Management Discussion and Analysis Report

Transcription

1 CRISIL LIMITED Management Discussion and Analysis Report (Annexure to the Directors Report) Business and Industry Overview CRISIL is India s leading Ratings, Financial News, Risk and Policy Advisory Company. CRISIL pioneered the concept of credit rating in the country and is the leader in the ratings business. It is the leading infrastructure and risk advisor to multilaterals, governments and banks and the leading realtime news provider on the financial markets. It is India s first and only listed credit rating agency involved in the business of rating corporate debt obligations such as debentures, preference shares, fixed deposits, commercial paper and structured obligations. Over the years, the Company has continued to innovate and consistently introduced new rating services for entities such as state governments, municipalities, banks, non-banking financial companies, infrastructure sector projects, insurance companies and mutual funds. CRISIL has always been the first rating agency to introduce rating criteria for new debt securities and structures in the country like governance and value creation, maritime institutes, SMEs, micro-finance institutions, healthcare ratings. CRISIL s ratings are widely accepted and are considered to be fair, consistent, timely and reliable indicators of the risks associated with investment decisions. The company has assisted in setting up the first rating agencies in Malaysia, Israel and Caribbean Islands. Apart from rendering rating services, CRISIL is involved in providing research, information and advisory services to corporates, banks, financial institutions and Central and State Governments. It has executed several landmark assignments for the World Bank, Asian Development Bank and international investment banks. These services span the economic, industrial business and financial markets domain. These services help diversify the Company s skill base besides offering opportunities for growth. CRISIL s core competence enables it to compete effectively in other synergistic business activities, which helps it to further enhance its earnings potential. CRISIL Investment Management Services, a division of CRISIL, provides comprehensive risk management solutions for Banks & Financial Institutions. The division has a complete suite of models which combine the domain knowledge and the technology while offering solutions to the clients to meet the requirements of Basel II. Analysis of Financial Condition and Results of Operations The accompanying financial statements have been prepared in accordance with the requirements of the Companies Act, 1956, and Generally Accepted Accounting Principles and accounting standards prevailing in India. CRISIL s management accepts responsibility for the integrity and objectivity of these financial statements as well as for the various estimates and judgments used therein. A. Financial Condition 1) Fixed Assets At the end of the year, the Company s investment in fixed assets was as under: Particulars December 31, 2005 March 31, 2005 Growth AMT. ( RS. LAKHS) AMT. ( RS. LAKHS) % Gross Block 8, , Less : Accumulated Depreciation 4, , Net Block 4, , Add : Capital Work in Progress Net Fixed Assets 4, , Depreciation as a % of Total Income Accumulated Depreciation as % of Gross Block

2 19TH ANNUAL REPORT 2005 During the year, the Company purchased assets worth Rs lakhs and sold assets worth Rs lakhs. The assets acquired were mainly computers to support expansion of business and to provide for replacement of existing assets. The assets sold were mainly computers and vehicles which were replaced. Depreciation as a percentage of revenue was lower at 5.13% as against 6.53% in the last year while accumulated depreciation as a percentage of the gross block increased from 47.25% to 48.43%. The Company estimates that it will be able to fund its investments in fixed assets and infrastructure from its internal accruals and liquid assets. It may, however, take recourse to borrowings to fund such capital expenditure, if considered necessary. 2) Investments During the year, the Company acquired Irevna group of companies, which provide high-end customised equity research, analytics and knowledge process outsourcing to worlds leading financial institutions, investment banks, private equity firms and consulting Companies. The Company acquired 8,000,000 equity shares of Irevna Limited UK for USD million and 50,005 equity shares of Irevna Research Services Limited for Rs. 100 lakhs. The Company also acquired additional 2,00,000 equity shares of EconoMatters Limited for GBP 2,00,000 and paid part of the balance consideration as per the agreed terms. EconoMatters Limited is the leading provider of business advice and information services to the energy and gas industry, serving global majors, multilaterals and leading international banks. During the year, EconoMatters Limited achieved the turnaround in its operations. The Company s short-term surplus funds were invested in money market mutual funds. 3) Current Assets, Loans and Advances Cash and cash equivalents were 3.73% of total assets as at December 31, 2005, as against 10.05% as at March 31, Sundry debtors were Rs lakhs as at December 31, 2005, as against Rs lakhs as at March 31, Debtors, as a percentage of the total operating revenue, were 19.13% as against 18.28% in the previous year, representing an outstanding of 70 days and 67 days of operating revenue for the respective years. The break-up of debtors relating to various services is as under: As on December 31, 2005 As on March 31, 2005 (RS. LAKHS) % (RS. LAKHS) % % CHANGE Rating Services Advisory Services Research & Information Services Total 1, , The company considers that the outstanding debtors are recoverable. During the year, the Company has written off Rs lakhs as bad debts as against Rs lakhs in the previous year. Loans and advances comprise loans to staff, advances recoverable in cash or kind and sundry deposits. Advances recoverable in cash or kind or for value to be received are mainly towards amounts paid in advance for value and services to be received in future. Sundry deposits represent deposits for premises taken on lease, telephone, electricity and others. 4) Current Liabilities & Provisions Sundry creditors include amounts payable to vendors for supply of goods and services, provision for bonus payable to the staff and commission payable to the Directors. Advances received from clients include fees received for which services have not yet been rendered and unearned revenue at the year-end, which pertain to services to be rendered in the next financial year for which related costs were not yet incurred. Provision for leave encashment represents the Company s liability for leave encashment valued on an actuarial basis. The valuation is made as per Projected Accrued Benefit Method taking into account qualifying salary projected upto the assumed date of cessation of employment by whatever reason and assuming rate of interest at 7.50% p.a., salary growth at 7% p.a. and adopting published mortality tables LIC ( ). Proposed dividend represents the dividend recommended to the shareholders by the Board of Directors, which would be paid after the Annual General Meeting upon approval by the shareholders.

3 CRISIL LIMITED B. Results of Operations The summary of the operating performance for the year is given below. (RS. LAKHS) Particulars 9 Months Ended 9 Months Ended Growth 12 Months ended Income December % December % % March % Income from Operations 8, , , Other Income Total Income 8, , , Expenses Staff Expenses 2, , , Establishment Exp Other Expenses 1, , , Depreciation Operating Expenses 5, , , Profit before Tax 2, , , Contingency provision written back Provision for Taxation 1, , Profit after Tax 1, , , During nine months ended December 31, 2005, operating income grew by 40.46% and operating expenses by 40.83% over corresponding period ended December 31, While net profit grew by 39.38% profit margins were marginally lower at 20.61% as against 21.14% in the previous period. The composition and growth of income from various business segments was as under: The composition and growth of income from various business segments are as under: (RS. LAKHS) 9 Months Ended 9 Months Ended Growth 12 Months ended Particulars December % December % % March % Rating Services 5, , , Advisory Services 1, , Research & Information Services 1, , Income from Operations 8, , , During nine months ended December 31, 2005, total income grew by 40.46% over corresponding period in the previous year. Rating income grew by 27.30%, advisory income by 94.49% and research and information income by 40.60%.

4 19TH ANNUAL REPORT 2005 The number of instruments and volume of debt rated by the Company during the last five years is as under: Year ended March 2001 March 2002 March 2003 March 2004 March 2005 Dec 2005 Number of Instruments rated Volume of debt rated (Rs. crores) 53,013 70,441 70,407 78, , ,159 The composition and growth of expenses during the year is as under: (RS. LAKHS) 9 Months Ended 9 Months Ended Growth 12 Months ended Particulars December % December % % March % Staff Expenses 2, , , Establishment Exp Other Expenses 1, , , Depreciation Total Expenses 5, , , Revenues 8, , , During the year, staff expenses increased by 37.38% due to increase in salaries and net addition of 157 persons. As a result of this, revenue per employee declined from Rs lakhs to Rs lakhs (annualized Rs lakhs) and profits per employee declined from Rs lakhs to Rs lakhs (annualized Rs lakhs). The Company expects to improve upon this through business process re-engineering and effective use of technology. The key challenge for the Company is to retain and re-skill people in line with fast-changing organisational goals in the context of globalization and competition. The Company constantly strives to make its salary structure competitive in the market to attract and retain talent. Revenues and profits per employee for the last five years are as under: Year ended March March March March March December Months Number of Employees Revenue per employee (Rs.lakhs) Profit per Employee (Rs. lakhs) Establishment expenses for the period increased by 51.08% over corresponding period of previous year mainly on account of additional rent and maintenance of new offices operationalised during the year. As a percentage of total revenue, they were 9.54% vis-à-vis 9.02% in the previous period. Other expenses increased by 59.21% over last year in absolute terms and from 18.34% to 20.43% as a percentage of total revenue, mainly on account of higher travel expenses and professional fees. The travel expenses were higher on account of travel undertaken with the objective of globalizing the operations of the company and in connection with the execution of assignments. Professional fees include outsourcing charges paid to wholly-owned subsidiaries for supporting the Company s operations as well as to a network of professionals engaged by the Company to execute assignments and to augment Company s business prospects.

5 CRISIL LIMITED Interest The Company continued to be debt-free during the year and therefore, did not incur any interest expense. C. Risk Management CRISIL faces the following types of risks in its business operations: 1) Business Risks Business risks primarily arise out of the high dependence on the ratings business. To mitigate this risk, the Company has adopted a strategy of launching innovative rating products, globalising its operations and diversifying into the advisory and research and information businesses. The strategy has yielded good results and non-rating businesses have been making steady progress. The ratings business has grown at CAGR of 15% while non-ratings business has grown at the CAGR of 38% over last ten years. To address the risk of high dependence on a few large clients and a few sectors in the ratings business, the Company actively attempts to diversify its client base and industry segments. The company has been attempting to constantly add value to its clients by providing superior quality service and better franchise with investors, to mitigate the risk arising from price competition. High repeat business from large clients, however, contributes significantly to the Company s revenues in rating services. In the advisory services business, the risks arise primarily on account of the acute competition prevailing in this business segment and dependence on large mandates from multilaterals, government agencies and banks. The Company constantly strives to increase the success probability on multilateral bids and to diversify and expand the client base. CRISIL s Centres of Excellence and the policy research and product quality assurance wings assist in designing and refining methodologies and facilitate knowledge accumulation and dissemination. This is aimed at improving the predictive capability of CRISIL s ratings and advice to guard its credibility in the market place. 2) Financial Risks CRISIL has been a debt-free Company since its date of incorporation. The Company has followed the strategy of funding all its expansion, diversification and infrastructurerelated expenditure through internal accruals. Its liquidity enables the Company to settle its payables within stipulated timeframes and claim cash discounts. 3) Legal & Statutory Risks The Company has no material litigation in relation to contractual obligations pending against it in any court in India or abroad. The Company Secretary functions as a Compliance Officer to advice the Company on compliance issues with various laws in the country and ensures that the Company does not violate the same. The Compliance Officer reports on the compliance or otherwise of the laws of various jurisdictions at every Board meeting. The Company also seeks independent legal advice wherever needed. 4) Technology-Related Risks The Company uses information technology extensively for its business. All technology services are provided through laid-down policies and processes. These processes allow information access to personnel within the company based on identified roles. A systems audit is carried out regularly to ensure that the policies and processes are satisfactory and in line with internationally-accepted practices. The Company s business processes are automated through a customized business application which captures and maintains information regarding business processes thus protecting its knowledge base. The technology used throughout the Company at all locations provides for redundancy. There is also a disaster recovery solution in place. The Company also possesses intellectual property rights for all the business critical software in use. The technology department keeps continuously abreast of the technology changes and suitably undertakes projects for technology upgradation to keep the technology infrastructure current. 5) Audit and Internal Controls CRISIL has well-established processes and clearly defined roles and responsibilities for people at various levels. This, coupled with adequate internal information systems embedded in business automation software, ensures proper information flow for the decision-making process. Adherence to these processes is ensured through frequent internal audits. The Executive Committee monitors business operations through regular reviews of budgets. An extensive programme of internal audits, reviews by the Audit Committee and requisite guidelines and procedures augment the internal controls. The internal control system is designed to ensure that financial and other records are reliable for preparing financial statements and other information. These procedures ensure that all transactions are properly reported and classified in the financial records. 6) Policy Risks Most of the Company s revenues come from rating services, which depend on several factors including Government policy. At present, ratings are mandatory for all public offerings of debentures except where the conversion or redemption is within 18 months. Ratings are also mandatory for all commercial paper issuances. The present Government policy is directed towards meeting investment requirements through resource mobilisation from the capital markets. In the recent past, due to investor awareness and insistence, over 90% of the bonds which

6 19TH ANNUAL REPORT 2005 are issued privately and are not required to be rated mandatorily have been rated, which has sufficiently addressed this risk. However, to keep the risk of dependence on mandated business at minimum level, the Company has continued to pursue its strategy of diversification, globalising its operations and building a strong franchise and creating risk consciousness amongst investors by holding investor meets and seminars as a result of which there has been a marked improvement in non-mandated business. The above discussion contains forward-looking statements, which may be identified by their use of words like plans, expects, will, anticipates, intends, all statements that address expectation and projection about the future including but not limited to statements about the Company s strategy for growth, product development, market development, market position, expenditure and financial results. These forward-looking statements are based on certain assumptions and expectation of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised. The Company s actual result or performance or achievements could thus differ materially from those projected in any such forward-looking statements. The Company assumes no responsibility to publicly amend any forward-looking statements, on the basis of any subsequent developments, information or events.