There are more revenue streams, but these can, however, be broadly classified into three segments:

Among these segments, ratings are most profitable

Thriving on ratings

Crisil offers a number of rating services — credit, corporate governance, mutual fund (also ranking), and performanceas also rating of financial strength of insurance companies. But credit rating is the major income-earning segment.

Industry profile

Crisil has over 60 per cent share of the ratings industry — in terms of both value and volume of instruments rated. Crisil's fees are also at a premium to that of other rating agencies such as ICRA and CARE. The fee for a rating assignment generally works out to 0.10 per cent of the borrowing programme subject to a cap. But if the borrower is likely to borrow through the year in several tranches, the fee is pegged lower, closer to 0.03 per cent. The fee for maintaining a rating given for the original borrowing programme is about 0.03 per cent per annum, which is again subject to a cap.

The rating industry has until now been thriving on the borrowing programmes of the corporate and banking sectors. The programmes of the special purpose vehicles and other wholly-owned corporations of the State governments have so far not been money-spinners. The programmes have been driven by a tendering process marked by aggressive fee-based competition.

Growth drivers

The drivers for the borrowing programmes are mainly economic growth and decline in interest rates. The latter leads to refinancing and, thus, more ratings business. Interest rate decline-led spurt to the ratings business was visible in 2001 and 2002. Since 2003, interest rate reduction has been muted and, ergo, refinancing. Given that further interest rate reduction appears less likely, the growth for the ratings industry now depends largely on economic growth. Here too, mere economic growth is not enough. Investment demand-led growth is essential.

Securitisation deals, another growth driver, depends on the need for banks and financial institutions to restructure their balance-sheets. This is likely to be felt more in the years ahead as business growth and changes in regulation bring pressure on the capital adequacy ratios of banks. Large growth in the demand for credit or any decline in the rate of growth of money supply are otherfactors that can trigger securitisation activity.

Advisory: Stiff competition

The advisory business can be primarily classified into infrastructure and risk advisory. The infrastructure advisory business is the major segment, accounting for domestic revenues of about Rs 12 crore while the risk advisory business accounts for revenues of about Rs 3 crore. The infrastructure advisory now includes Economatters, the London-based gas advisory firm that Crisil acquired in 2003. Including the revenues of Economatters, the size of the infrastructure advisory segment is about Rs 40 crore.

The infrastructure advisory business is characterised by stiff competition, right from big consulting firms, investment banks and, to a lesser extent, software firms such as TCS and Infosys. The margins are lower compared to the ratings business. Pricing power is also considerably diminished because of intense competition. According to Crisil, bidding at massively discounted prices is now common because of poor economic activity and thus fewer projects.

Despite such stiff competition, Crisil has dealt with advisory assignments ranging from water projects to gas and power. Growth in terms of number of assignments that Crisil has done is also increasing each year. The acquisition of Economatters has given Crisil the added advantage of international gas sector expertise. The gas sector is also witnessing increased activity, world over.

For instance, 17 gas terminal projects, similar to that of Petronet LNG, are said to be on in the US alone. Still, Crisil is at the crossroads now. Any rise in profitability of this segment is now linked to a turnaround in Economatter's profitability. For the period ended October 2003, Economatters made a loss. Crisil says that in the next financial year, Economatters will become profitable. The next 12 months as such will be critical.

Information services: Right linkages

Crisil's information services business presents an insight into its strategy of converting some of the inputs into the ratings business into profit-centres and independent businesses. For instance, ratings business needs inputs in the form of industry research, financial analysis and access to real time news. All three are now independent business segments for Crisil. Apart from industry research, financial analysis and real-time news, Crisil now also has a centre for economic research, which intends targeting the corporate sector for marketing usable and customised economic research.

The competition in the information services business is intense. Right from brokerages to specialised research firms, even other credit rating agencies offer research inputs. This puts pressure on Crisil to deliver research information that is more valuable than what the market offers. This will strain pricing too.

Crisil also faces another set of challenges in the information services business. CRIS-Infac accounts for a substantial proportion of the revenues of the information services business. The problem, however, is that CRIS-Infac is now said to face saturation in terms of its client base. Growth for CRIS-Infac cannot come from pricing increases also, since a round of increase in price was put through only in 2002-03.

The information services segment is thus focussed on customised research to drive growth. Crisil has met with some limited success doing an assignment for the auto and the auto ancillaries industry. Still, in contrast to the other two divisions, the validity of the growth initiatives in the information services division is largely untested.

Acquisitions and global linkages

APART from the domestic economy, Crisil also has an eye on the global market to deliver growth. Like most service companies in India, Crisil intends tapping outsourcing opportunities. There is however one major difference. Crisil wants to grow only sustainable business opportunities. It is reluctant to add to its employee strength only to find a few years down the line that the business is no longer viable. Given such a cautious approach, growth in revenues from outsourcing is only likely to be moderate.

In the sphere of outsourcing, Crisil already has a team working on S&P's business. This business is said to be growing steadily and expected to maintain such growth. The size of the business is, however, small now. Crisil also has a strategy to involve Indian analysts in the work done by Economatters. Crisil wants to reduce the time spent by Economatters analysts in individual projects by assigning such work to Indian analysts. This will enhance the work done by the premier analysts at Economatters and augment growth. Crisil is also exploring ways to outsource capital market research to companies in the US.

In the area of acquisitions, apart from Economatters, Crisil has acquired a stake in a Caribbean rating agency and in a derivatives exchange in India. Both these acquisitions are not likely to start delivering results immediately. They also constitute small investments even for Crisil. Still, the potential for these investments to deliver considerable value exists. For instance, the Caribbean rating market could emerge as big as that of India, according to Crisil. Similarly, investment in the derivatives exchange could open up opportunities to sell Crisil's information services to the exchange participants and thus drive growth. These benefits however will be visible only over a longer-term.

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