leverage compared with research. Given
the recovery in debt volumes, we expect segment margins to improve to 53-55% over the next few
years.

 Research’s (RAS) business margins (Exhibit 38) have declined over the years due to revenue pressure
resulting from regulatory pressures facing the sell-side industry, which has been partly offset by
growth in risk and benchmarking. Due to the reclassification of business, the exhibit has two series—
pre-2022 is the erstwhile research segment, whereas post-2022 is the RAS segment, which also
includes businesses such as infrastructure advisory. We believe the margin could improve to 24-25%
over the medium term from 22% in FY2022, driven by (1) selective price enhancements in contracts,
(2) moving up the value chain in terms of nature of work (such as climate risk) and (3) focusing on
operating leverage through better cost flexibility.

Core PBT margins to improve to ~25% in FY2026E

Core PBT (i.e., PBT-other income) as % of revenues, December 2009-26E (%)

45

34
36
31 30
29 29 28
26 27
27 25 25 24 24 24 24
22 23 23
20

18

-
2024E

2026E
2023E

2025E
2009

2011

2013

2014

2016

2017

2019

2021

2022
2010

2012

2015

2018

2020

Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 21

Rating’s revenue margins likely to improve to 54-55% Research (RAS) margins to improve over next few years
Operating margin (calculated) and revenue growth Operating margin and revenue growth in Research
in ratings business, December fiscal year-ends, 2008-26E (%) business, December fiscal year-ends, 2008-26E (%)

Operating margin (LHS) Revenue growth (RHS) Operating margin (LHS) Revenue growth (RHS)
60 25 45 50

54 18 36 38

48 11 27 26

42 4 18 14

36 (3) 9 2

30 (10) - (10)

2026E
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

2022
2023E
2024E
2025E
2023E
2024E
2025E
2026E
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Cost ratios to decline on higher operating leverage

We expect 11-12% expense growth over the next three years. This will result in a marginal decline in the
cost-income ratio (adjusted for other income) to 75-76% by FY2025E from 78% in FY2022. As discussed
earlier, this reflects a sharper margin improvement in ratings and marginal improvements in research.
Employee cost comprises almost 70-75% overall expenses. CRISIL has seen a strong headcount
increase to nearly 4,600 from ~3,600 in FY2020. We believe the business has built capacity to benefit
from growth in the ratings business. We are building about 8-9% growth in cost per employee compared
with the ~10% average growth over the past ~15 years.

Cost ratios to decline… … led by higher operating leverage

Core cost-income ratio, December fiscal year-ends, Operating expense growth, December fiscal year-
2009-26E (%) ends, 2009-26E (%)

90 35
81
78 78 77 77 7676
75 75
72 74 73 74
69 71 70 71
72 66 27

54 19

36 11

18 3

- (5)
2023E
2024E
2025E
2026E
2011
2009
2010

2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023E
2024E
2025E
2026E
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 22

Employee expenses is the largest cost item

Expense break-up, December fiscal year-ends, 2022 (%)

Other expenditure,
9
D&A, 5
Software purchase
and maintenance
expense, 2

Associate service
fee, 6

Professional fees, 6

Employee expense,
72

Source: Company, Kotak Institutional Equities

We expect staff additions to decline after growth in recent years Cost per employee to increase at CAGR of 7-8%
Employee count and yoy growth, December fiscal Cost per employee and yoy growth, December
year-ends, 2009-26E (%) fiscal year-ends, 2009-26E (%)

(#) Employees YoY (%) (%) (Rs mn) Cost per employee YoY (%) (%)
6,000 25 5.0 25

4,800 19 4.0 19

3,600 13 3.0 13

2,400 7 2.0 7

1,200 1 1.0 1

0 (5) 0.0 (5)

2023E
2024E
2025E
2026E
2014
2009
2010
2011
2012
2013

2015
2016
2017
2018
2019
2020
2021
2022
2023E
2024E
2025E
2026E
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Healthy FCF generation

CRISIL’s average PAT-to-FCF ratio over the past decade has been close to ~80-85%. The company
increased its dividend payout to ~65% in FY2022 from ~50% a decade ago. It has also done a buyback
in FY2015, while investing in selective M&A and other investments. From a working capital cycle
standpoint, Ratings is a negative working capital business, as the initial rating fee is received upfront and
surveillance over the period.

CRISIL
Diversified Financials India Research
 23

CRISIL has strong RoEs of 30-35% FCF conversion to improve

RoEs, December fiscal year-ends, 2014-26E (%) FCF/PAT ratio, December fiscal year-ends, 2014-
26E (%)
40
35 35
33 33 33 130 121
32 32 32 32 32
30 30 112
32 29
104 95
91 89 89 89
86 84
24 78 75
78 69
63
16
52
8
26
-
2025E
2023E
2024E

2026E
2014
2015
2016
2017
2018
2019
2020
2021
2022

2023E
2024E
2025E
2026E
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: Company, Kotak Institutional Equities estimates
Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 24

Consolidated income statement for CRISIL Ltd.

December fiscal year-ends, 2020-26E (Rs mn)
2020 2021 2022 2023E 2024E 2025E 2026E
Growth rates (%)
Revenue from operations 14 16 20 14 11 11 12
Investment income (36) 17 6 5 18 18 18
Total income 14 15 22 12 10 11 12
Operating expenses 22 12 19 14 10 11 11
Employee expense 22 20 21 14 11 11 12
PBT before exceptional items (7) 25 30 7 11 13 13
PAT 3 31 21 7 11 13 13
EBIT (7) 30 24 17 13 13 13
Key ratios
Cost-income (%) 81 78 78 77 77 76 76
EBITDA margin (%) 26 27 26 27 27 27 27
EBIT margin (%) 20 22 23 23 24 24 24
Net profit margin (%) 17 20 20 19 19 19 19
Investment yield (%) 2.4 2.5 2.3 2.2 2.3 2.2 2.2
RoE (%) 29 32 33 32 32 32 32
Dividend payout ratio (%) 68 72 62 65 65 65 65
P&L
Revenue from operations 19,818 23,007 27,687 31,701 35,081 39,060 43,678
Ratings 5,650 6,041 6,634 7,845 8,817 9,902 11,014
Research (old) 12,827 15,437 — — — — —
Advisory (old) 1,341 1,529 — — — — —
Research, Analytics and Solutions (new) — 17,083 21,053 23,856 26,265 29,158 32,664
Operating expenses (14,712) (16,902) (20,391) (23,265) (25,621) (28,404) (31,705)
Employee expense (10,684) (12,869) (15,530) (17,694) (19,623) (21,858) (24,430)
Professional fees (1,084) (1,239) (1,230) (1,377) (1,446) (1,591) (1,782)
Associate service fee (1,316) (1,226) (1,322) (1,481) (1,659) (1,825) (2,007)
Other expenses (1,627) (1,568) (2,309) (2,712) (2,892) (3,131) (3,486)
EBITDA 5,106 6,105 7,297 8,436 9,461 10,655 11,973
Depreciation and amortisation (1,211) (1,060) (1,033) (1,116) (1,205) (1,301) (1,406)
EBIT 3,895 5,045 6,263 7,320 8,256 9,354 10,567
Other income 832 770 1,225 709 682 732 792
Finance costs (144) (89) (64) (67) (71) (74) (78)
Exceptionals — 458 — — — — —
Profit before tax 4,583 6,184 7,424 7,962 8,867 10,012 11,282
Tax (1,036) (1,526) (1,780) (1,909) (2,126) (2,401) (2,705)
PAT 3,547 4,658 5,644 6,053 6,741 7,612 8,577
EPS (Rs) 49 64 77 83 92 104 117
Number of shares (# mn) 73 73 73 73 73 73 73

Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 25

Consolidated balance sheet for CRISIL Ltd.

December fiscal year-ends, 2020-26E (Rs mn)
2020 2021 2022 2023E 2024E 2025E 2026E
Balance sheet
Share capital 73 73 73 73 73 73 73
Reserves and surplus 13,046 15,711 17,847 19,965 22,324 24,989 27,990
Shareholder's fund 13,118 15,784 17,920 20,038 22,398 25,062 28,063
Lease liabilities 2,241 1,321 835 901 973 1,051 1,135
Employee related payables & provisions 1,927 2,529 3,490 3,664 3,847 4,040 4,242
Trade payables 1,054 1,337 1,439 1,554 1,679 1,813 1,958
Provisions 976 952 1,159 1,217 1,278 1,342 1,409
Other liabilities 2,751 3,116 3,467 3,641 3,823 4,014 4,215
Total liabilities 8,948 9,255 10,390 10,978 11,600 12,260 12,959
Investment 6,463 8,402 8,742 9,425 10,553 11,850 13,341
Cash and bank balances 2,787 2,944 3,214 3,836 4,982 6,245 7,631
Trade receivables 3,074 3,985 7,588 8,727 9,163 9,621 10,102
Fixed assets 2,501 1,673 1,340 1,273 1,209 1,149 1,091
Goodwill on consolidation 3,759 3,727 3,798 3,798 3,798 3,798 3,798
Intangible assets 1,366 1,208 1,052 1,104 1,160 1,218 1,278
Other assets 1,660 2,729 2,459 2,705 2,976 3,273 3,601
Net assets 22,067 25,039 28,310 30,994 33,976 37,300 41,001
Key metrics/ratios
Cash and cash equivalents 2,787 2,944 3,214 3,836 4,982 6,245 7,631
Gross borrowings — — — — — — —
Net cash and cash equivalents 2,787 2,944 3,214 3,836 4,982 6,245 7,631
Receivable days 60 68 109 107 100 95 89
RoE (%) 29 32 33 32 32 32 32
RoIC (%) 33 38 47 47 48 49 51

Source: Company, Kotak Institutional Equities estimates

Consolidated cash flow statement

December fiscal year-ends, 2020-26E (Rs mn)
2020 2021 2022 2023E 2024E 2025E 2026E
Cash flow statement
PBT 4,583 6,184 7,424 7,962 8,867 10,012 11,282
Depreciation and amortisation expense 1,211 1,060 1,033 1,116 1,205 1,301 1,406
Other income, net (109) (708) (566) (641) (611) (658) (714)
Working capital changes
(Increase)/ Decrease in trade receivables (474) (960) (2,165) (1,138) (436) (458) (481)
(Increase)/ Decrease in other assets 342 (1,057) (368) (255) (281) (308) (339)
Increase/ (Decrease) in trade payables 153 421 112 115 124 134 145
Increase/ (Decrease) in other liabilities 548 1,060 1,297 406 426 447 470
Cash taxes paid (1,250) (1,970) (2,205) (1,909) (2,126) (2,401) (2,705)
Cash flow from operations 5,005 4,031 4,564 5,655 7,168 8,070 9,062
(Purchase)/sale of fixed assets (340) 270 (389) (1,035) (1,124) (1,221) (1,325)
(Purchase)/sale of investments (2,888) (1,153) (228) 25 (446) (564) (699)
Interest income 62 74 40 709 682 732 792
Cash flow from investing (3,167) (809) (577) (301) (889) (1,053) (1,232)
Dividends paid (2,320) (2,765) (3,431) (3,934) (4,382) (4,947) (5,575)
Cash flow from financing (2,651) (2,910) (3,683) (4,001) (4,452) (5,022) (5,653)

Free cash flow 3,976 3,221 3,545 4,553 5,973 6,775 7,660

Increase in cash and cash equivalents (875) 238 264 644 1,146 1,263 1,386
Cash the beginning of the period 3,391 2,749 2,899 3,193 3,836 4,982 6,245
Cash at the end of the period 2,749 2,899 3,193 3,836 4,982 6,245 7,631

Source: Company, Kotak Institutional Equities estimates

CRISIL
Diversified Financials India Research
 INITIATING COVERAGE

ICRA (ICRA) REDUCE

Diversified Financials
CMP(₹): 5,535 Fair Value(₹): 5,100 Sector View: Attractive NIFTY-50: 18,989 November 02, 2023

In a rebuilding phase; initiate with REDUCE Company data and valuation summary
We initiate coverage on ICRA with a REDUCE rating and a SoTP-based FV of Stock data
Rs5,100. ICRA is a relatively direct play on credit ratings (~60% of revenues
CMP(Rs)/FV(Rs)/Rating 5,535/5,100/REDUCE
and ~50% of operating profit come from ratings). Driven by ratings and the
52-week range (Rs) (high-low) 6,249-3,837
business from Moody’s, ICRA’s revenue and earnings growth rates have
Mcap (bn) (Rs/US$) 53/0.6
recovered strongly over FY2022-23, coming off the weak earnings
ADTV-3M (mn) (Rs/US$) 62/0.7
performance over FY2015-21. We believe growth rates are likely to moderate
to about 12-13%, linked to credit growth assumptions. Our FV implies 26X Shareholding pattern (%)
December 2025E EPS.

Initiate with REDUCE and FV of Rs5,100 7.6

11.9
We initiate coverage on ICRA with a REDUCE rating and a SoTP-based FV of
2.8
Rs5,100. While ICRA is a relatively more direct play on credit ratings (~60%/50% of 51.9
revenues/EBIT from ratings), its flow-through to earnings is offset by the need for 17.7

investing in the business (which explains ICRA’s lower EBIT margins of ~30% 8.2
versus ~50% of CRISIL). The company is coming out of a weak earnings
performance during FY2015-21 (-5% EBIT CAGR), impacted by muted credit growth Promoters FPIs MFs BFI s Retail Others

and a decline in securitization volumes during Covid. FY2022-23 saw a strong

Private Circulation Only. This document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933
recovery (near doubling of EBIT in FY2023 from the FY2021 lows). We believe Price performance (%) 1M 3M 12M
Absolute 1 (3) 35
growth rates are likely to moderate at close to 12-13%, led by similar revenue
Rel. to Nifty 4 1 30
growth. Our FV of Rs5,100 implies 26X December 2025E EPS.
Rel. to MSCI India 4 (1) 32

Recovery in ratings business Forecasts/Valuations 2024E 2025E 2026E

ICRA is the third-largest rating agency in terms of revenues and the quantum of EPS (Rs) 161.6 180.0 201.0
debt rated. It is well-placed to benefit from a potential recovery in corporate credit EPS growth (%) 14.1 11.4 11.7
growth through banks and bonds. The company is recovering from: (1) a long
P/E (X) 34.2 30.8 27.5
period of muted credit growth, (2) reputational setback after IL&FS, (3) decline in
P/B (X) 5.0 4.7 4.4
securitization volumes during Covid and (4) divestment of a sub-scale IT services
EV/EBITDA (X) 33.0 29.6 26.5
business in FY2017. We expect ratings revenues to see ~14% CAGR over FY2024-
RoE (%) 15.1 15.8 16.6
27E, with operating margins recovering to about 28% in 3Y from 25% in FY2023.
Div. yield (%) 0.2 0.2 0.2
Sales (Rs bn) 0 0 0
Non-ratings: Scope to scale up but execution history has been patchy
EBITDA (Rs bn) 2 2 2
ICRA’s execution in the non-ratings business has been subpar, given the lack of a
Net profits (Rs bn) 2 2 2
clear strategy and focus on areas where it intends to build scale. This has led to
volatile revenue performance with acquisitions followed by divestment of non-core Source: Bloomberg, Company data, Kotak Institutional Equities estimates
businesses, such as IT services. However, the past couple of years have seen a Prices in this report are based on the market close of
resumption of growth, led by captive ratings-related work for Moody’s (~20% November 01, 2023
CAGR). We build in ~13% revenue CAGR over FY2024-26E, with operating margins
likely to moderate to ~40% from 43%.

Key risks: Strong corporate credit growth, corporate bond market development
The key risks are: (1) stronger corporate credit growth extending over a few years
may lead to an upward revision in growth estimates, especially if supported by
growth in higher-margin bond borrowings; (2) significant development of corporate
bond market borrowing patterns should lead to a rethink of fair multiple for the
business; and (3) over the short- to medium-term, faster-than-expected margin
expansion in ratings (converging toward CRISIL’s margins) could lead to earnings
upgrades.
Full sector coverage on KINSITE

Abhijeet Sakhare
[email protected]
+91-22-4336-1240

Nischint Chawathe M B Mahesh, CFA Varun Palacharla Ashlesh Sonje, CFA Sidham Jain
[email protected] [email protected] [email protected] [email protected] [email protected]
 2

Table of Contents

Financial snapshot .............................................................................................................................. 3

Valuation: Initiate with REDUCE and FV of Rs5,100 ................................................................................ 4

Valuations at ~10% premium to long-term range and ~30% discount to CRISIL ......................................................................... 4

Ratings-focused revenue profile ................................................................................................................................................... 5

Key risks: Positive surprise in rating’s volumes, strong revival in the global business ................................................................ 5

ICRA: Recovery in ratings business; non-ratings largely driven by Moody’s .............................................. 6

A volatile revenue growth trajectory in the past decade ............................................................................................................... 6

Credit ratings: Well-placed for recovery ........................................................................................................................................ 7

Non-ratings: Work-in-progress toward scaling up businesses ................................................................................................... 11

Risks: Pricing discipline, bond market spreads and regulations ............................................................ 13

Financials: Earnings recovery driven by ratings ................................................................................... 14

13-14% core earnings growth ..................................................................................................................................................... 14

Growth tailwinds in ratings ......................................................................................................................................................... 15

Stable margins with upside potential.......................................................................................................................................... 17

Healthy FCF generation .............................................................................................................................................................. 18

ICRA
Diversified Financials India Research
 3

Financial snapshot
ICRA – Financial overview
March fiscal year-ends, 2020-2027E
Net profit EBIT Dividend
Revenue YoY PAT YoY EBIT YoY margin margin EPS P/E EV/EBITDA ROE yield
(Rs mn) (%) (Rs mn) (%) (Rs mn) (%) (%) (%) (Rs) (Rs) (Rs) (%) (%)
2020 3,211 (2) 972 (7) 855 (21) 26 27 101 51 46 14 0.5
2021 3,011 (6) 827 (15) 712 (17) 24 24 86 60 56 11 0.5
2022 3,428 14 1,135 37 1,128 58 30 33 118 44 39 14 0.5
2023 4,032 18 1,367 20 1,331 18 30 33 142 36 33 15 2.5
2024E 4,636 15 1,560 14 1,505 13 30 32 162 32 29 16 2.0
2025E 5,247 13 1,737 11 1,674 11 29 32 180 29 26 17 2.3
2026E 5,880 12 1,940 12 1,869 12 29 32 201 26 23 18 2.5
2027E 6,590 12 2,173 12 2,095 12 29 32 225 23 21 19 2.8

Source: Company, Kotak Institutional Equities estimates

ICRA — Summary of key financials

March fiscal year-ends, 2021-2027E
2021 2022 2023 2024E 2025E 2026E 2027E
Growth rates (%)
Revenue from operations (6) 14 18 15 13 12 12
PBT before exceptional items (15) 36 19 14 11 12 12
PAT (15) 37 20 14 11 12 12
EBIT (17) 58 18 13 11 12 12
Key ratios
Cost-income (%) 67 60 60 60 61 61 61
EBIT margin (%) 24 33 33 32 32 32 32
Net profit margin (%) 24 30 30 30 29 29 29
RoE (%) 11 14 15 16 17 18 19
RoIC (%) 10 21 32 40 42 45 47
Dividend payout ratio (%) 32 24 92 65 65 65 65
P&L
Revenue from operations 3,011 3,428 4,032 4,636 5,247 5,880 6,590
Employee expense (1,717) (1,792) (2,076) (2,399) (2,728) (3,058) (3,426)
Other expenses (482) (430) (528) (619) (716) (804) (897)
EBITDA 811 1,206 1,429 1,618 1,804 2,018 2,267
Depreciation and amortisation (99) (78) (98) (113) (130) (149) (172)
EBIT 712 1,128 1,331 1,505 1,674 1,869 2,095
Other income 428 409 496 577 644 719 802
Finance costs (21) (16) (14) (15) (16) (16) (17)
Profit before tax 1,120 1,521 1,812 2,067 2,302 2,571 2,880
Tax (293) (386) (445) (508) (565) (631) (707)
PAT 827 1,135 1,367 1,560 1,737 1,940 2,173
EPS (Rs) 86 118 142 162 180 201 225
Balance sheet
Shareholder's fund 7,610 8,477 9,549 10,049 10,657 11,336 12,096
Lease liabilities 170 140 130 141 152 164 177
Trade payables 78 92 84 91 98 106 114
Provisions 293 365 423 444 466 490 514
Other liabilities 809 710 822 863 906 951 999
Total liabilities 1,350 1,308 1,459 1,538 1,622 1,711 1,804
Investment 3,570 4,538 6,885 7,280 7,734 8,257 8,858
Cash and bank balances 3,994 3,101 2,415 2,514 2,636 2,757 2,879
Trade receivables 475 265 380 400 439 483 532
Fixed assets 475 394 399 419 440 462 485
Goodwill on consolidation 12 12 12 12 12 12 12
Intangible assets 47 66 73 80 88 97 107
Net assets 8,960 9,785 11,008 11,587 12,279 13,046 13,900
Cash flow statement
Cash flow from operations 1,064 1,381 1,468 1,584 1,790 2,002 2,248
Increase in cash and cash equivalents 122 (65) (98) 100 122 122 121
Free cash flow 692 881 872 932 1,062 1,186 1,332

Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
 4

Valuation: Initiate with REDUCE and FV of Rs5,100

We initiate coverage on ICRA with a REDUCE rating and a SoTP-based FV of Rs5,100. ICRA is a
relatively direct play on credit ratings (~60% of revenues and ~50% of operating profit come from
ratings). The company is coming out of a fairly volatile earnings performance during FY2015-21
(-5% EBIT CAGR), impacted by muted credit growth and a decline in securitization volumes during
Covid. FY2022-23 saw a strong recovery (near doubling of EBIT in FY2023 from the FY2021 lows).
We believe growth rates are likely to moderate to about 13-14%, led by similar revenue growth.
Operating leverage benefit for ICRA, unlike CRISIL, could be back-ended due to the need for catch-
up on investments. Our FV of Rs5,100 implies 31X December 2025E EPS.

Valuations at ~10% premium to long-term range and ~30% discount to CRISIL

ICRA’s current valuations of ~29X 1Y forward earnings is in the middle of 25-35X band of mean and 1
standard deviation range. The recent re-rating of the stock reflects the delivery of stronger revenue and
earnings growth in both ratings and non-ratings businesses. ICRA is trading at ~30% discount to CRISIL,
which is likely due to: (1) less volatile earnings performance of CRISIL across cycles; (2) CRISIL’s
stronger track-record of ratings business in terms of quality (i.e., lower cumulative default rates) as well
as higher operating margins; and (3) ICRA’s efforts to diversify revenues have been less fruitful
compared to CRISIL (Exhibits 7-8).

ICRA is trading at ~10% premium to mean PE since 2008

ICRA consensus 1-year forward P/E (X), May 2019-August 2023

ICRA Mean +1 s.d -1 s.d CRISIL

50
42.9
40

30
28.8

20

10

0
Jun-09

Jun-23
Sep-14

Jun-16
Nov-15

Sep-21
Nov-08

Nov-22
Dec-12

Dec-19
May-12

May-19
Oct-18
Oct-11

Jul-20
Jul-13
Apr-08

Apr-22
Apr-15
Feb-14

Feb-21
Aug-10

Jan-17
Aug-17
Jan-10

Mar-11

Mar-18

Source: Bloomberg

SoTP better suited to value the business; FV implies 26X multiple

We value ICRA using a SoTP methodology, as we believe that SoTP appropriately captures the varied
growth outlook, margin and return profiles for ratings, compared with the non-ratings business. The
higher implied valuations for the ratings business compared with AMCs or RTAs reflect stronger entry
barriers and a lower risk of disruptions in the medium term.

 Valuations – look for lower entry valuations: ICRA’s franchise is relatively is relatively weak compared
to CRISIL in both ratings (smaller scale; lower margins) and non-ratings (largely driven by Moody’s,
although with higher margins). While relative valuations capture this, we believe risk-reward is not
attractive at current valuations.

 Ratings: Our DCF-based FV calculation implies ~35X FY2025E earnings. We value ICRA’s ratings
business using DCF with assumptions of (1) ~14% revenue CAGR over FY2024-26E and then 12%
growth in over subsequent 10Y; (2) EBIT margin to expand to 28% by FY2026E from 25% in FY2023
and stabilizing at 30% over the following decade; and (3) ~12% WACC and 5% terminal growth.

ICRA
Diversified Financials India Research
 5

 Non-ratings: We assign 20X December 2025E earnings to the non-ratings business, which reflects
9- 10% earnings growth in the medium term. ICRA’s non-ratings business is largely focused on
serving Moody’s, but there is management intent to add more growth levers, such as data and
analytics.

At our FV, ICRA will trade at ~26X December 2025E EPS

SoTP valuation for ICRA, December 2025

Dec-2025E Value (Rs bn) Valuer per share (Rs) Comments

Ratings 24 2,535 DCF-based; implies~35X Dec-25E earnings
Non-ratings 13 1,398 Assign 20X Dec-25E earnings; pegged to peers
Cash 11 1,141
Total 49 5,074 Implies ~26X Dec-25E EPS

Source: Company, Kotak Institutional Equities estimates

Ratings-focused revenue profile

Compared to CRISIL, ICRA has higher revenue share from the credit ratings business but has a smaller
scale, with lower operating margins. However, like CRISIL, its ratings business is also benefiting from the
recovery in bank loan ratings and bond issuances, but the margin recovery is likely to be more gradual.
Management’s focus on diversifying the revenue profile is in the early stages, with the recent pick-up in
work from the parent, Moody’s.

Our FY2023-26E EBIT growth of 14% builds: (1) Ratings: 14-15% rating revenue growth with margins
expanding to ~28% over 2-3 years from 25% currently; (2) Non-ratings: 12% CAGR, driven by the scale-
up with Moody’s and 8-10% growth in data and consulting business (lacks scale) with a moderation in
margins to ~40% from ~43% in the next 2-3 years.

EBIT expected to grow at ~12% over FY2024-27E

EBIT, December fiscal year-ends, 2008-26E
(Rs bn) EBIT (LHS) YoY (%, RHS) (%)
2.0 60
1.7
1.6 1.5 43
1.3

1.2 1.1 1.1 1.1 26

1.0
0.9 0.9
0.9
0.8
0.8 0.7 9
0.6 0.6 0.6 0.6
0.4
0.4 0.3 (8)

0.0 (25)
2008

2009

2010

2012

2013

2015

2016

2017

2019

2020

2023

2024E
2011

2014

2018

2021

2022

2025E

Source: Company, Kotak Institutional Equities estimates

Key risks: Positive surprise in rating’s volumes, strong revival in the global business
Key risks: While we build in a positive view on the ratings business (~15% 3Y EBIT CAGR), there is a
stronger upcycle on corporate credit. In addition, there have been a series of regulatory reforms and
initiatives in recent years to shift large corporate borrowing to the bond market. Stronger cyclical growth,
along with any structural shift in borrowing patterns, could lead to stronger revenue growth and earnings
expansion versus our assumptions.

ICRA
Diversified Financials India Research
 6

ICRA: Recovery in ratings business; non-ratings largely driven by Moody’s

ICRA is third-largest rating agency in terms of revenues and debt rated. With ~55-60% revenue
from ratings, ICRA is well-placed to benefit from a potential recovery in corporate credit growth
through banks and bonds. The company is recovering from (1) a long period of muted credit
growth, (2) reputational setback post IL&FS, (3) decline in securitization volumes during Covid, (4)
divestment of a sub-scale IT services business in FY2017. Revenues have recovered well over
2022-23 (~15% CAGR) compared to 2015-21 (nearly zero revenue growth). The non-ratings
business is largely dependent on work from Moody’s, whereas the rest of the business remains
quite small.

A volatile revenue growth trajectory in the past decade

ICRA is one of the three largest ratings agencies in India. The company was established in 1991 by
leading financial/investment institutions and commercial banks. Moody’s first acquired ~29% stake in
ICRA back in 1998. In 2014, Moody’s increased its stake to ~52% to become its majority shareholder. Its
revenue mix is led by domestic credit ratings with a few other ancillary businesses. ICRA’s revenue
growth has been quite muted in the last decade, with a CAGR of 5% over both 5- and 10-year periods.

ICRA’s revenues saw a strong 17% CAGR during FY2008-16, supported by 16% growth in ratings revenues
and 20-25% growth in the non-ratings business. The next five years were weak with growth slowing down
materially over FY2016-21 due to the weakness in the ratings business and divestment of one of the non-
ratings businesses. However, growth is now coming back over FY2021-23, with a revenue CAGR of ~15%
(Exhibit 6).

Ratings revenues have contributed ~60-70% of total revenues since FY2008. ICRA’s next largest
business after ratings is knowledge services, with revenue contribution growing to ~37% in FY2023 from
~30% in FY2021.

ICRA’s overall revenue growth has been lackluster over the previous decade
Revenue and yoy growth, March fiscal year-ends, 2008-23 (%)

(Rs mn) Revenue (LHS) YoY (RHS) (%)

4,500 40
4,041

3,600 3,423 3,344 3,307 3,246 3,436 30

3,211 3,107 3,024
2,830
2,700 2,514 20
2,074
1,930
1,800 1,623 10
1,358
994
900 -

- (10)
2008

2009

2010

2014

2015

2016

2017

2018

2022

2023
2011

2012

2013

2019

2020

2021

Source: Company, Kotak Institutional Equities

ICRA
Diversified Financials India Research
 7

Ratings is a primary business segment for ICRA… …with knowledge services growing its share in recent years
Revenue mix (old disclosure), March fiscal year- Revenue mix (new disclosure), March fiscal year-
ends, 2008-20 (%) ends, 2021-23 (%)
IT services (discon.) Outsourced/info. services (old) Ratings Knowledge services
Consulting Ratings Market services Consulting services
100 100
5 5 5

80 80
30 34 37

60 60

40
40
62 59 57
20
20
-
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
-
2021 2022 2023
Source: Company, Kotak Institutional Equities
Source: Company, Kotak Institutional Equities

Credit ratings: Well-placed for recovery

Please see the industry section of the report for a more detailed discussion on the credit ratings industry.
There are two broad ways to understand the drivers of revenues: (1) type of instrument, i.e., bank loan
ratings (BLR), bonds and securitized instruments, or (2) initial ratings fee (earned at the time of issuance)
and surveillance fee (ongoing fee).

Similar to CRISIL, we see a strong correlation between corporate credit growth and rating revenues
across time periods. Revenue growth accelerates at the time of credit growth cycles either through bank
loans or corporate bonds. Growth is also supported by one-off events such as the introduction of BLR in
2008, following the Basel II rules for banks. ICRA’s ratings revenues have grown at ~12% in the past ~20
years (Exhibit 9-10).

Rating revenues have seen ~12% CAGR in the past 20 years Rating revenues have strong correlation with credit growth
Rating revenues and yoy, March fiscal year-ends, Corporate credit growth and rating revenue growth,
2004-23 (%) March fiscal year-ends, 2008-23 (%)

(Rs bn) Revenues (LHS) YoY (RHS) (%) Corporate credit growth by banks
3.0 25 ICRA - rating revenue growth (RHS)
45 60
Start of bank loan
2.3

2.3
2.3

ratings
2.1
2.1

2.4 17
2.0
2.0

36 44
1.9
1.8
1.6

1.8 9
1.5
1.4

27 28
1.3
1.1

1.2 1
0.9

18 12
0.6
0.4
0.3

0.6 (7)
0.3
0.2

9 (4)

- (15) - (20)
2015

2017

2019
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

2016

2018

2020
2021
2022
2023

2010
2004
2005
2006
2007
2008
2009

2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

ICRA
Diversified Financials India Research
 8

 Revenue decline in FY2018-21 followed by recovery in FY2021-23. ICRA saw revenue declines in
FY2020 and FY2021. The revenue decline was driven by both bank loan and non-bank loan ratings
business as a result of low credit growth in corporate and financial sector, along with competitive
market. The compression was also caused by lower structured finance ratings volumes due to risk
aversion from investors around collections due to the Covid-19 pandemic.

 After IL&FS, ICRA has become more selective in segments, such as small-ticket bank loans or
companies that adopt lowest-cost approach toward selecting rating agency. This has helped improve
realizations in FY2022-23 versus FY2019-20.

 35-30% of revenues from bank loan ratings. ICRA provides helpful historical disclosures on the break-
down of rating revenues. The share of bond ratings (including securitizations) in revenues has been
in the 60-65% range in the past decade. Bond revenues grew consistently during FY2012-19, driven by
market expansion and growth in areas such as NBFC borrowing and growth in securitization. Bank
loan ratings have been range-bound for a long period (FY2012-22), but have rebounded strongly in
FY2023, helped by growth pick-up in bank credit growth.

 Surveillance fee contributes ~70% of revenues. FY2018-22 mix between surveillance fee and initial
fee indicates that lack of credit growth has hurt the growth in initial fee during FY2018-21. FY2022
has seen improvement in rated volumes resulting in growth in the initial rating fee (see Exhibits 11-
12).

Rating revenue mix is more skewed towards bond ratings Share of initial rating fee has increased with credit growth
Rating revenue mix, March fiscal year-ends, 2012- Breakup of rating revenues, March fiscal year-ends,
23 (%) 2018-22 (%)

Bond rating revenues (LHS) BLR revenues (LHS) Surveillance fee Initial fee
100 100

80 80

60
60

40
40

20
20

-
2023
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

-
2018 2019 2020 2021 2022

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

ICRA
Diversified Financials India Research
 9

Bond rating revenues declined during Covid due to lower BLR revenues have been subdued due to lower credit growth
securitization volumes and increase in threshold by banks for mandatory rating
Bond rating revenues and yoy, March fiscal year- BLR revenues and yoy, March fiscal year-ends,
ends, 2012-23 (%) 2012-23 (%)
Bond rating revenues (LHS) BLR revenues (LHS)
(Rs mn) YoY (RHS) (%) (Rs mn) (%)
2,000 20 YoY (RHS)
1,000 30
1,608
1,571 805
1,600 1,458 1,495 12 800 757 737 738 736 20
1,398 1,377 700 689 686
669 654 653648
1,239 1,225
1,200 1,067 4 600 10
942
842
800 726 (4) 400 -

400 (12) 200 (10)

- (20) - (20)

2012

2016

2020
2013
2014
2015

2017
2018
2019

2021
2022
2023
2012

2016

2020
2013
2014
2015

2017
2018
2019

2021
2022
2023

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

 Growth in bond ratings; stable BLR book. ICRA’s rated bond book (incl. securitizations) has grown to
~Rs38 tn from ~Rs20 tn over FY2019-23. This is still small compared with ~Rs70 tn rated debt by
CRISIL as of March 2023. ICRA historically had much larger presence in bank loan ratings, with ~Rs23-
28 tn of debt rated amount in FY2019-23 compared to the ~Rs15 tn book of CRISIL as of March 2023.

 In FY2023, growth in bank rated debt was driven by offtake by large industries, supported by higher
working capital requirements, along with cheaper rates, compared to bonds and overseas borrowing.
In 2H, bond borrowings grew strongly as banks started hiking MCLR rates (Exhibit 15-16).

ICRA’s rated profile has 40% share of BLR debt 2HFY23 has seen strong growth in rated debt
Outstanding rated amount of debt securities (incl. Issuances of debt securities (incl. PTC) and
PTC) and instruments other than debt securities, March fiscal instruments other than debt securities, March fiscal year-ends,
year-ends, 2019-23 (Rs tn) 2012-23 (Rs tn)

Instruments other than securities Securities Instruments other than securities Securities
45 10
8.8
38
7.9
36 33 8 7.2
6.9
6.6
28 28 6.2
27 27
27 23 24 6
22 4.74.5
20
3.9 3.7
18 4

2.22.4
9 2

- 0
2019 2020 2021 2022 2023 2019 2020 2021 2022 1HFY23 2HFY23

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

ICRA
Diversified Financials India Research
 10

 Market share has stabilized after the decline following IL&FS crisis. ICRA is the third-largest agency
in terms of rating revenues, as per our calculations. Its revenue market share rose to 22% in 2017-18
from 20% in 2014, led by growth in NBFCs and securitization volumes. This reversed in the years
following the IL&FS crisis in FY2019. The market share has stabilized at ~19% over FY2022-23 (Exhibit
17-18).

 IL&FS episode gave negative publicity, impacted long-term default rates. In September 2020, the
SEBI imposed a Rs10 mn penalty on CARE Ratings, ICRA and India Ratings, finding these rating
agencies guilty of not applying independent judgement and excessively relying on the submissions of
the IL&FS management. The rating updates failed to take into account the stressed balance sheet
position and subsequently failed to downgrade the AAA rating. ICRA’s cumulative default rate reflects
generally higher default rates compared to CRISIL (Exhibit 19).

ICRA’s market share in NCDs has stabilized in the last few years ICRA’s market share has declined to 20% in 2023 from ~22% in
Market share in bonds rated, March fiscal year- 2017
ends, 2014-23 (%) Rating revenue market share, March fiscal year-
CRISIL ICRA CARE
ends, 2014-23 (%)
India Ratings BWR Infomerics CRISIL CARE ICRA India Ratings
SMERA Not rated/known Infomerics Brickworks Acuite
100 100 4 4 2 2 3 3 3 3 4 4
5 5 6 6 7 7 6 6 4 2
8 10 10 12 12
80 13 13 13 14 14
80
20 20 22
60 22 21 21 18 19 19
21
60

40 28 28 21
29 28 22 22 21
40 30 27

20
20 35 35 35 36
33 32 30 28 29 33
-
2006
2002
2003
2004
2005

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

-
2014

2015

2016

2017

2018

2019

2020

2021

2022

2023
Source: Prime Database, Kotak Institutional Equities
Source: Prime Database, Kotak Institutional Equities

ICRA’s ratings have exhibited higher long-term cumulative default rates than CRISIL
3-year cumulative default rates over 10-year period across ratings, (%)

AAA AA A BBB
10

0
CRISIL ICRA CARE India Ratings Brickwork

Source: Company, Kotak Institutional Equities

ICRA
Diversified Financials India Research
 11

Non-ratings: Work-in-progress toward scaling up businesses

The non-ratings business has contributed ~35-40% of revenues over the years. Most of ICRA’s sizable
non-ratings businesses are currently housed under a fully owned subsidiary ICRA Analytics. Apart from
this, ICRA has small ratings operations in Indonesia, Sri Lanka and Nepal. The business has gone through
a few reclassifications, M&As and divestments in the past. This explains the strong revenue growth after
FY2012 and the decline post FY2016 (Exhibit 20).

Performance of the non-ratings business has been volatile but gaining momentum since 2022
Non-ratings revenues and yoy growth, March fiscal year-ends, 2008-23
(Rs bn) Non-rating revenues (LHS) YoY (RHS) (%)
2.0 55
1.7

1.6 1.4 37
1.4 1.4
1.2 1.2
1.1 1.1
1.2 1.0 19
1.0
0.8
0.8 0.6 0.7 1
0.6
0.5
0.4
0.4 -17

- -35
2008

2010

2012

2013

2015

2017

2018

2020

2021

2023
2009

2011

2014

2016

2019

2022
Source: Company, Kotak Institutional Equities

ICRA Analytics’ major offerings include knowledge services, market data and risk solutions. Exhibits 21-
22 show the revenue breakup and a brief description of the services provided.

 Knowledge services (~85% of non-ratings revenues). The knowledge services division works closely
with Moody’s for a range of basic data management activities, such as sourcing, validation and
cleansing of data, as well as relatively more advanced services such as accounting adjustments
(GAAP/IFRS) across multi-lingual financial statements, interpretation and numerical analysis of
accounting disclosures, MD&As and other disclosures. The division has also ramped up the team size
to support ESG analytical work for the parent, helping revenue growth in FY2023.

 Market data and consulting (~15% of non-ratings revenues). Market data services include valuation
of fixed-income securities and MLDs, mutual fund industry database (performance, portfolio, etc.),
fixed income indices, etc. Mutual fund database, for example, is quite comprehensive (over 20 years
old) and sold through on-premise product, SaaS cloud hosted solutions as well as API calls, research
reports, etc. This segment also includes risk management solutions such as stress testing, capital
computations, Basel II internal rating models, industry risk scores, among others.

ICRA
Diversified Financials India Research
 12

Non-ratings revenues decline post 2016 due to sale of IT Knowledge services (Moody’s) is the largest segment within
business non-ratings
Non-ratings revenue mix, March fiscal year-ends, Non-ratings revenue mix, March fiscal year-ends,
2008-20 (%) 2021-23 (%)
IT services (discon.) Knowledge services Market services Consulting services
Outsourced/info. services (old)
Consulting 100
100

80
80

60 60

40 40

20 20

-
-
2012
2008
2009
2010
2011

2013
2014
2015
2016
2017
2018
2019
2020

2021 2022 2023

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

Overview of services provided in the non-ratings business

Overview of the non-ratings business

Source: Company

ICRA
Diversified Financials India Research
 13

Risks: Pricing discipline, bond market spreads and regulations

The key risks to our investment view on the stock: While we build in a positive view on the ratings
business (~18% 3Y EBIT CAGR), there is a stronger upcycle on corporate credit. In addition, there have
been a series of regulatory reforms and initiatives in recent years to shift large corporate borrowing to
the bond market. Stronger cyclical growth, along with any structural shift in borrowing patterns, could
lead to stronger revenue growth and earnings expansion versus our assumptions.

For a more complete picture, we highlight the below key risks to the business in the medium term,
notwithstanding our negative view on the share price.

 Competitive intensity in credit rating. While there are entry barriers in the credit rating industry, India
being a seven-player market leads to strong competition among players. Competition is likely much
more severe in the bank loan ratings market, which is driven by regulatory compliance to get rated (for
RWA reduction). The tendency to shop for acceptable ratings (due to issuer pays model) leads to
dilution in pricing discipline and the quality of ratings.

 Macro risks leading to risk aversion and spread expansion. ICRA benefits from benign risk
environment leading to reduction in credit spreads and fund raising from bond markets. The rise in
risk aversion due to macro events (local or global) can temporarily cause a decline in primary bond
issuances and/or greater dependence on bank lending. This is negative for ICRA, given the higher
margins (like-for-like basis) in the bond markets compared to bank loan ratings.

 Regulatory changes that reduce dependence on CRAs. CRAs benefit from regulations that mandate
the use of external rating agencies. Some of these regulations are: (1) bank loan ratings for bank loans
under standardized methodology to determine RWAs, (2) investment norms for investments by debt
funds, insurance and pension companies, etc. Regulatory changes caused by misconduct or any other
reasons can cause regulators to review these rules, leading to lower revenue potential for CRAs such
as ICRA.

ICRA
Diversified Financials India Research
 14

Financials: Earnings recovery driven by ratings

Our FY2023-26E EBIT growth of 13-14% builds in: (1) Ratings: credit growth recovery to drive
~14% rating revenue growth, with margins (calculated) expanding to ~28-29% from 25% in the
next 3Y; (2) Non-ratings: steady scale-up of captive work from Moody’s to drive ~13% CAGR over
FY2024-27E, with operating margins likely to moderate to ~40% from 43%. The company has
indicated a high willingness to return cash (~20% of market capitalization), with FY2023 payout
of ~90%.

13-14% core earnings growth

We expect core earnings (i.e., PBT-other income) of ~13-14% CAGR over FY2024-26E, which reflects
similar revenue and expense growth. Our earnings growth broadly assumes mid-teens revenue growth
in domestic ratings and non-ratings businesses. Underlying in our assumptions is a (1) favorable and a
broad-based credit cycle that will support demand for credit ratings and (2) non-ratings businesses led
by knowledge services (Moody’s captive center) is able to deliver 13-14% revenue growth, driven by lower
relative scale of these businesses and stronger focus by management to diversify revenues.

 Earnings bottomed in FY2021. ICRA’s core earnings have been subdued during FY2015-19 due to low
revenue growth (almost zero growth) without any reduction in operating expenses. Earnings declined
sharply in FY2020-21 due to a decline in rating revenues (bond/securitization revenues declined more
sharply) without any decline in expenses. Earnings have recovered over FY2022-23, led by supportive
credit growth environment for bank lending and bond raising.

We expect ~13% PAT CAGR over FY2024-27E We expect ~15% core earnings CAGR over FY2024-27E
PAT and yoy growth, March fiscal year-ends, 2015- Core PBT and yoy growth, March fiscal year-ends,
27E (%) 2015-27E (%)

(Rs bn) PAT (LHS) YoY (%, RHS) (%) (Rs bn) EBIT (LHS) YoY (%, RHS) (%)
2.5 40 2.5 65
2.2
2.1
1.9
2.0 28 2.0 1.9 47
1.7
1.7
1.6 1.5
1.5 1.4 16 1.5 1.3 29
1.1 1.1 1.1 1.1
1.0 1.0 1.0 1.0
0.9 0.9 0.9 0.9
1.0 0.8 0.8 4 1.0 11
0.7 0.7

0.5 (8) 0.5 (7)

0.0 (20) 0.0 (25)

2024E
2025E
2026E
2027E

2024E
2025E
2026E
2027E
2015

2015
2016
2017
2018
2019
2020
2021
2022
2023

2016
2017
2018
2019
2020
2021
2022
2023

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
 15

We expect revenue CAGR of ~15% over FY2024-27E We expect operating leverage to be delayed due to investments
Revenues and yoy growth, March fiscal year-ends, Expenses and yoy growth, March fiscal year-ends,
2015-27E (%) 2015-27E (%)

Revenues (LHS) YoY (%, RHS) Operating expense (LHS)

(Rs bn) (%) (Rs bn) (%)
7.0 6.6 20 YoY (%, RHS)
5.0 4.5 20
5.9
5.2 4.0
5.6 14 4.0 12
4.6 3.6
4.0 3.1
4.2 8 3.0 2.7 4
3.2 3.4 3.3 3.1 3.3 3.2 3.0 3.4 2.3 2.5 2.4 2.4 2.3 2.3
2.2
2.0
2.8 2 2.0 (4)

1.4 (4) 1.0 (12)

0.0 (10) 0.0 (20)

2019
2015
2016
2017
2018

2020
2021
2022
2023
2024E
2025E
2026E
2027E

2024E
2025E
2026E
2027E
2019
2015
2016
2017
2018

2020
2021
2022
2023
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Growth tailwinds in ratings

In terms of broad revenue assumptions, we expect: (1) continued momentum in the ratings business
(~13-14% CAGR), driven by higher corporate credit growth through banks and new bond issuances; (2)
~13% CAGR in the non-ratings business, led by growth in knowledge services (scale-up from Moody’s)
and 8-10% growth in other smaller businesses. We highlight the revenue growth drivers of the company
below.

We expect 13-14% revenue growth with similar growth in ratings and knowledge services business
Revenue breakup, March fiscal year-ends, 2015-27E (%)
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E
Reveues (Rs mn)
Rating services 1,823 1,976 2,136 2,259 2,344 2,143 1,878 2,025 2,300 2,661 3,027 3,403 3,826
Knowledge services 909 1,177 1,501 1,726 1,951 2,185 2,447
Market services 145 171 183 197 213 230 248
Consulting services 92 62 57 62 67 72 78
Consulting services (old) 296 292 307 236 206 248
Outsourced and information services (old) 336 421 486 611 756 855
Professional and IT services (discotinued) 756 734 415
Total (after inter-segment adj.) 3,219 3,411 3,330 3,089 3,281 3,211 3,011 3,428 4,032 4,636 5,247 5,880 6,590
YoY (%)
Rating services 11 8 8 6 4 (9) (12) 8 14 16 14 12 12
Knowledge services 30 27 15 13 12 12
Market services 18 7 8 8 8 8
Consulting services (32) (8) 8 8 8 8
Consulting services (old) 12 (1) 5 (23) (13) 20
Outsourced and information services (old) 26 25 16 26 24 13
Professional and IT services (discotinued) 15 (3) (43)
Total 14 6 (2) (7) 6 (2) (6) 14 18 15 13 12 12
Mix (%)
Rating services 57 58 64 73 71 67 62 59 57 57 58 58 58
Knowledge services 30 34 37 37 37 37 37
Market services 5 5 5 4 4 4 4
Consulting services 3 2 1 1 1 1 1
Consulting services (old) 9 9 9 8 6 8
Outsourced and information services (old) 10 12 15 20 23 27
Professional and IT services (discotinued) 23 22 12

Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
 16

 Ratings: ~13-14% revenue CAGR with growth optionality. Our view is that the ratings business is well
set to witness a cyclical bounce-back from the lows of 2015-20. As highlighted in the industry section
and business section above, we believe there are drivers in place for corporate credit growth
acceleration, driven by higher credit utilization and capex-related credit requirements. Lending system
in India is well-placed to become broad-based, with strong capital position, well-provided NPLs and a
healthy demand for credit. We are likely to see greater number of lenders becoming active in onward
lending, benefiting from stronger banks and bond financing market. There are other regulatory
initiatives as well that could spur the demand for credit ratings. These include: (1) loss guarantee for
debt funds at the time of distress, (2) secondary market for corporate loans and (3) ESG ratings,
among others (Exhibit 29).

Ratings revenue growth likely to gain momentum in the medium term

Revenue and yoy growth, March fiscal year-ends, 2004-26E (%)
(Rs bn) Revenues (LHS) YoY (RHS) (%)
5.0 25

3.8
4.0 17
3.4
3.0
2% CAGR
3.0 2.7 9
2.3 2.3
2.1 2.3 2.1
1.8
2.0 1.9 2.0
2.0 1
1.5 1.6
1.3 1.4
1.1
0.9
1.0 0.6 (7)
0.3 0.2 0.3 0.4
- (15)

2026E
2027E
2024E
2025E
2004
2005

2008
2009
2010

2014
2015
2016

2020
2021
2022
2006
2007

2011
2012
2013

2017
2018
2019

2023
Source: Company, Kotak Institutional Equities estimates

Both BLR and bond rating revenues to grow… …driven by growth in debt rated
Rating revenue breakup, March fiscal year-ends, Debt rated, March fiscal year-ends, 2016-27E (Rs
2016-27E (Rs mn) tn)

Bond rating revenues (LHS) BLR revenues (LHS) Bonds rated BLR rated
4,000 20

3,200 1,415 16
1,244
11.3
2,400 1,095 12 9.8
947
689 736 686 805 8.4
738 648 7.1
1,600 737 653 2,411 8 6.6
7.2 5.9
2,158
4.7
1,571 1,377 1,932 3.9
800 1,398 1,608 1,495 4 7.6
1,225 5.9 6.7
1,458 1,714 4.5 4.3 5.1
1,239 3.4 3.3 3.0
- 0
2024E
2025E
2026E
2027E

2024E

2025E

2026E

2027E
2016
2017
2018
2019
2020
2021
2022
2023

2019

2020

2021

2022

2023

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
 17

 Non-ratings: 12-13% revenue growth. Knowledge services within non-ratings is the most relevant
segment, as it contributes ~85% of non-ratings revenues. Knowledge services revenue growth has
picked up in recent years given greater traction in services provided to Moody’s (which includes ESG-
related work). This could become a steady source of revenues going ahead, given the relative scale
of Moody’s operations and what ICRA currently manages. ICRA’s management is also focused on
growing the ‘controllable’ parts of the portfolio, such as market data services, with an objective of
creating a 50-50 revenue mix of ratings and non-ratings.

Non-ratings business revenues to grow 13-14% with margin moderation

Non-rating revenues and operating margin, March fiscal year-ends, 2012-27E
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E
Revenues (Rs mn)
New segments
Consulting services 92 62 57 62 67 72 78
Knowledge services 909 1,177 1,501 1,726 1,951 2,185 2,447
Market services 145 171 183 197 213 230 248
Old segments
Consulting services (old format) 252 257 265 296 292 307 236 206 248
Outsourced and information services (old format) 176 216 267 336 421 486 611 756 855
Professional and IT services (discotinued) 252 545 655 756 734 415 — — —
Non-rating revenues 680 1,018 1,187 1,387 1,447 1,209 847 963 1,103 1,146 1,411 1,741 1,986 2,231 2,487 2,774
YoY (%) 6 50 17 17 4 (16) (30) 14 15 4 23 23 14 12 11 12

Operating margin (%)

New segments
Consulting services (54) (50) (40) (35) 5 15 15
Knowledge services 39 51 50 47 45 44 43
Market services 11 21 11 10 10 10 10
Old segments
Consulting services (old format) 7 5 7 15 6 (4) (35) (28) (8)
Outsourced and information services (old format) 12 16 25 21 27 27 32 34 38
Professional and IT services (discotinued) 10 (4) 18 6 7 6
Non-rating revenues 10 3 17 12 12 12 13 21 28 28 43 43 41 40 40 39

Source: Company, Kotak Institutional Equities estimates

Stable margins with upside potential

 ICRA’s operating profit margin, i.e., PBT-other income (% of revenues), declined from ~35% to ~23%
between FY2018 to FY2021 (Covid year). Subsequently, margins have improved to ~32-33% in
FY2022-23. We believe operating profit margins can remain in the 32-33% range as the need for
investing in the business, especially technology, will likely offset gains from mid-teens revenue
growth.

 The ratings business’ margins have been volatile, but generally have been sliding in the past decade.
From the bottom in FY2021 (21%), margins have improved to 25% in FY2023. We believe margins
should steadily drift upward to ~30% in the medium term, driven by revenue growth and better
operating leverage. There are upside risks to our assumptions, given the potential to deliver stronger
margins (~10-20 ppt difference versus CRISIL) (Exhibit 33).

 The non-ratings business’ margins are quite healthy already at 43% in FY2023. This is partly supported
by FX gains, but more importantly stronger revenue growth and value-added work in the knowledge
services vertical. We expect margins to decline marginally, given higher staff compensation and
technology-related investments (Exhibit 34).

ICRA
Diversified Financials India Research
 18

Core PBT margin to stabilize at 32-33% Rating margins to improve

Core PBT (% of revenues), March fiscal year-ends, Rating margin and revenue growth, March fiscal
2008-27E (Rs mn) year-ends, 2008-27E (Rs mn)

45 Operating margin (LHS) Revenue growth (RHS)

70 25
35 35
36 33 32 32 33 33 33 32 32 3232
32
56 17
28 28 27 28 27
27 24
22 42 9

29
28
27
26
26
18

25
28 1

21
9 14 (7)

0 - (15)
2024E
2025E
2026E
2027E
2009

2011

2013
2008

2010

2012

2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2027E
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024E
2025E
2026E
Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Stable cost-income ratio as investment needs offset revenue Staff cost is the major cost item
growth Expense breakup, March fiscal year-end, 2023 (%)
Core cost-income ratio and expense growth, March
fiscal year-ends, 2008-27E (Rs mn) Other
expenditure,
Core cost-income (LHS) Opex growth (RHS) 16
80 50

D&A, 4
75 36
Professiona
l fees, 4
70 22

65 8

Employee
60 (6) expense,
76

55 (20)
2024E
2025E
2026E
2027E
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Source: Company, Kotak Institutional Equities estimates

Source: Company, Kotak Institutional Equities estimates

Healthy FCF generation

ICRA’s mid-teens ROEs are lower than CRISIL (~30-35%) due to higher cash on balance sheet. ICRA has
historically paid lower dividends, with ~30% payout until FY2022, which was increased to ~90% in
FY2023 by paying a special dividend. The company intends to return excess cash back to shareholders,
even as the dividend payout policy is 25-50% of profits. We expect dividend payout of 65% over the
medium term.

ICRA
Diversified Financials India Research
 19

ROE are poised to improve in the next few years PAT to FCF conversion of 60-65%
ROE, March fiscal year-ends, 2013-27E (%) FCF/PAT, March fiscal year-ends, 2013-27E (%)

25 150 145

20 18 19 18 17 18
19 120
17 17 104
16 16 16
14 15
15 14 84
90 80 78
11 73
65 64 60 61 61 61
58
10 60
41

5 30
14

- -

2016
2013
2014
2015

2017
2018
2019
2020
2021
2022
2023
2024E
2025E
2026E
2027E
2025E
2024E

2026E
2027E
2015
2013
2014

2016
2017
2018
2019
2020
2021
2022
2023

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
 20

Consolidated income statement for ICRA

December fiscal year-ends, 2021-27E (Rs mn)
2021 2022 2023 2024E 2025E 2026E 2027E
Growth rates (%)
Revenue from operations (6) 14 18 15 13 12 12
Investment income 0 (6) 18 18 12 12 12
Total income (7) 12 18 15 13 12 12
Operating expenses (2) (0) 17 16 14 12 12
Employee expense 6 4 16 16 14 12 12
PBT before exceptional items (15) 36 19 14 11 12 12
PAT (15) 37 20 14 11 12 12
EBIT (17) 58 18 13 11 12 12
Key ratios
Cost-income (%) 77 68 67 68 68 68 68
EBITDA margin (%) 27 35 35 35 34 34 34
EBIT margin (%) 24 33 33 32 32 32 32
Net profit margin (%) 24 30 30 30 29 29 29
Investment yield (%) 5.9 5.3 5.6 5.8 6.2 6.5 6.9
ROE (%) 11 14 15 16 17 18 19
Dividend payout ratio (%) 32 24 92 65 65 65 65
P&L
Revenue from operations 3,011 3,428 4,032 4,636 5,247 5,880 6,590
Ratings 1,878 2,025 2,300 2,661 3,027 3,403 3,826
Consulting services 92 62 57 62 67 72 78
Knowledge services 909 1,177 1,501 1,726 1,951 2,185 2,447
Market services 145 171 183 197 213 230 248
Operating expenses (2,199) (2,222) (2,603) (3,018) (3,444) (3,862) (4,323)
Employee expense (1,717) (1,792) (2,076) (2,399) (2,728) (3,058) (3,426)
Professional fees (135) (103) (100) (115) (130) (147) (166)
Other expenses (347) (327) (428) (504) (586) (657) (731)
EBITDA 811 1,206 1,429 1,618 1,804 2,018 2,267
Depreciation and amortisation (99) (78) (98) (113) (130) (149) (172)
EBIT 712 1,128 1,331 1,505 1,674 1,869 2,095
Other income 428 409 496 577 644 719 802
Finance costs (21) (16) (14) (15) (16) (16) (17)
Exceptional
Profit before tax 1,120 1,521 1,812 2,067 2,302 2,571 2,880
Tax (293) (386) (445) (508) (565) (631) (707)
PAT 827 1,135 1,367 1,560 1,737 1,940 2,173
EPS (Rs) 86 118 142 162 180 201 225
Number of shares (# mn) 9.7 9.7 9.7 9.7 9.7 9.7 9.7

Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
 21

Consolidated balance sheet for ICRA

December fiscal year-ends, 2020-26E (Rs mn)

2021 2022 2023 2024E 2025E 2026E 2027E

Balance sheet
Share capital 97 97 97 97 97 97 97
Reserves and surplus 7,481 8,340 9,406 9,952 10,560 11,239 12,000
Shareholder's fund 7,610 8,477 9,549 10,049 10,657 11,336 12,096
Lease liabilities 170 140 130 141 152 164 177
Trade payables 78 92 84 91 98 106 114
Provisions 293 365 423 444 466 490 514
Other liabilities 809 710 822 863 906 951 999
Total liabilities 1,350 1,308 1,459 1,538 1,622 1,711 1,804
Investment 3,570 4,538 6,885 7,280 7,734 8,257 8,858
Cash and bank balances 3,994 3,101 2,415 2,514 2,636 2,757 2,879
Trade receivables 475 265 380 400 439 483 532
Fixed assets 475 394 399 419 440 462 485
Goodwill on consolidation 12 12 12 12 12 12 12
Intangible assets 47 66 73 80 88 97 107
Other assets 386 1,409 843 928 974 1,023 1,074
Net assets 8,960 9,785 11,008 11,587 12,279 13,046 13,900
Key metrics/ratios
Cash and cash equivalents 3,994 3,101 2,415 2,514 2,636 2,757 2,879
Gross borrowings — — — — — — —
Net cash and cash equivalents 3,994 3,101 2,415 2,514 2,636 2,757 2,879
Receivable days 56 30 37 34 32 32 31
RoE (%) 11 14 15 16 17 18 19
RoIC (%) 10 21 32 40 42 45 47

Source: Company, Kotak Institutional Equities estimates

Consolidated cash flow statement

December fiscal year-ends, 2020-26E (Rs mn)
2021 2022 2023 2024E 2025E 2026E 2027E
Cash flow statement
PBT 1,120 1,521 1,812 2,067 2,302 2,571 2,880
Depreciation and amortisation expense 99 78 98 113 130 149 172
Other income, net (359) (385) (421) (562) (628) (702) (785)
Working capital changes
(Increase)/ Decrease in trade receivables 89 163 (166) (19) (40) (44) (48)
(Increase)/ Decrease in other assets 115 5 144 (84) (46) (49) (51)
Increase/ (Decrease) in trade payables (77) 14 (9) 7 7 8 8
Increase/ (Decrease) in other liabilities 290 331 (187) 62 65 69 72
Cash taxes paid (301) (415) (476) (508) (565) (631) (707)
Cash flow from operations 764 967 992 1,076 1,225 1,371 1,541
(Purchase)/sale of fixed assets (23) (52) (89) (130) (148) (168) (192)
(Purchase)/sale of investments (783) (896) (938) (395) (454) (522) (601)
Interest income 485 229 258 577 644 719 802
Cash flow from investing (321) (719) (769) 52 42 28 10
Dividends paid (263) (265) (279) (1,014) (1,129) (1,261) (1,413)
Cash flow from financing (320) (313) (321) (1,029) (1,144) (1,277) (1,430)

Free cash flow 692 881 872 932 1,062 1,186 1,332

Increase in cash and cash equivalents 122 (65) (98) 100 122 122 121
Cash the beginning of the period 162 284 219 121 220 342 464
Cash at the end of the period 284 219 121 220 342 464 585

Source: Company, Kotak Institutional Equities estimates

ICRA
Diversified Financials India Research
“Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is
responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies
and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this report: Abhijeet Sakhare, Nischint Chawathe, M B Mahesh, CFA, Ashlesh Sonje, CFA, Varun Palacharla, Sidham Jain.”

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may
not strictly be in accordance with the Rating System at all times.

Distribution of ratings/investment banking relationships

Kotak Institutional Equities Research coverage universe

Percentage of companies covered by Kotak Institutional

70%
Equities, within the specified category.

60%
Percentage of companies within each category for which
Kotak Institutional Equities and or its affiliates has
50%
provided investment banking services within the previous
12 months.
40% * The above categories are defined as follows: Buy = We
expect this stock to deliver more than 15% returns over
29.0% the next 12 months; Add = We expect this stock to deliver
30% 25.3%
24.5% 5-15% returns over the next 12 months; Reduce = We
21.2%
expect this stock to deliver -5-+5% returns over the next
20% 12 months; Sell = We expect this stock to deliver less than
-5% returns over the next 12 months. Our target prices
10% 6.1% are also on a 12-month horizon basis. These ratings are
3.7% 2.4% used illustratively to comply with applicable regulations. As
0.4%
of 30/09/2023 Kotak Institutional Equities Investment
0%
Research had investment ratings on 245 equity securities.
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities

As of September 30, 2023

Coverage view
The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable
regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or
strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a
sufficient fundamental basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in
effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Diversified Financials
India Research
 CRISIL (CRISIL)
Kotak Institutional Equities rating and stock price target history

4,500 80,000

4,000 70,000
3,500
60,000
3,000
50,000
2,500
40,000
2,000
30,000
1,500
20,000
1,000

500 10,000
Stock Price

- 0

Nov-22
Nov-20

Nov-21
Sep-20

Sep-23
Sep-21

Sep-22
May-21

May-23
May-22

Jul-22

Jul-23
Jul-21
Jan-21

Jan-22

Jan-23
Mar-21

Mar-22

Mar-23

Index
Price
Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.

BSE-30 Index (RHS) Covered by Abhijeet Sakhare

Price target Not covered by current analyst

The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may
or may not have included price targets, as well as developments relating to the company, its industry and financial markets

ICRA (ICRA)
Kotak Institutional Equities rating and stock price target history

7,000 80,000

6,000 70,000

60,000
5,000
50,000
4,000
40,000
3,000
30,000
2,000
20,000

1,000 10,000
Stock Price

- 0
Nov-22
Nov-20

Nov-21
Sep-20

Sep-23
Sep-21

Sep-22
May-21

May-23
May-22

Jul-22

Jul-23
Jul-21
Jan-21

Jan-22

Jan-23
Mar-21

Mar-22

Mar-23

Index
Price
Source: Kotak Institutional Equities Research for ratings and price targets, Bloomberg for daily closing prices.

BSE-30 Index (RHS) Covered by Abhijeet Sakhare

Price target Not covered by current analyst

The price targets shown should be considered in the context of all prior published Kotak Institutional Equities research, which may
or may not have included price targets, as well as developments relating to the company, its industry and financial markets

Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: Abhijeet Sakhare
Company name Ticker
360 One 360ONE IN
ABSL AMC ABSLAMC IN
Computer Age Management Services CAMS IN
CRISIL CRISIL IN
HDFC AMC HDFCAMC IN
ICRA ICRA IN
Kfin Technologies KFINTECH IN
Nippon AMC NAM IN
UTI AMC UTIAM IN

Source: Kotak Institutional Equities research

Diversified Financials
India Research
Corporate Office Overseas Affiliates

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compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material, may from time to time have "long" or "short"
positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Kotak Securities Limited and its non-US affiliates may, to the extent permissible under applicable laws, have acted on or used
this research to the extent that it relates to non-US issuers, prior to or immediately following its publication. Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value
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Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange
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Kotak Securities Limited is also a Depository Participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and
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Research Analyst has served as an officer, director or employee of subject company(ies): No.
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) or acted as a market maker in the financial instruments of the subject company/company (ies) discussed herein in the past 12
months. YES. Visit our website for more details https://kie.kotak.com.
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for
products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject
company(ies) or third party in connection with the research report.
Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the week immediately preceding the date of publication of Research Report: YES. Nature of Financial interest: Holding equity shares or derivatives of the
subject company.
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
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First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any
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Analyst Certification
The analyst(s) authoring this research report hereby certifies that the views expressed in this research report accurately reflect such research analyst's personal views about the subject securities and issuers and that no part of his or her
compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Firm. Firm Research is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the
like and take professional advice before investing.
Investments in securities market are subject to market risks. Read all the related documents carefully before investing.
Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of
returns to investors.
Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Sandeep Gupta. Call: 022 - 4285 8484, or
Email: [email protected].
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com /
www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137(Member of NSE, BSE,
MSE, MCX & NCDEX), AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-629-2021. Compliance Officer Details: Mr. Sandeep Gupta. Call: 022 - 4285 8484, or Email: [email protected]
Details of Contact Person Address Contact No. Email ID
Customer Care/ Complaints Mr. Ritesh Shah Kotak Towers, 8th Floor, Building No.21, Infinity 18002099393 [email protected]
Head of Customer Care Mr. Tabrez Anwar Park, Off Western Express Highway, Malad (East), 022-42858208 [email protected]
Compliance Officer Mr Sandeep Gupta Mumbai, Maharashtra - 400097 022-42858484 [email protected]
CEO Mr. Jaideep Hansraj 022-42858301 [email protected]

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