• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

Mr R. Ravimohan, MD, Crisil

These are exciting times at Crisil. The cash-rich company has just made three acquisitions in 2003-04. The company is also keen on leveraging its research capabilities. The top management at Crisil think that the company has the right business model to grow at a brisk pace. In particular, though ratings are the predominant business of Crisil, they expect non-rating businesses to grow faster. Business Line spoke to Mr R. Ravimohan, Managing Director, Crisil, on these issues.

Excerpts from the interview:

What are the growth drivers for the ratings business?

There are four drivers for the ratings business. First is investment. The rating business is pro-cyclical with the investment cycle. The second most significant driver is refinancing. In the last five to six years, many companies have refinanced by issuing fresh bonds to take advantage of the decline in interest rates. The third factor, which used to be a significant driver earlier, is regulation. Last is innovation in financial markets. Right now, that is the biggest driver. The structured finance ratings have been growing significantly and we feel it will continue to be a growth driver. If you look at the last four-five years, there has hardly been any investment.

In the current financial year, for instance, there has been no investment, no refinancing and no regulatory intervention. This has led to a shrinking of issuance of debt this year. Ratings business is open to this kind of risks. The saviour for us has been structured finance and securitisation deals.

What will be the impact of external commercial borrowings (ECBs)?

The ECBs are a competition to us. These are all essentially banks loans and they are not rated. They are a competition to all rating systems. In a sense, these are leakages from the industry revenues. To the extent the ECBs are popular, which is what has happened in 2003-04, the competition will be higher.

ECBs are threatening to rise to even higher levels this year. What is your assessment?

It will not be consistent. It will only be an intermittent threat. Both the supply and demand for the ECBs will only be episodical. This will not be repeated in 2004-05. Those who had an understanding of how much they need have already done it. Indiscriminate ECBs are also not good from the foreign exchange risk perspective. Those who have subscribed to the ECBs will also not keep on increasing their exposure. There certainly will be co-existence of the ECBs and domestic borrowings.

The debt issuance market has shrunk for two years now. Has your market share increased?

Market share has more or less remained constant at 60-63 per cent. Still, our ratings business has been flat though there has been shrinkage in market size because we have diversified even within our ratings business. We are now into governance ratings, performance ratings, micro-finance ratings and then doing work for S&P, which has contributed to incremental business. As a result, we will be maintaining a flat growth rate in our ratings business.

Is your market share higher in structured finance ratings?

We are almost 90-95 per cent of the market. We have two or three strengths — structured finance is one of them.

What has been the trend in the price for ratings?

The fee is always a hotly debated issue. It is continuing to remain under pressure. We get a premium pricing in the non-government ratings business. The fee in the government ratings business is determined based on an auction. Our market share is smaller in the government business because of aggressive pricing by our competitors. Last year, we increased our fee by about 8-9 per cent.

What is the value you offer for your premium pricing?

The most important value is by far we have the most credible rating. When the issuer goes to the market with our rating there is no discount. Whereas in the case of raters, there is an element of discount and there is an element of debate. In secondary markets, you will find that between CRISIL's triple A rating and triple A rating of other raters you will find a small spread.

We also provide other value-added services to our clients as we have the right reach to disseminate our views. For instance, take Great Eastern Shipping. Everybody feels shipping is a high-risk industry. But we have a triple A rating which has been a matter of debate. Not that we want to favour GE Shipping, but we felt there are certain credit fundamentals that have not been looked at by the market seriously. It is the case with public sector banks too where our view that credit fundamentals of the banking system is good has finally found acceptance with the market. We believe that we are in a position to influence the market.

You were talking about working for S&P? Is it a BPO kind of opportunity?

It is quite different from BPO. We cannot disclose exactly what we are doing because of a confidentiality clause in our agreement. It is more in the nature of partnership. We are finding ways of working together which gives our people exposure to international work and it gives S&P additional manpower at Indian costs. In certain mission critical areas, we are using time advantage. As a result, we are turning around work that gives the S&P analyst an edge. The work is in the research domain relating to credit rating, equity and industry research.

Why have you not scaled up this operation rapidly?

It alludes to the nature of what we are trying to do. We should not be looking at growth rates that a typical start-up is able to achieve. The big ramp up that has happened in those firms is also the big risk factor in that model. Already we are finding rates are crashing because there are no entry barriers. I am a little worried that BPO is going the internet way. Everybody is jumping into the bandwagon now. We don't want to enter into that BPO as it is emerging now. S&P also has very similar concerns. The business has the potential to grow to 10 to 15 per cent of our revenue base in the next one or two years.

What is the strategy behind the overseas acquisitions?

In ratings, international rating agencies are not present in plenty of geographies. The question is only of the right business model. The Caribbean agency, in which we have picked up a stake, is the first regional rating agency that is being proposed. The size of the market could be as big as that of India. We will concentrate on the Caribbean agency for the time being and work with S&P for other national exposure for the rating side.

In the non-ratings side, we have acquired Economatters that has businesses in three main areas - consulting, publication and training. There are two thoughts behind the acquisition. One, gas is an exploding market. We think all these three businesses will benefit. We also think that we can take advantage of our strong relationships that we have built with global financial and energy majors through these businesses.

Most overseas consulting firms are low margin businesses...

Economatters is not a highly profitable business now. It is only a 3 million pounds business. One of the reasons why the company was sold was because they realised that they were running the business not so much driven by business considerations. There was the realisation that they could do a lot better if they introduced some business discipline. The attempt is now to see how the strengths of the organisation can be leveraged. For instance, they have not priced themselves to the optimal level. There is considerable scope for toning up the organisation. The price paid was right too. We also expect top line growth and expenses to come down.

Why has the advisory business not done well this year?

Until this year, the advisory business provided us with good diversification. This year has been a problem however. Year before last we broke into Tier 1 consulting group with Asian Development Bank. As a result, we started bidding for ADB projects that are usually of a larger ticket size. We had two ADB projects of Rs 2.5 crore each in 2002-03. This year we have won our first project but a lot of them were delayed. Even the impact of the project we got in this year's finances would be almost nothing. Had this project been done in September, we would have got Rs 2.5 to Rs 3 crore this year out of this project itself.

Until we start getting large projects regularly each year, the financial performance of the advisory business will swing from year to year depending on how many projects we got. In addition, the state governments are a prominent growth driver for the advisory business. The election schedule in the current year - initial half years was lost due to state elections and now the parliament elections — has had an impact. Nobody has gone in with any tangible infrastructure plan this year. This business is actually not such a cyclical business. If our analysis is right, next year should be better.

The information services business has however grown rapidly...

It has grown very well this year because of a pick-up in equity markets and our offering has become very sharp now. The equity market is a big driver for this business. Earlier, we used to produce standard reports that many people used to describe as a goldmine. I used to feel happy until they pointed out they needed to dig to get at the gold. We have fashioned products with specific users in mind. We have done a lot of mass customisation in the product arena.

We have also struck a number of partnerships. We are able to provide the bandwidth of CRISIL's research capabilities but in the manner in which the client wants it. We are trying out different models through with this research capability can be applied and therefore the value we charge can go up.

We have also added economic research to our offering. We are now doing some cutting-edge work by combining our econometric capability with data collection on a weekly basis. We have been able to improve forecasting. For instance, we have done one assignment for a tractor company that gives us what is likely to happen to sales week-by-week over the next six months in rural areas.

Our models links tax outflows, fertiliser subsidy outflows and impact of monsoon to gauge the liquidity in the system.

As a result, we have come out with a week-on-week programme on how the company can organise distribution, advertisements and tying up with bank finances. We have been able to differentiate ourselves again. That is why our revenues have grown.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
On stock option and employee stock ownership plans

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line