Edelweiss business is in INR, but then why do they report to BSE in $ and million denomination. ?
Buy side of FIIs requests it for their decision making and ease of global comparison/benchmarking. The company might be raising another round of funding before 2020 so it helps to get valuation.
If it is reporting to BSE, SEBI, NSE should it not be in denominations used as per Indian regulations.
brother, check again! they report ppt deck in both USD and INR.
In think you did not notice that it is there is an Indian Version in Rs Cr from page 66 onwards…
A good example of power of simplicity (explaining things simply) - thanks Mr. Rashesh Shah.
How the payoff works in an ARC model (under 85-15 structures)?
- On an average when we buy a Rs.100 loan we buy it at let say Rs.40 that has been the average. A loan which is in the bank at Rs.100, the purchase price for ARC is Rs.40 and up till now a large part of the book has been under 85-15.
- When we buy something at Rs.40 we put a Rs.6 of our capital into that and the other Rs.34 is bank’s capital or the bank’s security receipts in that. Now we have AUM of Rs.40 and our capital invested of Rs.6.
- On that Rs.40 we get fee, on the Rs.6 we get some interest also because these are credit assets which are earning some interest or the other or an average on the Rs.6 that we invest, we end up getting between Rs.1-1.10 as annual return which is what we call the 16% to 17% current normal yield.
- If you recover more than Rs.40 so if we buy it at Rs.40 and we recover exactly Rs.40, then on the Rs.6 we invested, we will get a 16-17% yield.
- If that Rs.40 gets settled at say Rs.30 we make a loss on that then our yield falls down from 16%-%17 to 11-12%.
- If that Rs.40 becomes Rs.20 then the yield falls down to almost equal to 0 which means we get back only the Rs.6 capital because on that fixed capital we will lose Rs.3 but we will get Rs.3. So, effectively we just broke even on that is on the downside.
- On the upside, when we buy something at Rs.40 and we settle at Rs.50 we should get an incremental IRR of about 3% to 4% cost on that.
- And if we buy it at Rs.40 and we settle at Rs.60, we should get another 3% to 4% points IRR.
So, if you buy it at Rs.40 and settle at Rs.40 you make about 16%-17%, if you buy at Rs.40 and settle at Rs.50, you get 21%, if you buy at it 40 and 60 cents to a dollar you end up getting 25% IRR so that is the broad way of estimating this.
Source: Q1Fy19 earnings call transcript (page 10 & 11) https://www.edelweissfin.com/documents/30595/238805/Concall%20Transcript%20Q1FY19.pdf
I was wondering how much can Edelweiss make from the Essar deal. The above explanation is good but it doesnt talk about the extension of timelines in debt resolution. So below is the list of loans of Essar that Edelweiss bought. As per Essar steel website, the exposure of Edelweiss ARC is about 7400cr. I have compiled this from few news articles and I see that some of the numbers vary depending on the source.
550cr in march 2015 from hdfc bank.
70cr in Dec 2015 from federal bank.
1600cr in jun 2016 from ICICI Bank. Discount was about 50%.
1000cr in sep 2016 at 55%discount from axis.
1600cr in July Aug 2017 from Indian overseas bank at 50%.
1000cr in aug18 at 30%discount from hdfc Ltd.
These components must be getting booked regularly all along.
Now what additional amounts can Edel get would be from the below part. And it does appear that Essar steel resolution can go to about Rs 75-80. So would total IRR be around 30%? Sounds unrealistic
Here is my calculation. For calculation of lumpy benefit, I have assumed 3 years for HDFC, Federal bank, 2 years for ICICI, Axis and 1 year for IOB amounts.
|Loan bought at (cr)||Seller||Discount||When?||Edel investment||Additional IRR assumption||Lumpy benefit|
|330||HDFC Bank 550cr||40%||Mar-15||49.5||12||70|
|42||Federal Bank, 70cr||40%||Dec-15||6.3||12||9|
|700||HDFC Ltd, 1000cr||70%||Aug-18||105||Negligible|
The total lumpy benefit is coming to 441cr, which looks a bit too much. Maybe this is where the timeline of resolution would effect the additional IRR, eg HDFC Bank exposure bought in 2015 would not earn additional 12% IRR ?
Can anyone help? @dd1474 @desaidhwanil
I think they do have clause of sharing upside with banks from which the loan was bought. I am not sure how do they book profit after concluding the deal. I think it happens when they get the fund reimbursed helping them redeem security receipts. So whole P&L booking could be spaced out.
You need to look at Q1 annualised RoE in ARC div. which touched whopping 25% and there is every reason to believe that in some of the upcoming quarters it could even touch 30% in this div. so IMO 30% is not unrealistic. This is also because some of these asset resolutions are getting bunched together. I was going through credit report of their ARC div and what I found very heartening that 57% of all loans/assets they have bought or managed (~43k cr) are resolved so they would become productive sooner than later. They have gone of another round of 10-15k cr fund addition in ARC which shows confidence in their biz model.
Yes…I remember reading somehwere that the ARC gets about 20% extra carry on the additional recovery that happens. This 20% generates the additional IRR and is booked at the time of final settlement. This is the lumpy part that I am trying to estimate for Essar exposure. I maybe completely off but if this calculation happens to be approximately correct, then it can be a large kicker, given that FY18 PAT was 890cr.
By the way…Edel holds 60% in the ARC so the 440cr will translate to 264cr
Broadly, I agree that Edel ARC is in a sweet spot. Many accounts are finally getting resolved so there will be lot of positive surprises in numbers. Also, the recent deals are moving to more cash components and therefore the large players will be able to grab these. The competition has been increasing with foray of many international players. But the market size is enormous.
yeah, they 3 sources of funds in ARC. 1) Equity and debt from owners Edel, CDPQ and HNIs 2) Managed funds from other investors typically AIF or wealth management looking for high yield fixed rate instruments 3) They also raise own debt.
Equity holders get 2% fund management charge + performance fee after hurdle rate. They also raise debt to deploy into companies at the cusp of revival at very high ROA. Equity size of ARC is 6-7k cr so even 3% RoA on 43kcr will make 20% RoE which looks perfectly possible in the medium term. It was widely reported in media that in one deal i.e. Binani cement they were supposed to make 500cr worth of profits
Sorry but I am not able to understand the methodology that you have used to arrive at additional IRR calculation. Can you please explain it a bit more? Also, I feel the template is too simplistic and we are working with limited information and lot of assumptions. So unless we are privy to deal details in each case, it is very difficult to project a number. However, I think 30% IRR is quite possible on case to case basis where evertthing work in their favour (steel cycle). Also, as we know, the key thing in getting deisred IRR is the timeline for resolution and as the resolution is delayed, IRR gets diluted. Also, like we do, we have to look at the IRRs on portfolio basis and I think they should be generating more than 20%IRR on portfolio, which is very respectable.
Thanks for the comments. Here are the steps that I followed for the calculation
Collect approx numbers from news articles on the loan bought and discounts from different banks. I assumed 40% in cases where discount info was not available. Eg HDFC bank loan of 550cr was bought at about 40% discount so that comes to 40%*550= 330cr.
Now Edelweiss contribution in this would have been 15%, ie 15% * 330=49.5cr.
Then I assumed an IRR based on the info as per concall. For eg, In case of HDFC bank loan which was bought at 40% discount, and the recovery is 80%, then IRR can be about 30%. So I took additional IRR to be 12%.
This 12% IRR in 3 years would give 49.5cr* (1.12)^3= 70cr
Maybe I made a mistake in last step. I should calculate 30% IRR on 49.5cr and deduct the regular interest that would have been booked by now. Possibly it should be = 49.5* (1.3)^3 - regular fee and interest income in 3 years
In Asset management - most of Edelweiss funds are performing poorly in terms of AUM, Performance, Ratings.
The top performing Fund - Edelweiss Arbitrage Fund has suspiciously large exposure to Edelweiss Group Companies
Also in Wealth management - majority revenue comes from broking/ distribution - which is likely to face serious threat from new technology, discount brokerages, new competitors like PayTM
I’m finding it hard to believe that Edelweiss will perform above the industry average in these two businesses
There is absolutely nothing wrong in edelweiss arb fund with regards to exposure in edelweiss, edelweiss is a solid and a well run business! I dont see anything wrong in this move.
So they have to grow their AUM and that has been growing very quickly over the years. When it comes to broking they usually cater to instituions… Its more of a institutional/HNI/UHNI brokerage.
So on the wealth mgmt side I dont see much of an issue. They have a number of products apart from vanilla MFs. Take a look at their AUM under advisory as well as their AIFs PMS etc: etc:. Edelweiss’s services are more suited toward larger ticket clients, hence their MFs underperforming is no big deal. If distributors like edelweiss they will either which way try and push edelweiss’s funds on retail investors. Anyway Their wealth mgmt business has alot more to it than just thier brokerage and MFs. This is my understanding and I might be very very bias…
Sorry, i didn’t understand the issue. You have chosen a fund which is 5 star with 4.5k cr of AUM which can’t be called small. Regarding holding in Edel debt securities, it is completely immaterial for Edel whoever holds outstanding debt once it has been issued. Allocation is also typically small. You need to keep in mind that Edel acquired JPM funds and they were under performing. They have very few schemes which are Edel original. I don’t track MF universe closely but funds have started doing relatively better after Edel acquired them. BTW, Edel arbitrage fund is 4th in terms of returns over 3 year.
I just made a fund house search on edelweiss on value research and can see few funds from edelweiss in 4 star ( large cap And a mid cap ) and 5 star ranking ( arbitrage fund,govt security etc)
They just started scaling up this business so we can expect ( and hope ) that they will only improve from here on.
As I write they aggressively scaling up their branch network ( I know as we are in discussion with them to supply some equipments required for branch rollout ) .
I don’t know branches will be of brokerage/insurance or other business of edelweiss though.
So let’s wait and see how they scale up their business.
Rashesh Shah has been alluding to this for some time now…the trend seems to be only strengthening with every qtr.
India is primed to double its size to a $5-trillion economy from $2.5 trillion at present over the next seven to eight years. Edelweiss Financial Services Ltd., with its fingers in all aspects of the country’s financial market, is the stock to bet on, said Stallion Assets’ Founder Amit Jeswani.