CRISIL Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Growth despite global uncertainty: Revenue grew across all businesses, with the rating segment supported by a corporate bond market recovery and bank credit growth, while the research and analytics segment was driven by risk and sustainability offerings.
• FX swung from tailwind to headwind: A sharp rupee and GBP appreciation against the dollar in Q1 FY23 reversed the prior year's gains, wiping out nearly all underlying margin expansion in the global research business.
• Margins held back by deliberate investment: Rating segment margins stayed range-bound despite strong revenue as the company invests in talent and technology to protect its competitive moat, while the global business margin drop is almost entirely an FX story.
• The demand cycle is getting harder: Global banking clients are very cost-conscious, leading to a harder decision cycle even for CRISIL's non-discretionary services, though underlying demand remains higher than before.
• What to watch next quarter: Whether the bond market tailwinds from stabilizing interest rates convert to revenue, the pace of debtor days normalization after a timing-related spike, and any margin recovery as the investment cycle matures.

Revenue Drivers: The Domestic Engine Fires

• Bond market revival: After years of stagnation, the number of issuers tapping the bond market increased in 2022 as interest rates stabilized and bank loan rates rose, directly benefiting CRISIL's domestic rating revenues given its stronger market position in bond market ratings versus bank loan ratings.
• Bank credit growth: Credit growth inched up well in 2022, with services (including NBFCs), infrastructure, and mid-corporates all growing; large corporate borrowing also picked up, though growth moderated somewhat on a higher base in Q1 FY23.
• Surveillance revenue momentum: Robust growth in surveillance fees continued from last year into Q1 FY23, providing a steady annuity stream within the ratings business.
• MI&A tailwinds: Financialization of savings, healthy loan growth, and banks' renewed appetite to lend after balance sheet cleanup are driving demand for CRISIL's integrated credit platforms, indexing products, and digital delivery of research.
• Infrastructure and capex catalyst: A substantial increase in government capex at central and state levels, plus PLI-linked industrial capex expected to rise sharply over the next three to four years, is creating demand for implementation roadmaps, due diligence, and financial closure advisory.

Sanjay Chakravarti: "the whole idea for us was when we went into the research analytics and solutions business... the idea was to progressively de-risk our ratings business."

Margin Story: FX Masks the Real Picture

• Research & Analytics margin drop is almost entirely FX: The ~300 bps YoY decline (from 24% to ~21%) is explained by adverse currency movements of roughly 280-290 bps; underlying core margin expanded only 10-20 bps after stripping out FX.
• FX location is concentrated: The currency impact sits almost entirely in the research analytics and solutions segment, which houses the global business; the domestic rating business is largely insulated.
• Rating margins are structurally protected: Margins have moved in the same band despite significant revenue traction because management deliberately invests in talent and technology to maintain a competitive moat, allowing CRISIL to walk away from low-margin business or clients unwilling to accept its ratings.
• Investment cycle is multi-year: The investment program into people and technology spans two to three years; management expects faster margin expansion once investments start delivering results, but declined to provide a mathematical formula for flow-through.
• Quarterly margin patterns are misleading: Management pushed back on analyzing any single quarter's margin, insisting the business must be viewed over a full 12-month cycle that covers all seasonal patterns.

Sanjay Chakravarti: "Every time we lose good talent, it's like losing cash from the main door."

Global Business: Harder Decisions, Intact Demand

• Revenue pool for global banks slightly reduced: The revenue pool for global CIBs contracted in 2022, principally due to reduced marketing, markets, and IBD/M&A activity, though lending revenue grew on increased margins and debt capital demand.
• Decision cycle is harder: Organizations are very cost-conscious, creating a harder decision cycle even for CRISIL's non-discretionary services; demand is probably higher than before, but conversion takes longer.
• CIB revenue declined sequentially: Revenue fell from ₹645 cr in Q4 FY23 to ₹528 cr in Q1 FY24, reflecting the broader industry backdrop; management says this does not indicate diminished ability to grow the business and did not confirm a seasonal recovery.
• FRTB and Basel IV are live opportunities: Management sees capital optimization as a material opportunity and is having live conversations with multiple clients; preparatory work typically needs to happen two to three years in advance.
• Non-financial risk is the next frontier: Non-financial risk is described as possibly the biggest risk clients currently deal with; CRISIL is building out this business, currently focused on financial institutions, and sees it as a very substantial opportunity.

Andre Cronje: "I think there is certainly a harder decision cycle with regards to whether they can spend the money, because clearly most of the organizations we deal with are now very cost conscious."

Balance Sheet & Cash Flow

• Debtor days spike is a timing issue: The expansion in debtor days in CY22 was caused by key client payments expected in December arriving in January, bumping up the 31st December outstanding; those debtors were subsequently paid in Q1.
• Debtor days concentrated in global business: Debtor days reside in the research analytics and solutions segment (global businesses and MI&A), not in the ratings business, which operates on a negative working capital model with upfront fee collection.
• Revenue mix in GR&RS: 30-35% of the global research and risk solutions business is annuity revenue; the remainder is project-driven, split between renewable projects and short-term assignments.

Sanjay Chakravarti: "The reason why you see an expansion in the debtor days as far as 22 is concerned is because there's a bit of timing difference here. Some of the key clients whose payments were expected to come in by December actually came in in January, which kind of bumped up our outstanding as of 31st December, which bumped up the debtor days that you see."

Competitive Position & Moat

• Premium positioning maintained: Almost every deal gets negotiated, but CRISIL maintains a premium positioning in the competitive rating market; management declined to disclose fees as a percentage of amount raised.
• Research business de-risks ratings: The research, analytics and solutions business was built to progressively de-risk the ratings business, creating a moat that allows CRISIL to protect margins by walking away from low-margin or difficult clients.
• Product and platform IP: Proprietary platforms like ICON (which digitizes the entire credit underwriting process and is used by all large Indian banks) and data products leveraging CRISIL's research create sticky, IP-led revenue streams.
• Global Analytical Center growth: Robust surveillance work delegation from S&P Global Rating Services continues; management is excited about new areas of common growth including sustainability and emerging risk areas, though did not address specific wallet share expansion.

Outlook: Cautious Optimism Anchored in Non-Discretionary Spend

• Bond market tailwinds building: With interest rates stabilized and the RBI pausing hikes, bonds and bank loans are evenly poised; when rates start declining, the bond market typically benefits significantly, and higher-rated corporates are well-positioned to start investing.
• Corporate capex expected to revive: Management expects to see gradual signs of corporate capex over the next 12 months, then hopefully more intense activity; infrastructure InvITs and REITs are expected to grow larger and access bond markets.
• Securitization remains a key borrowing source: NBFCs, now back in shape and growing, will continue using diverse funding sources including securitization, which remains a key source for non-bank borrowing.
• ESG ratings opportunity awaits regulatory clarity: CRISIL has already launched ESG scores for 580-plus companies but is waiting for final SEBI guidelines to understand how to shape the opportunity; the market is expected to evolve over the next couple of years.
• Overall stance is optimistic: Despite global uncertainty, most offerings are in the non-discretionary space, which continues to drive buoyancy in demand; the India economy remains robust and resilient.

Andre Cronje: "Yes, we see it as a big opportunity. FRTB, capital optimization is a big theme... we are actually having live conversations with a number of the clients that we service specifically on this topic."

Guidance & Commitments

Key Metrics