If the `other income' is ignored, the growth in profit before tax is about 13 per cent — a healthy number. In addition, establishment expenses rose nearly 50 per cent. It is unlikely that the pace of expense growth will be maintained at this rate for the rest of the year. This would boost profit growth.

In terms of consolidated earnings, profits fell 12 per cent. This appears due to the consolidation of the financial performance of Economatters, a London-based Gas Advisory Firm that CRISIL acquired in 2003. This firm is expected to break even in the later half of 2004-05.

Inspiring business

Even as CRISIL's profits growth remained muted in the first quarter, business growth is strong. Ratings business grew 11 per cent in a tough quarter for the debt market. The performance of the other two divisions appears encouraging, although their base is smaller. The advisory business grew 50 per cent after a poor show in 2003-04. The information business exhibited strong momentum clocking a growth of 36 per cent.

It is likely that the expense growth for the whole year will be contained within revenue growth. This has happened in the past. If the revenue growth momentum is maintained, profit growth will be robust for the whole year and in line with the stock valuation.

It is not only the potential for growth in 2004-05 that is inspiring. The Indian debt market is still in a nascent stage . The potential for growth in the volume of activity that would require rating in terms of both plain vanilla lending and financial innovations such as securitisation is immense. CRISIL is in a vantage position to make the most of such growth.

Over the years, the potential growth of the debt market has remained a compelling reason to buy CRISIL. It continues to remain a strong factor though other growth-drivers have emerged. Even as the growth in debt market will have a strong effect on earnings growth, the importance of CRISIL's overseas ratings business, advisory business (including its overseas acquisitions) and information services business (which is linked to growth in the economy) have now increased.

The outlook for these businesses appears favourable now. CRISIL's conservative management style is a positive factor in this regard.

Market risks

CRISIL's business can be categorised as less risky than that of the most other businesses in the stock market. It has consolidated its lead in the ratings business and the outlook for its main business is positive. The market risks, on the other hand, are high.

Trading volumes in the stock are, however, quite low. This enhances the risk involved for investors. On a few days, no trading takes place in the CRISIL share. On several days, traded volume in both the NSE and the BSE put together is less than 100 shares.

The lower liquidity has implications for the price at which the share is bought and sold. It is possible that a purchase of about 100 shares can be made only at an average price of between Rs 450 and Rs 500, though the stock now trades at about Rs 400.

This necessitates a considerably long holding period, which should extend well beyond a year for the investment to make decent returns.

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