MANAGEMENT DISCUSSION AND ANALYSIS REPORT CRISIL BUSINESS CRISIL is India's foremost provider of ratings, research, policy advisory and analytics, with a global footprint and a strong track record of growth and innovation. We are driven by our mission of making markets function better by delivering independent opinions, actionable insights and efficient solutions. CRISIL is majority owned by Standard and Poor's (S&P), the world's foremost provider of credit ratings and a part of McGraw Hill Financial (formerly The McGraw-Hill Companies) (NYSE:MHFI). BUSINESS ENVIRONMENT India's growth picked up in 2015, but only by a little. The Central Statistical Organisation has estimated current fiscal GDP growth at 7.6% compared with 7.3% in the last. Inflation remained within the Reserve Bank of India's target range despite two successive monsoon failures. India's external vulnerability has declined dramatically, especially since 2013, because of a sharp fall in current account deficit, and stable and moderate external debt. However, despite macroeconomic improvement, the economy's underbelly remains weak and business environment challenging. The outlook on private corporate investment remains sluggish amid a mildly favourable turn in the interest rate cycle, even as bad loans keep rising and testing the banking sector. Huge underutilised capacities and lackluster household demand continue to weigh on manufacturing investments. Additionally, highly leveraged balance sheets of infrastructure companies are constraining investments. On the external front, while a decline in commodity prices have helped India control inflation and rein in its twin deficits (fiscal and current account), the ongoing global slowdown has hurt its exports. Some of the big-ticket structural reforms as Goods and Services Tax were delayed and diluted, subduing sentiment further. As for the global scene, after the financial crisis of 2008-09, economic recovery was patchy, uneven and fraught with risks. 2015 was no different, with world output growth slowing to 3.1% from 3.4% in 2014. Economic activity was marked by a modest improvement in advanced economies and slower growth in emerging and developing economies. While Europe and Japan stepped up monetary easing to brserve growth, improved outlook for the US prompted the Federal Reserve to raise interest rates by 0.25 percentage points towards the end of 2015. Commodity and crude exporting economies such as Russia and parts of Latin America slipped into recession, while Chinese growth slowed to 6.9% in 2015 from 7.3% in 2014. Chinese rebalancing towards consumption and services from investment and manufacturing contributed to weakening global trade and falling crude and commodity prices. Slowing China and weak trade also hit the Asian economies. Yet businesses continue to perform fairly well amid tough market conditions. CRISIL's international business grew significantly driven by opportunities arising out of changing regulatory environment, and our strong capabilities in the risk and analytics. The India businesses continued to strengthen their position in a subdued operating environment. CRISIL RATINGS India's economy and business environment remained subdued in 2015 due to weak demand and investments. However, growth seems to be clawing back on a modest recovery in consumption and increased government spending. Credit growth of India's banking sector remained muted at 11.1% year-on-year (y-o-y) as of December 2015. Poor monsoon, muted investments, weak working capital demand, rising risk aversion owing to deteriorating asset quality of public sector banks, and availability of cheaper funds in the commercial paper market slowed credit off take. The capital market witnessed an increase in activity in the third quarter of the year due to falling interest rates in line with easing policy rates. However, base rates of banks saw much weaker transmission; issuances were primarily driven by refinancing of debt and not by the need for capital investment. Hence the bond market which saw a big leg up in quarter three was again subdued in the last quarter. In 2015, CRISIL's bank loan ratings, or BLR, business witnessed muted growth due to weak credit offtake in the manufacturing sector and intensified competition. These factors adversely impacted average realisation. SME Ratings were impacted due to reduced budgetary support by Government of India under the NSIC - Performance & Credit Rating Scheme. However, CRISIL continues to serve small and medium enterprises (SMEs) without subsidy from the government and there has been an uptick in volumes in second half of 2015 due to enhanced efforts taken to scale the business. GAC continued to work closely with S&P, growing in new areas such as risk management and regulatory support, including model validation and documentation support, among others, while increasing the level of integration with S&P teams globally. CRISIL GLOBAL RESEARCH & ANALYTICS (CRISIL GR&A) (Includes Irevna, Pipal Research and Coalition) 2015 was another year of subdued growth for the global economy. Banks are actively transforming their front-, middle-and back-office activities to provide differentiated services, achieving cost efficiencies and increasing productivity, which have resulted in a large portion of their derivatives business being shifted to captives and to offshoring entities. The Risk & Analytics vertical continued to see good demand from banks in areas such as stress testing, model validation and regulatory change initiatives. New regulations such as the Fundamental Review of the Trading Book (FRTB) as well as increased demand for our services with banks and financial institutions in the areas of operational risk, credit risk, market risk, compliance analytics and risk infrastructure support have been growth drivers. In Financial Research, we have added clients across our business segments of the buy and sell sides, and credit risk. The majority of the incremental business has come from new areas and/or clients. Corporate Research faced a challenging business environment due to shrinking client budgets and restricted spends. Coalition delivered a strong performance, driven by its core Competitor and Client Analytics, which reported solid growth, Newer Analytics such as Cost/Operating Margin and RWA/ Exposure Analytics performed well, too. CRISIL Research maintained its dominant and brmium position in its flagship Industry Research business. However, debrssed investment cycle and weak performance of banks stemming from poor credit growth, high NPAs and squeezed profitability, impacted research business. Consequently, the growth of the Industry Research business remained modest with muted pricing growth. CRISIL INFRASTRUCTURE ADVISORY AND RISK SOLUTION (CRIS) • INFRASTRUCTURE ADVISORY CRISIL Infrastructure Advisory started the year slowly, but picked up momentum in the second half. It won several large and brstigious mandates in India and abroad. This has helped the business build an order book that's significantly larger than before. • RISK SOLUTIONS 2015 was a year of consolidation with investments being made in various products for CRISIL Risk Solutions (CRS). These investments are expected to play a key role in expansion and growth of the business and contribute to revenues over the next 3 years. ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULT OF OPERATIONS The financial statements of the group and its' subsidiaries have been combined on a line by line basis by adding together the book values of like items of assets, liabilities, income and expenses, after duly eliminating intra-group balances and intra-group transactions and resulting gains/ losses as per Accounting Standard 21 - Consolidated Financial Statements notified under section 133 of the Companies Act 2013, read together with paragraph 7 of the Companies (Accounts) Rules 2014. The accounting policies have been consistently applied by the company and are consistent with those used in the brvious year. The financial statements have been brpared under historical cost convention on an accrual basis. The management accepts responsibility for the integrity and objectivity of the financial statements, as well as for the various estimates and judgment used therein. The consolidated financial condition and result of operations are more relevant for understanding the performance of CRISIL. A. FINANCIAL CONDITION 1. Share capital The authorised capital of the company is Rs.10 crore, comprising 100,000,000 equity shares of Re.1 per share. During the year, the company issued and allotted 363,980 equity shares of the company to eligible employees on exercise of options granted under Employee Stock Option Scheme 2011, 2012 and 2014. The company also completed buyback of shares on July 16, 2015, pursuant to which 511,932 shares of Re. 1 each, fully paid-up, were purchased from the open market. Consequently, the issued, subscribed and paid up capital of the Company decreased from 71,357,055 equity shares of Re.1 each to 71,209,103 equity shares of Re.1 each. 2. Reserves and surplus Reserves and surplus, as at December 31, 2015, stood at Rs. 848.64 crore as against Rs. 841.21 crore in the corresponding brvious period. The growth in reserves is after recording an appropriation for dividend and dividend distribution tax of Rs. 197.37 crore and utilisation of Rs. 101.98 crore reserve for buyback of shares. 3. Trade payables Trade payables as at December 31, 2015, were Rs. 37.36 crore as against Rs. 38.60 crore in the brvious year. Trade payables include amounts payable to vendors for supply of goods and services. 4. Provisions a. Provision for employee benefits. The overall liability was Rs. 56.94 crores as on December 31, 2015, compared with Rs. 48.98 crore in the brvious year. The growth in the current year is in line with headcount and merit increase. b. Proposed dividend. The proposed dividend rebrsents the dividend recommended to the shareholders by the Board of Directors, which will be paid after the Annual General Meeting upon approval by the shareholders. 5. Other liabilities Other liabilities mainly rebrsent payables on account of withholding tax, service tax, other duties, unearned revenue, rent deferment and employee payables like bonus, salary and other reimbursement. Unearned revenue rebrsents fee received in advance for which services have not been rendered. Other liabilities were Rs. 289.20 crore as against Rs. 235.52 crore in the current year. Other liabilities were higher in the current year due to employee payable and unearned revenue. 6. Goodwill on Consolidation Goodwill on consolidation rebrsents the excess of purchase consideration over net asset value of acquired subsidiaries on the date of such acquisition. Goodwill is tested for impairment annually or more frequently, if there are indications of impairment. 7. Fixed assets Tangible assets The Company's investments in tangible assets rebrsent cost of buildings, leasehold improvements, computers, office equipment, furniture, fixtures and vehicles. During the year, the Company invested Rs. 26.20 crore in fixed assets. This included office equipment, computers and leasehold improvements to support expansion of business and to provide for replacement of existing assets. Gross block was lower mainly on account of classification of certain brmises as assets held for sale. Debrciation as a percentage of total income remained constant at 3% for the current year. The Company expects to fund its investments in fixed assets and infrastructure from internal accrual and liquid assets. It may, however, borrow to fund capital expenditure, if considered necessary. Intangible assets The Company's intangible assets are stated at cost of acquisition or construction less accumulated amortisation and impairment losses, if any. Intangible assets are amortised over their estimated useful economic life. During the year, the Company's net intangible assets were Rs. 19.06 crore as against Rs. 25.60 crore in the brvious year. 8. Investments and Treasury The Company's treasury position continues to be healthy and showed a marginal growth as funds were utilised towards share buyback The Company continues to maintain adequate amount of liquidity/treasury to meet strategic and growth objectives. The Company has ensured a balance between earning adequate returns on liquidity/treasury assets and the need to cover financial and business risks. The Company actively monitors its treasury portfolio and has a policy in place for investing surplus funds. Appropriate limits and controls are in place to ensure that investments are made as per policy. 9. Deferred tax assets We recorded net deferred tax assets of Rs. 36.26 crore as at December 31, 2015, as against Rs. 29.91 crore as at December 31, 2014. Deferred tax assets are recognised only to the extent that there is reasonable certainty sufficient future taxable income will be available against which such deferred tax assets can be realised. 10. Loans and advances Loans and advances comprise loans to staff, advances recoverable in cash or kind, sundry deposits and advance taxes. 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 rebrsent deposits for brmises taken on lease, electricity and others. As on December 31, 2015, loans and advances were Rs. 89.04 crore compared with Rs. 80.13 crore for the corresponding brvious period ended December 31, 2014. Growth in loans and advances was mainly on account of an increase in brpaid expenses and cenvat credit receivable during the year. 11. Other assets Other assets, excluding bank balances, as on December 31, 2015, were Rs. 58.11 crore compared with Rs. 51.78 crore for the corresponding brvious period ended December 31, 2014. Other current assets mainly comprise accrued revenue and mark to market (MTM) on outstanding forward contracts. 12. Trade receivables Trade receivables at gross levels were Rs. 211.68 crore as at December 31, 2015, compared with Rs. 156.15 crore as at December 31, 2014. Trade receivables constituted 15% of operating revenue, (rebrsenting an outstanding of 56 days of operating revenue) compared with 12% of operating revenue (rebrsenting an outstanding of 45 days of operating revenue) during the brvious year. Rating revenues witnessed drop in current year on account of reduced budgetary support from Government of India for the NSIC- Performance & Credit Rating Scheme for small and medium enterprises business. The large corporate ratings business was impacted by subdued domestic economic environment in 2015 and delays in decision-making by corporates. The medium corporate ratings (BLR) business witnessed muted growth due to weak credit offtake in the manufacturing sector and greater competition. Research revenue growth was driven by CRISIL GR&A's Risk and Analytics vertical on account of continued demand from banks in areas such as stress testing, model validation and regulatory change initiatives. Coalition delivered a strong performance, driven by its core Client Analytics. The India Research business was impacted by debrssed investment cycle and weak performance of the banking sector stemming from poor credit growth, high NPAs and squeezed profitability. The Advisory segment comprising infrastructure and risk solutions business grew by 4%. The infrastructure advisory vertical witnessed growth in revenue driven by a few large and brstigious mandates won. For the Risk Solutions business, 2015 was a year of consolidation with investments in various products to strengthen product base. Margins in Ratings were impacted on account limited budgetary allocation of subsidy by the Government and muted growth in large and medium corporate businesses. Research segment profitability grew 26% on account of improved performance by CRISIL GR&A business primarily in Risk and Analytics vertical. Advisory segment profitability was lower mainly on account of investments made in various products of the risk solution business to strengthen product base. Other income (net) Other income for the year was Rs. 43.22 crore from Rs. 23.69 crore for the corresponding brvious period ended December 31, 2014. Other income was higher on account of profit on sale of current investment and foreign exchange income in the current year. Expense Analysis Total expense for the year was Rs. 1017.46 crore as against Rs. 901.01 crore for the corresponding brvious period Operating revenue per employee recorded a healthy growth of 6% over brvious period. Operating cost was higher compared with the brvious year on account of increase in personnel expenses linked to merit increase. Profit per employee remained constant at Rs. 10.20 lakh which was achieved through a combination of revenue growth and improved productivity through automation and effective utilisation of resources. ANALYSIS OF STANDALONE FINANCIAL CONDITION AND RESULT OF OPERATIONS OF CRISIL LIMITED A. FINANCIAL CONDITION 1. Share capital The authorised capital of the company is Rs.10 crore, comprising 100,000,000 equity shares of Re.1 per share. During the year, the company issued and allotted 363,980 equity shares to eligible employees on exercise of options granted under Employee Stock Option Scheme 2011, 2012 and 2014. The company also completed buyback of shares on July 16, 2015, pursuant to which 511,932 shares of Re. 1 each, fully paid up, and were purchased from the open market. Consequently, the issued, subscribed and paid up capital of the Company decreased from 71,357,055 equity shares of Re.1 each to 71,209,103 equity shares of Re.1 each. 2. Reserves and surplus Reserves and surplus, as at December 31, 2015, stood at Rs. 668.02 crore as against Rs. 720.25 crore in the brvious period. The growth in reserves was 7% (excluding reserve utilised towards buy back) achieved through strong profitability despite a challenging business environment. The growth in reserves is after recording an appropriation for dividend and dividend distribution tax of Rs. 197.37 crore and utilisation of reserve towards buyback of shares. 3. Trade payables Trade payables as on December 31, 2015, were Rs. 24.26 crore as against Rs. 30.10 crore in the brvious year. Trade payables include amount payable to vendors for supply of goods and services. 4. Provisions a. Provision for employee benefits. The overall liability was Rs. 46.99 crore as at December 31, 2015, as against Rs. 40.75 crore in the brvious year (+15%). Growth in the current year is in line with headcount and merit increase. b. Proposed dividend. The proposed dividend rebrsents the dividend recommended to the shareholders by the Board of Directors, which will be paid after the Annual General Meeting upon approval by the shareholders. 5. Other liabilities Other liabilities mainly rebrsent payables on account of withholding tax, service tax, other duties and unearned revenue. Unearned revenue rebrsents fee received in advance or advance billing for which services have not been rendered. 6. Fixed assets Tangible assets The Company's investments in tangible assets rebrsent cost of buildings, leasehold improvements, computers, office equipment, furniture fixtures and vehicles. During the year, the Company's investment in fixed assets was Rs. 16.28 crore, whereas sale of assets realised Rs. 0.57 crore. The assets acquired included equipment, computers and leasehold improvements to support expansion of business and to provide for replacement of existing assets. The assets sold were mainly computers and furniture. Decrease in gross block is mainly on account of certain brmises being classified as asset held for sale. Debrciation as a percentage of total income for the ended December 31, 2015 was 2% as against 3% in the brvious year. The Company expects to fund its investments in fixed assets and infrastructure from its internal accruals and liquid assets. Intangible assets The Company's intangible assets are stated at cost of acquisition, software or construction less accumulated amortisation and impairment losses if any. Intangible assets are amortised over their estimated useful economic life. During the year, the Company' net intangible assets was Rs. 0.13 crore as against Rs. Nil in the brvious year. 7. Investments and Treasury The Company's treasury as at December 31, 2015, was Rs. 400.73 crore as against Rs. 413.60 crore in the brvious year. Cash and cash equivalents constituted 40% of total assets and remains same over the period. The Company's treasury position as on December 31, 2015 is marginally lower over the brvious year, mainly on account of payouts for dividend and the buyback programme. The Company continues to maintain adequate amount of liquidity/treasury to meet strategic and growth objectives. The Company has ensured a balance between earning adequate returns on liquidity/treasury assets and the need to cover financial and business risks. The Company actively monitors its treasury portfolio and has a policy in place for investing surplus funds. Appropriate limits and controls are in place to ensure that investments are made as per policy. 8. Deferred tax assets We recorded net deferred tax assets of Rs. 28.04 crore as on December 31, 2015, as against Rs. 21.66 crore as at December 31, 2014. Deferred tax assets are recognised only to the extent that there is reasonable certainty sufficient future taxable income will be available against which such deferred tax assets can be realised. 9. Loans and advances Loans and advances comprise loans to staff, advances recoverable in cash or kind, sundry deposits and advance taxes. 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 rebrsent deposits for brmises taken on lease, electricity and others. As at December 31, 2015, loans and advances were Rs. 199.98 crore as against Rs. 227.86 crore for the corresponding brvious period ended December 31, 2014. 10. Other assets Other assets, excluding bank balances, as at December 31, 2015, were Rs. 17.60 crore as against Rs. 19.16 crore for the corresponding brvious period ended December 31, 2014. Other current assets mainly comprise interest accrued and unbilled revenue. 11. Trade receivables Trade receivables at gross levels were Rs. 147.72 crore as at December 31, 2015, as against Rs. 138.11 crore as at December 31, 2014. Trade receivables constituted 15% of operating revenue, (rebrsenting an outstanding of 56 days of operating revenue) and remains same over the period. The improvement in operating cycle over the brvious year was on account of focused collection efforts throughout the year. The Company believes that outstanding trade receivables are recoverable and it has adequate provision for bad debts. Provision for doubtful debt balance as of December 31, 2015, was Rs. 12.59 crore as against Rs. 11.51 crore as on December 31, 2014. Provision for bad debts as a percentage to revenue for the year ended December 31, 2015, was 1.32% as against 1.27% for the year ended December 31, 2014. Revenue Analysis Ratings revenue witnessed a drop in the current year on account of reduced budgetary support from Government of India for the NSIC- Performance & Credit Rating Scheme for small and medium enterprises business. The large corporate ratings business was impacted by subdued domestic business environment during 2015 due to weak investment demand and delay in decision- making by corporates. The medium corporate ratings (BLR) business witnessed muted growth due to weak credit offtake in the manufacturing sector and greater competition. Research revenue growth was driven by CRISIL GR&A's Risk and Analytics vertical on account of continued demand from banks in areas such as stress testing, model validation and regulatory change initiatives. The India Research business was impacted by the debrssed investment cycle and weak performance of the banking sector, brssured by poor credit growth, high NPAs and squeezed profitability. Other income (net) Other income for the year was Rs. 44.60 crore from Rs. 32.04 crore for the corresponding brvious period ended December 31, 2014. Other income was higher mainly on account of profit on sale of current investment and foreign exchange income in the current year. Expense Analysis Personnel expense growth of 10% was on account of merit and headcount increase in the current year. Increase in other expenses is mainly on account of professional fee expenses that are linked to revenue growth. Revenue and average profit per employee were Rs. 27.51 lakh and Rs. 7.95 lakh, respectively. CRISIL will continue with its initiatives to improve its revenue and profit per employee through business process re-engineering, making the processes more efficient and effective use of technology. Interest The Company continued to be debt-free during the year and therefore, did not incur any interest expense. C. RISK MANAGEMENT The company has in place a robust risk management framework with overall governance and oversight from the Audit Committee and Board of Directors. Risk Assessment is conducted periodically and Company has a mechanism to identify, assess, mitigate and monitor various risks to key business objectives. Risk Assessment is a combination of bottom-up and top-down view of key risks facing the business across all segments and functions. All the risks were reviewed and assigned probability of materialisation and potential impact based on deliberations with business leaders and independent assessment. Mitigation plans are designed, implemented and monitored on quarterly basis. Key business risks and mitigation strategy are highlighted below. 1. Business risks To mitigate the risk arising from high dependence on any one business for revenues, the Company has adopted a strategy of diversifying in new products/services and into different business segments. To address the risk of dependence on a few large clients and a few sectors in the business segments, the Company has also actively sought to diversify its client base and industry segments. The Company strives to add value to its clients by providing services of a superior quality, and maintaining a robust franchise with investors and end-users, to mitigate the risk arising from slowdown in global economy and competitive pricing. Repeat business from large clients in the research segment, nevertheless, continues to contribute significantly to revenue. The Company carries reputation risk for services rendered, especially in rating business. CRISIL's ratings process is designed to ensure that all ratings are based on the highest standards of independence and analytical rigour. 2. Foreign exchange earning risk CRISIL foreign currency revenue earnings are significant and any apbrciation or debrciation in the rupee can have a significant impact on revenue and profitability. The company has in place a well-defined hedging policy and process designed to minimise the impact of volatility in foreign exchange fluctuations on earnings. We evaluate exchange rate exposure arising from these transactions and enter into foreign exchange hedging contracts to mitigate the risks arising out of movement in the rupee (INR). The hedging programme covers a large portion of projected future revenue over a 12-month period and is restricted to standard forward contracts and options. Overall, the company has not faced any significant negative impact on profitability on account of currency fluctuation. Appropriate internal controls are in place for monitoring the hedging programme. 3. Policy risk The company derives a significant portion of its revenue come from Ratings services, which depend on several factors, including regulatory policy. The Reserve Bank of India (RBI) has mandated that a new Internal Rating-Based (IRB) approach be adopted from this year. The RBI has also specified that after implementation of the IRB framework by a bank, there should be a transition period of a minimum of two years during which banks will have to calculate minimum capital requirement using the IRB Approach as well as the Standardised Approach of Basel II. Most of the banks are in the process of building infrastructure to migrate to the IRB approach over the next 3-4 years. To mitigate the risk of dependence on mandated businesses, the company continues to pursue its strategy of diversification and globalising operations. It also seeks to build a strong franchise with investors by holding investor meets and seminars for improving transparency around ratings and rating methodologies, and showcasing the utility and benefits of ratings. 4. Human resource attrition risk CRISIL's key assets are its employees and in a highly competitive market attrition continues to be one of the key challenges. CRISIL continues to accord top priority to managing employee attrition by formulating talent retention programme and offering a competitive salary and growth path for talented individuals. 5. Legal and 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, compliance and legal functions advice the Company on issues relating to compliance with law and to br-empt violations. The Company Secretary submits a quarterly report to the Board on the company's initiatives to comply with the laws of various jurisdictions. The company also seeks independent legal advice wherever necessary. 6. Technology - related risks Information Technology is core to the operations of all CRISIL businesses. All technology services are governed through combrhensive policies and processes. These processes allow information access to personnel within the company based on identified roles. Audits are conducted regularly to ensure that implementation of policies and processes are satisfactory, and in line with internationally-accepted best practices; ISO certification of eight of our offices underscores our high compliance with policies related to Information Security and Management System. The company's business processes are automated through bespoke business applications that capture and maintain information regarding business processes, client agreements, reports generated and assignments delivered, thus creating adequate database for our knowledge appropriately. The technology used by the company at all locations provides for redundancy and for disaster recovery. For critical business processes, the business teams have defined a business continuity plans and have tested it with the help of the IT team. The technology department keeps abreast of changes, and suitably undertakes projects for technology upgradation to keep the infrastructure current, and to provide for redundancy. 7. Internal audit and Internal financial controls system The Audit Committee provides oversight of the Company's Internal Audit process. The Audit Committee reviews and concurs in the appointment, replacement, performance and compensation of the Company's Internal Auditor and approves Internal Audit's annual Audit Plan and budget. The Audit Committee also receives regular updates on the Audit Plan's status and results including reports issued by Internal Auditor and the status of management's corrective actions. Pursuant to the requirement of amendments in Companies Act 2013, the Company has institutionalised Internal Financial Controls System. Accordingly, key risks and controls across all businesses and functions are identified, and gaps are remediated, if any. |