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Evalueserve news; CRISILs rich valuation justified

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December 11, 2012

Rating Accumulate CMP Rs1,030

Previous Reco Accumulate Target Price Rs1,050

NA NA 5,899 19,387 n n n

Unconfirmed media reports suggest that promoter of Evalueserve (EVS), a KPO firm is looking to sell its stake at valuation of 12-15x CY11 EV/ EBIDTA or $250mn CRISIL trades at a higher EV/ EBIDTA of 26x CY11 which is justified, given its presence in more value added analytics, 25% higher rev/ employee, higher margins and RoCE CRISIL runs much profitable model with EBIDTA per employee in research business higher at USD16,500 vs. USD7,000 for EVS At CMP, CRISIL trades at 26x CY13 EPS with RoE/ RoIC in excess of 50%/ 100% respectively. Maintain ACCUMULATE with price target of Rs1,050

EPS Chg FY13E/FY14E (%) Target Price change (%) Nifty Sensex

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

1M 11 6

3M 13 3

6M 12M -4 -17 18 -1

Media reports suggest exit of promoters from EVS

Some media reports suggest that promoters of EVS, KPO firm are looking to sell its majority stake in the company at valuation of 12-15x CY11 EBIDTA or $250mn. Alongside high end analytics products like buy side/sell side research like IREVNA (CRISILs analytics business), EVS also offers data and process analytics.

Relative price chart

1100 Rs % 30 1050 20 1000 10

950

About Evalueserve
Evalueserve was incorporated in the year 2000 by Marc Vollenweider, a former Mckinsey professional and Alok Aggarwal, a former IBM employee as a knowledge process outsourcing firm. While the promoters hold 75%, 11% is held by Swiss family office IHAG Holdings, and the rest is owned by employees. The company provides a range of knowledge-based professional research and analytics services for clients worldwide, with offices across India, China, Eastern Europe, and Latin America. The revenue over the last five years has grown at a CAGR of 40% to $105mn in CY11. The employee strength as on CY11 crossed 2600.

900

-10

850 Dec-11

Feb-12

Apr-12 CRISIL (LHS)

Jun-12

Aug-12

Oct-12

-20 Dec-12

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector Non Banking Financial Company CRISIL IB 70 1 70 1,262/ 748 72/ 1,328 34,717 0.6
Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

CRISILs richer valuation justified

The reports suggest, the promoters are looking for a valuation of 12-15x CY11 EBIDTA or 2.4x Sales. As per media reports, EVS reported revenues of $105mn, with EBIDTA margin of 19%. Even on overall basis, CRISIL which derives ~50% of the revenue from research quotes at significantly higher 26x CY11 EV/ EBIDTA. CRISIL higher valuation is justified given:

Shareholding Pattern (%)

S'12 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg

J'12 53.0 11.1 16.6 1.6 17.7

M'12 53.1 10.9 16.6 1.6 17.9

It is present only in high end work for buy side/sell side research for investment banks, brokerages and financial institutions its revenue per employee is 25% higher at $50000 as against $40,000 for EVS It enjoys higher margins (overall research segment) at 32% as against 19% for EVS with EBIDTA per employees at USD16,500 vs. USD7,600 for EVS

53.0 10.6 16.8 1.7 17.9

Financial Snapshot (Consolidated)

Kashyap Jhaveri kashyap.jhaveri@emkayglobal.com +91-22-66121249 Pradeep Agrawal pradeep.agrawal@emkayglobal.com +91-22-66121340 YEDec CY10 CY11 CY12E CY13E Net Sales 6,284 8,070 10,072 12,901 EBITDA (Core) 2,189 2,625 3,247 4,168 (%) 34.8 32.5 32.2 32.3 APAT 1,645 1,877 2,252 2,788 EPS EPS RoE (%) 48.6 58.4 57.4 52.4 P/E 44.4 38.5 32.0 25.9 EV/ EBITDA 32.8 26.8 21.5 16.5

(Rsmn)

(Rs) % chg 23.2 26.8 32.1 39.8 23.5 15.5 20.0 23.8

P/BV 23.4 21.8 15.9 11.8

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CRISIL

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Event Update

Comparable Copal Partners was sold at much richer valuations

Moodys Corp. (MCO) acquired Copal Partners (CP) which is also into similar business as IREVNA in Q4CY11. MCO had acquired 75% economic interest in CP for a total consideration of USD193mn including USD60mn for acquiring a call option to buy residual stake from minority shareholders. CPs revenues for CY11 were estimates at USD50mn by various media reports, thus valuing the company at 5.1x CY11 revenues. Assuming the EBIDTA margins between 20-30%, the deal would value CP at 17-25x EBIDTA.
Exhibit 1: Financial snapshot CY 11, USDmn Revenues EBIDTA EBIDTA (%) No of employees Revenue per employee ($) EBIDTA per employee ($) Deal value/Sales Deal value/EBIDTA Evalueserve 105 20 19.0 2,625 40,000 7,619 2.4 12.5 CRISIL* 77 25 32.8 1,531 50,235 16,500 6.9 21.5 Copal Partners 50 NA NA 1,300 38,462 NA 3.9 NA

Source: Media Reports, Company, Emkay Research * also includes CRISILs domestic research business

Exhibit 2: CP's valuations on EBIDTA EBIDTA (%) Deal value (USD mn) EBIDTA (USD mn) Deal value/EBIDTA (x)
Source: Media reports. Company, Emkay Research

20% 193.0 7.5 25.7

25% 193.0 9.4 20.6

30% 193.0 11.3 17.2

Exhibit 3: Consideration paid by MCO for CP USD Cash paid Put/call option for non-controlling interest Contingent consideration liability assumed Total
Source: Company, Emkay Research

125.0 61.2 6.8 193.0

EVS deal valuation at par with other historical deals

As per the media reports EVS promoters are looking for valuation of about $250mn, which is 2.4x CY11 sales. CRISIL has done lot of acquisitions in this space over last several years which have also been valued in the similar range of 2.2-2.3x EV/ Sales. CRISIL has acquired these businesses in their initial stages and then scaled them up.
Exhibit 4: Comparative valuation of other deals Rs mn Year of Acquisition Acquisition Cost Revenue at the time of Acquisition EV/ Sales CY11 Revenues CAGR*** CrisInfac CY00 70 30 2.3 732 34% IREVNA CY04 771 331 2.3 3,104** 38% Pipal CY10 580 363 1.6 289 -20% Coalition CY12 2500 1162* 2.2 668 NA Evalueserve CY12/13 13750 5775 2.4 5,775 40%#

Source: Media reports, Companies, Emkay Research

* CY13 revenue assuming 30% annual growth over CY11 Revenues of Rs688mn # last 5 yrs ** Total of all IREVNA subsidiaries *** CAGR has been calculated from year of acquisition to CY11

Emkay Research

December 11, 2012

CRISIL

Event Update

Key Financials (Consolidated) Income Statement

Y/E, Dec (Rs. mn) Net Sales Growth (%) Expenditure Materials Consumed Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adjusted PAT After JV/MI E/O items Reported PAT Growth (%) 1,645 560 2,082 48.1 1,877 250 2,064 -0.9 2,252 50 2,287 10.8 2,788 0 2,788 21.9 CY10 6,284 22.1 4,096 793 2,616 687 2,189 16.9 35 213 2,109 33.6 133 0 2,669 587 22.0 1,645 21.3 26.2 CY11 8,070 28.4 5,445 935 3,581 928 2,625 19.9 33 298 2,505 31.0 178 0 2,755 691 25.1 1,877 14.1 23.3 CY12E 10,072 24.8 6,825 1,173 4,494 1,159 3,247 23.7 32 337 3,171 31.5 262 0 3,221 934 29.0 2,252 20.0 22.4 CY13E 12,901 28.1 8,733 1,481 5,768 1,484 4,168 28.4 32 559 3,927 30.4 318 0 3,927 1,139 29.0 2,788 23.8 21.6 Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Total Assets 1,086 587 510 1,247 2,139 1,677 462 1,291 2,977 879 928 539 2,082 2,853 2,319 534 1,575 3,177 1,097 507 539 2,673 3,326 2,536 789 1,490 4,242 1,405 333 539 3,673 3,921 2,928 994 2,028 5,808 2,275 -851 1,424 1 262 3,430 2,524 -1,081 1,443 6 159 4,428 4,011 -1,418 2,594 6 159 4,815 5,598 -1,976 3,622 6 159 5,949

Balance Sheet
Y/E, Dec (Rs. mn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities CY10 71 3,048 3,119 0 0 0 0 -142 2,977 CY11 70 3,238 3,308 0 0 0 0 -131 3,177 CY12E 70 4,464 4,534 0 0 0 0 -292 4,242 CY13E 70 6,030 6,100 0 0 0 0 -292 5,808

Cash Flow
Y/E, Dec (Rs. mn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position -2,478 -314 910 595 -1,674 342 595 938 -1,223 -431 938 507 -1,222 -174 507 333 CY10 2,491 213 -3 -559 -194 -650 2,110 -499 1,611 133 925 1,058 0 0 0 -1,681 CY11 2,493 298 -3 -164 665 -689 3,293 -264 3,029 178 115 293 0 0 0 -886 CY12E 2,904 337 -1 -262 255 -934 3,552 -1,487 2,065 262 0 262 -1 0 0 -1,222 CY13E 3,927 559 0 -318 288 -1,139 4,455 -1,587 2,869 318 0 318 0 0 0 -1,222

Key Ratios
Y/E Dec Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) 44.4 39.0 23.4 11.4 32.8 2.0 38.5 33.4 21.8 8.7 26.8 1.1 32.0 28.2 15.9 6.9 21.5 1.5 25.9 22.1 11.8 5.3 16.5 1.5 23.2 26.4 44.0 10.0 26.8 30.8 47.2 20.3 32.1 36.5 64.7 11.1 39.79 46.7 87.1 15.0 34.8 26.2 64.7 48.6 86.3 32.5 23.3 81.4 58.4 107.0 32.2 22.4 85.5 57.4 117.2 32.3 21.6 78.1 52.4 108.6 CY10 CY11 CY12E CY13E

Emkay Research

December 11, 2012

CRISIL

Event Update

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December 11, 2012

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