Crisil Financial Analysis

CRISIL Ltd. Growth CRISIL Ratings maintained its leadership position in the Indian market driven by strong growth in Bank Loan Ratings (BLR) and Small and Medium Enterprise (SME) Ratings. Despite the turmoil in global financial markets, Irevna, CRISIL’s offshoring division, added several strategic and high potential clients. Irevna also expanded its business development and delivery footprints, further strengthening its global reach and its positioning in the equity research, derivatives and credit research verticals The domestic research arm, CRISIL Research grew significantly through its launch of new reports in the areas of infrastructure, real estate, retail finance and SMEs and by focusing on high value customized research. IPO grading was directly impacted by unprecedented collapse of Indian equity markets and the consequent decline in the number of companies seeking to target the primary market. CRISIL Risk and Infrastructure Solutions Ltd (CRIS), CRISIL’s wholly–owned subsidiary, increased its global footprint through execution of mandates in Mauritius, Indonesia, Vietnam, Tanzania and Kingdom of Saudi Arabia. CRISIL Risk Solutions (CRS) maintained its position as India’s leading risk solution provider. Its products are currently in use at more than 20 Indian banks and financial institutions. It has undertook many diverse and challenging assignments both in the consulting and solutions space.

Revenues The revenues were constantly growing over the past three years. From 06-07 the revenues rose by 40.6% from 29.4 crores to 41.3 crores. From 07-08 the revenues rose by 28.7% to 52.3 crores. CRISIL’s Ratings revenues grew at over 50% driven largely by the strong traction seen in Bank Loan Ratings (BLR) , the activity that got off to a brisk start in 2007. Financial sector and structured financial ratings which were the key revenue drivers in 2007, slowed during the last quarter of 2008. After a 3 year hiatus the corporate bond market showed some recovery in the last quarter of 2008 with some borrowers issuing bonds. In case of CRISIL Infrastructure advisory the business executed was qualitatively very different from that of the previous years. International business accounted for 26% of the revenue against less than 10% in the previous years.

Operating income: Income from operations comprises of income from initial rating and surveillance services, credit assessments, special assignments and subscriptions to information products. The segment revenues which constitute the operating income could be classified under three segments: a) Rating services The company changed the revenue recognition policy in 2007 for initial rating fees. Until then, initial rating fee were recorded upfront 100%, when the rating was awarded. From 2007, management decided that 94% of initial rating fee is to be recognized upfront on the date the rating is awarded and balance 6% is recorded equally over 11 months subsequent from the month of awarding rating to commensurate with the efforts involved in assigning and monitoring such ratings. Had the Company continued to use the earlier basis of accounting for initial rating fees, Profit after tax would have been higher. b) Advisory services

The segment revenue from advisory services have reduced drastically by 75.8% from 36.23 crores to 8.76 croresin 2007 as the Advisory Division of the Company was transferred to CRISIL Risk and Infrastructure Solutions Limited, a wholly owned subsidiary of CRISIL Limited, with effect from 1st April, 2007 with a consequential effect on revenues and profits. c) Research services The revenue and hence the profits from the research services has shown a surge since 2007 as CRISIL Research and Information Services Limited, Global Data Services of India Limited, CRISIL Properties Limited and Irevna Research Services Limited – wholly owned subsidiaries of CRISIL Limited have been amalgamated with the Company with effect from April 1, 2007 in terms of the Scheme of Amalgamation sanctioned by the High Court of Judicature at Bombay and High Court of Judicature at Madras vide their orders dated July 27, 2007 and July 9, 2007 respectively. Other incomes Constituents of non operating income include following: • Interest on deposits • Interest on loans to subsidiaries • Profit on sale of fixed assets • Dividend income from subsidiaries • Dividend income from other investments • Foreign exchange gain • Profit on sale of investments • Rental income and • Miscellaneous income

Cost elements and the trend: The staffing expenses form the major proportion of the total expenses. It amounts to more than 50% of the total expenses. During the year 2006-2007 the staffing expenses shot up by 89% due to increase in the salaries and net addition of 707 employees on account of new hires and merger of wholly owned subsidiaries of the company with itself. As a result of this the revenue per employee declined to 17.61 lakhs in 2007 from 19.27 lakhs in 2006. However the revenue per employee rose to 23.31 lakhs in 2008. The profits per employee are increasing every year due to productivity improvements and better resource utilization. The key challenge for the company is to retain and re-skill the employees in line with the changing organizational goals in the context of globalization and competition. The other cost elements are establishment, rent, travel and other expenses. The establishment expenses were higher in 2008 due to operationalisation of new offices in the year.

Interest The company continued to be debt-free for three years and hence it did not incur interest expenses. The company was able to fund its investments in fixed assets and infrastructure from its internal accruals and liquid assets.

Depreciation

The Company has changed its accounting policy with respect to depreciation / amortisationof assets in the year 2007 from written down value method to straight line method with retrospective effect. Depreciation on Trademark and Copyrights was changed from 25% written down value method to 25% on straight line method based on estimated useful life. Goodwill was amortized at 5% on straight line method based on estimated useful life. In 2007 the Company revised the estimated useful life of Goodwill and fully amortized the balance in Goodwill account. Had the Company continued to use the earlier method of providing depreciation/ amortization, the Profit after tax would have been higher. So depreciation was higher in 2007 due to the conservative depreciation policies followed by the company. Depreciation as a percentage of revenue was lower at 2.93% in 2008 as against 4.92% in 2007

Operational profitability and net profitability The profits have shown an upward trend both at the operational and net level. In 2007 the net profit grew by 89% over the previous year and the profit margins improved from 24% in 2006 to 26% in 2007. In 2008 the net profit grew by 94% over that of 2007 and the profit margins also improved to 34%. As discussed already the surge in the profilts is mainly due to the growth in bank loan and corporate ratings over the 2 years.

Dividend payments The payment of final dividend was Rs. 35 per share for the year 2008. During the year, CRISIL Limited paid two interim dividends in July 2008 and October 2008 of Rs. 10 per share and Rs. 25 per share respectively; in total, therefore, the dividend paid by the company for 2008 is Rs. 70 per share as against Rs. 25 per share in the year 2007. It was only Rs.15 per share in 2006. There is an upward trend in the dividend payments and it is as high as 750% when compared to previous years.

Networth The stated networth and the tangible networth for the three years are as follows 2006 2007 Stated NW( in Crores) 165.99 268.21 Tangible NW( in crores) 48.38 98.368

2008 346.41 181.84

In order to be conservative the tangible networth is calculated by knocking off the following • Investments • Deferred tax assets • Advance tax • Loans to CRISIL Risk and Infrastructure solutions • Provisions • Capital work-in-progress So the net worth is positive and growing over years. This is a favorable sign for the banker.

Current liabilities Among the sundry creditors the company has no amounts due to any micro/ small/medium enterprises as defined under sec 7(1) of micro, small and medium enterprise development act 2006. From 2006 to 2007 the sundry creditor’s amount went up by 109%. The fees received in advance went up by 78.12% in 2008 when compared to other liabilities. The other liabilities have increased marginally. On the whole there is an upward trend in current liabilities

Assets From 2006-2008 the major fixed assets acquired were computers, leasehold improvements to support expansion of business. The fixed assets include buildings, furniture, office equipments, computers, vehicles and leasehold improvements with the buildings and computers amounting to 60% of the total fixed assets. The intangible assets include goodwill, trademark and copyrights

Investments More than 90% of the long term investments made are in the subsidiaries. A major proportion of the long term investment is in the equity shares of Irevna Ltd. The current investments amount to more than 50% of total investments. The company’s short term surplus funds are invested in money market mutual funds, fixed maturity plans and fixed deposits with the bank. From 2006-2007 the investments in mutual funds went up by 165.33%

Current assets The unsecured doubtful debts are constantly increasing from 2006. In 2008 the doubtful debts went up by 287% from 0.56 crores to 2.19 crores. All the debts are unsecured in nature. The other debts also rose from 2006. The sundry debtors amount went up by 165.8% from 25.5 crores in 2006 to 67.82 crores in 2007. It went upto 80.3 crores in 2008. Debtors as a percentage of operating revenue increased from 17% in 2006 to 27% in 2007 mainly on account of merger of subsidiaries and it improved to 21% in 2008 mainly due to the collection efforts. In case of the bank balances the balance in the deposit accounts increased in the year 2008 over the previous years. Loans and advances comprise of loans to staffs, advances recoverable in cash or kind and sundry deposits. The sundry deposits also have seen a sharp increase since 2006.

Effective tax rates The effective tax rates have reduced since 2006. In 2006 the rate was 40.5% and it came down to 21.5 % in 2008. The taxable income is showing a upward trend.