Stock Review: CRISIL

Pipal buy looks just right for better cash flow

CRISIL has been focusing on strengthening its capabilities in research delivery for quite some time now. In the past, the company had used both organic and inorganic routes to expand its research domain. The latest acquisition of Chicago-based Pipal Research is yet another attempt by Crisil in this direction.

   Crisil, India's largest credit rating company, announced on Wednesday that it has bought Pipal Research for $12.75 million (approximately 60 crore). Given Pipal's FY10 sales of $8.1 million (about 40 crore), Crtisil has valued it at 1.6 times the topline. In knowledge related sectors, typically deal size rests in the range of 1.3 to 1.8 times the sales. Considering this, Pipal's valuation looks reasonable.

   The move will provide Crisil a ready access to corporate clients in telecom and technology where it has no presence currently. Further, the deal will be earnings accretive since Pipal is profitable.

   Crisil has not given details about profits and profitability of Pipal. Knowledge process outsourcing (KPO) companies operate at an average net profit margin of 20%. A quick calculation suggests that Pipal's annual profit may be in the vicinity of 8 crore. Crisil had reported a net profit of 153 crore for the year ended December 2009. This means Pipal would constitute no more than 5% of Crisil's bottomline. Though this looks petite, it needs to be noted that in the past Crisil has shown ability to turn around smaller operations into bigger profitable businesses. For instance, it had acquired a Bangalore-based KPO, Irevna, in 2004 for 43 crore when it was of similar size as that of Pipal.

   But today, Irevna has grown significantly and contributes almost half to Crisil's total employee base. Also, Crisil's KPO business now forms nearly half of its total revenue.

   Crisil maintains a strong cash flow from its operations; its cash and equivalents jumped by 22% year-on-year to 157.5 crore as of December 2009. Earlier in the month, it decided to return back a portion of this to investors through buyback of outstanding shares from the open market. This had led to concerns whether the company was unable to find better investment opportunities.

   The latest deal to acquire Pipal puts such concerns to rest. KPO segment has grown at a faster pace of 40% in the last five years. According to industry estimates, it is likely to see over 35% growth in the next three years. Given this, Pipal's acquisition looks opportune for Crisil.