The Hindu Business Line : CRISIL: Reject

The offer price of Rs 775 values CRISIL's stock at a price-to-earnings multiple of nearly 26 times its latest earnings per share. The price, however, still does not fully factor in the company's growth potential.

SHAREHOLDERS of CRISIL can consider rejecting the open offer of The McGraw Hill Companies, the holding company of the international rating agency Standard & Poor's.

If S&P manages to obtain the controlling stake of 51 per cent or more in CRISIL,, then the value of the holdings could increases all the more for the shareholders.

This could ensure steady and stable growth in earnings of the company, given the potential for business process outsourcing (BPO). Incidentally, even without BPO, CRISIL's earnings growth could turn robust since its acquisitions appear to be turning around. Investors may, however, need to hold on to the stock for a considerably long period for returns beyond the price of Rs 775.

There is also the possibility of the share price falling below this when the offer closes. Investors with a perspective of more than five years, however, are unlikely to be disappointed, especially with S&P now poised to control CRISIL. Investors should not consider this recommendation as suitable to them if their expected holding period is shorter.

CRISIL: Immense potential

The market for financial services information such as ratings has not even entered the growth phase. It is still early days for the industry. Growth triggers such as securitisation and increased accessing of the capital market by Indian companies and financial innovation are only now starting to make their mark. The next decade could thus see strong growth in the demand for CRISIL's services.

CRISIL, with its strong brand name, is well placed to take advantage of the growth in demand for financial services information. In any case, competition is limited to a handful of players and there are strong entry barriers.

Incidentally, McGraw Hill Financial Services segment, which derives a significant proportion of its revenues from developed markets, has grown at a compounded annual rate of about 13 per cent over the past ten years.

This suggests that expectation of strong two-digit growth over extended periods from an under-developed financial services market such as that of India is not unjustified. There is, thus, immense potential for the company's earnings to grow at 15-20 per cent for a period beyond ten years.

CRISIL is also emerging as a major player in consulting having built a strong infrastructure advisory business over the years. The acquisition of the gas advisory firm, Economatters of London, has only strengthened its strategic positioning in the consulting business.

In contrast, the acquisition of the Chennai-based BPO firm, Irevna, will utilise the strengths built by the rating business.

The potential for growth in advisory and business process outsourcing is attractive and this has only bolstered expectations of robust earnings growth.

Growing profits

In the third quarter ended December 2004, CRISIL's profits rose 89 per cent over the corresponding previous period.

sAlthough, this could be misleading, it confirms that its subsidiaries such as Economatters, which incurred losses earlier, have now started contributing to the bottomline.

CRISIL's profit growth could thus rise from below 10 per cent to higher levels in the next few quarters. These factors suggest that the offer price may not have fully captured the growth potential of the business even at a price-to-earnings multiple of 26.

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

Stories in this Section
Investment quiz

CRISIL: Reject

How to pledge on the NSDL

Equity portfolio — A sell-it-yourself guide

Car sales waiting for next big push

Shock and surprise in the market

HDFC Equity Fund: Invest in phases

Why enhanced indexing?

UTI Basic Industries: Hold

MFs mop up record collections from IPOs

Waiting for correction