CRISIL Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Revenue growth offset by global slowdown: Consolidated revenue grew 3.2% YoY in Q1 FY24, as robust domestic ratings momentum was offset by slower decision-making and curtailed discretionary spending among global financial clients.
• PAT declined on tax headwind: Profit after tax de-grew 5.5% YoY, driven entirely by an increase in tax rates in one ex-India jurisdiction, not by operational weakness.
• Global banking clients are cautious: A slowdown in discretionary spending by global financial institutions is expected to persist for the next few months, creating a near-term drag on the research, analytics, and solutions segment.
• Domestic credit demand is a durable engine: Bank credit growth of 6.3% and a 9% rise in corporate bond issuance, supported by healthy bank balance sheets and corporate capex plans, underpin the ratings business.
• What to watch next quarter: Whether the anticipated second-half revival in bond market activity materializes as interest rates soften, and if the outreach program to new buying centers can offset the discretionary spending freeze.

Domestic Ratings: The Resilient Anchor

• Broad-based revenue growth: The ratings segment grew 8.4% in Q1, with domestic ratings revenue up roughly 12%, driven by surveillance fees and new rating revenues from mid-corporates.
• Corporate bond market held up: Issuance grew 9% on a high base, though management noted that issuers and investors are waiting for a decisive turn in the interest rate cycle before committing further.
• Bank credit supports the model: Credit growth of 6.3% was fueled by retail, services, and NBFCs, while large corporate credit remained lacklustre at 6.6%. CRISIL benefits because its revenue correlates with aggregate borrowing in the economy, not just the bond market.
• Surveillance income provides a floor: A good proportion of ratings revenue comes from surveillance fees, which are independent of current market activity and provide stability when issuance slows.
• Interest rate sensitivity is a lever: When rates decline, companies favor the bond market over bank loans because it prices in cuts faster, and the bond market is usually more lucrative for CRISIL. Management senses the second half of the year could see more bond market activity if the cycle turns.

Global Research & Analytics: A Tale of Two Businesses

• The slowdown is real and concentrated: Slower decision-making and curtailed discretionary spending by global financial clients impacted the quarter, with the effect most visible in the Global Research and Risk Solutions (GR&RS) business. Management expects this to continue for the next few months.
• GR&RS felt the squeeze: Traditional sell-side research faced cost-cutting pressure from a challenging deal environment, regional banking crises, and inflationary concerns. The impact was a drag on Q1 performance, though buy-side and ESG services saw sustained demand.
• Global Benchmarking & Analytics (GBA) bucked the trend: Strong momentum from 2023 continued into Q1, driven by increased penetration with global index banks and traction for a new flagship benchmarking offering. The business is not directly correlated to discretionary spend trends because stressed clients still need analytics to drive strategy.
• The response is commercial, not defensive: To offset the slowdown, CRISIL is amplifying its focus on getting into new buying centers and existing accounts, with a disciplined outreach program to small and mid-sized accounts that already produced early success stories in Q1.
• One quarter does not define the business: Management pushed back on judging GR&RS by a single quarter, arguing the full year's performance shows true potential as it goes through all revenue and expense cycles. Client stickiness remains intact, and external macro factors, not loss of market position, drove the softness.

Amish Mehta: "in the global environment, we are seeing some slower decision-making and impact on discretionary spend by our global financial clients, which has had an impact during the quarter. And I think we will continue to see that play out for the next few months or depending on when the decision-making cycle turns around for discretionary spend."

Margin Dynamics: Investment Ahead of Revenue

• Operating leverage is the core tool: For IP businesses, operating leverage exists naturally. For services businesses, levers include bench utilization, productivity, technology, and pricing.
• Investment timing compresses margins: Management acknowledged that it sometimes invests ahead of time to build capabilities for the future, which may lower margins for a couple of quarters. Margins correct when the revenues come in, a pattern visible in past trends.
• No steady-state margin given: When pressed for a steady-state margin for the research services business given its volatility, management declined to provide one, directing analysts to look at annual margins rather than quarterly ones.

Amish Mehta: "I think, Nirali, you should always look at the annual margin, not look at quarterly margins. So, from our perspective as an organization, our focus is to grow margins across all our businesses on a consistent basis."

Structural Growth Drivers

• Corporate India is ready to invest: Healthier corporate balance sheets (net debt to EBITDA at 1.9x, down from 2.8x three years ago) and capacity utilization trending above 70% are conducive for incremental capex. Policy interventions like the PLI scheme are bringing large-scale investments in emerging sectors.
• Banking system health unlocks demand: Asset quality continues to improve, with GNPAs down from 5.9% in 2022 to 2.9% in 2024. Healthy bank balance sheets and low credit losses have enabled banks to plan strategies to gain or protect market share, driving demand for CRISIL's market intelligence and analytics.
• Financialization of savings is a tailwind: The increase in AUM has led to demand for index-linked products, research insights, and digital interfaces, all of which feed the domestic non-ratings research business.
• Emerging sectors are a new frontier: Sectors like those supported by PLI incentives are expected to account for about a fifth of total industrial investments over the next four years. CRISIL is building data and analytics capabilities in these new sectors.

Capital Allocation & Strategic Moves

• Global delivery expanded: CRISIL set up a delivery center in Bogota, Colombia to serve North American clients, augmenting its global delivery model.
• S&P Global partnership deepened: The Global Analytical Center celebrated 20 years of partnership with S&P Global Ratings, now supporting all geographies and all products from an analytical, data, and technology support perspective. Expansion is limited only by regulatory definitions of what can be outsourced.
• ESG license application filed: CRISIL has applied for an ESG rating license from SEBI and is awaiting feedback on next steps, with no deadline imposed by the regulator.
• Gen AI is being deployed internally: The company is working towards large-scale adoption of Gen AI within CRISIL to drive efficiency gains and explore new business opportunities, while GR&RS is using Gen AI, Traditional AI, and Machine Learning to develop new offerings.

Guidance & Commitments

Key Metrics