Date: 11th July 2000
CRISIL Forgive him lord, for he did not know what he was rating.
Current market price - Rs270
BSE Sensex - 4898                

What would happen if Zeus, the Greek king of gods commits a mistake and goes out of favour? - Replace him. What do you do when a scrip's ratings fall? - Drop it from your portfolio. But what do you do when the rating agency itself fails the litmus test? Same rules apply - Sell it. And so be it with Crisil.

What is the Business?
From the time it was incorporated in 1987, credit rating has stood for CRISIL. Being the first credit rating agency involved in rating all kinds of debt obligations, it was almost revered to the point of being called 'Big Brother'. CRISIL has two divisions - the Credit Advisory Services (CAS) and Credit Research and Information Services (CRIS). It later supplemented its strength by acquiring a research firm called INFAC, thus, creating a synergy with CRIS. And as Internet became the mantra, crisil.com was launched as a vertical finance portal to garner business. Perfect, any rating agency would claim. Imperfect, we say. For as the debt market ran aground, CRISIL's income from the ratings business fell by 60% (FY2000) over the previous year. And with the euphoria over its 'Big Brother' status clouding its vision, it did not create a second line of defense in the form of a strong advisory and research service. So what was the management doing? Sitting on its huge pile of cash, it fiddled as CRISIL burnt.

Who is the Management?
Originally promoted by a host of banks and FIs, CRISIL's major shareholders include ICICI, UTI and Standard and Poor, followed by a few other banks and insurance companies. An above average EPS growth (CAGR of 18% over the last five years) and high dividend payments (grown at an average of 19% over the last five years) have historically characterized the management philosophy of this company. The brand name it enjoyed and the deluge of debt issues hitting the market ensured that cash profits was commonplace - the business was such that management was never an issue. The money just poured in because of the surveillance fees (the fixed fee paid over the life of the instrument) of the earlier debt issues. However, today, the management has become an issue and for all the wrong reasons. The exodus of employees, the unwillingness to pay dividends in spite of excess cash and the sheer lethargy to look beyond ratings business have all but sealed the case. But the acid test will come now as it decides on the future plan of action. And as far as we think the decision is already out of its hands.

Whither Cash flows?
Cash and CRISIL go hand in hand. It has generated oodles of it. CRISIL's mainstay, the rating industry, has a singular phenomenon. Rating companies usually have more cash in their hand than profits because of the practice of receiving payment in advance. Therefore, as long as business was good, the growth rate in cash was always greater than the growth in bottomline. But if business dwindled, the fall in the growth rate of cash was faster than its rise. Well, so much for rocket science. But the moot point is that with the obituary of the ratings business well chronicled, the kind of cashflows it did see will remain history and singularly unrepeated. CRISIL did try and diverse into real estate rating, LPG-Dealer rating and the like, but never did it look beyond rating itself. More questions remain unanswered. For one what will it do with the present cash-pile it is sitting on? Because in this business, what matters is not the amount of cash you generate, but the use to which you put it to. CRISIL has no idea where to invest the cash and not only does this compromise the return on capital but the lack of investment opportunities and the excess cash may force its hand to make phyrric investments. Perhaps a lot more credibility could have been attached to the tight-fisted management had it doled out liberal dividends. But if only wishes were horses. …hmm.. A classic case where more is a curse.

Why should I Sell?
With the market discounting the stock at a P/E multiple of 13x (from a high of 40 plus a few months back), we advise a strong sell on this stock. CRISIL's biggest downside has been its sole concentration on the ratings business without giving due emphasis on Information services. Infact, the second part of its name 'And Information Services' was more of an appendix than anything else. There are other concerns too. Although they strategically moved into dotcom with crisil.com, they could not take advantage of the same. CRISIL's advantage over competitors in the advisory and information services is also not strong enough to sustain it in the future. Finally, its inability to retain talent puts its credibility to provide expertise, in bad light. Countrymen, ratings business is puttering out and merger between ICRA and CARE may well shut CRISIL out of this business. Competition in the research and advisory industry will not budge an inch to CRISIL, and its veil of shortsightedness will ultimately become its shroud. We were all wrong - what we see is not the 'Big Brother' crooning, but its swan song.

Where can I go Wrong?
CRISIL's fate is largely dependent on the fate of the ratings industry. But with debt issues drying up, the potential seems to be alive only as new instruments like infrastructure projects rating, insurance and indices come on the Indian investment radar. But then with international rating agencies like Duff and Phelps joining the crowd and CRISIL having no exclusive expertise in rating these new instruments, the heat from the kitchen will still be strong.