Stock Review: CRISIL

 

CRISIL'S decision to buy back a portion of its outstanding equity is in line with its policy of returning shareholder wealth. The company had earlier declared a special dividend for the current fiscal. Considering a marginal 11% premium that the latest buyback offer provides, long-term investors may continue to hold the stock since the fundamentals look intact.

    On Friday, the company proposed to buy back around 2% of it outstanding shares at 6,500 per share. The proposed buyback will increase the share of the promoters to around 53% from 51.1%. Its stock reached the 52-week high of 6,300 during the intraday trading on Monday. It closed the day at 6,130, a daily gain of 5%.

    According to experts, there can be two reasons behind a company's decision to buy back its shares. "First, the company could have surplus cash flows and second, there could be a perception in the company that the stock's price should be higher," said VVLN Sastri, the country head of Firstcall India Equity Advisors.

    Crisil has reported a strong cash generation over the years. In the last two years alone, its cash and equivalents rose by nearly four times. The robust growth can be attributed to the newer business segments including IPO ratings and ratings of equity in the secondary market.

    The possibility of lower valuations doesn't look equally appealing given the fact that Crisil's stock enjoys a premium over its peer ICRA. Crisil currently trades at over 29 times its trailing 12 months earnings. ICRA trades at a P/E of 23.6. Moreover, the Crisil's stock has gained 53% on bourses in the past one year, thereby outperforming the 16% gains in the Sensex.

    A buyback may raise concerns about the company's inability to plough the cash back into business to generate higher returns. The company's sales had grown by a marginal 4.4% in 2009 due to a slowdown in its major divisions. However, with the domestic economy back in shape, a double-digit growth is back. So far in the first half of the current fiscal, its sales rose by almost 20% from the year-ago period. The lower growth of 8% in net profit is largely due to higher operating costs.

    Given that growth is back on track, concerns over bleak prospects should not surface. Long-term investors could hold on to the stock currently as there could be fresh triggers driving high growth going forward.