Edelweiss Financial Services


(ANANT JAIN) #244

At the cost of repeatation for ‘Stock In Trade’ this is what is mentioned in AR:

If we look at what was held in Stock In Trade in FY17 almost 56% of it was sold 46% was carried over. Would it not be fair to assume that Stock In Trade is AFS.

Agree. They do not talk of corporate bonds.


(ANANT JAIN) #245

Two more observations here although minor in nature:

Take a look at one of the entries in ECL Finance:

This got matured last year may and was not present in this year’s debentures and bonds but if you look below:

The company acquired debentures in the same company at significantly higher coupon (300 bps). On the face of it this looks like evergreening but may be management can have some explanation.

Another thing relative small but where MTM should have happened Edelweiss investment in Catholic Syrian Bank (CSB). Edelweiss bought 4% of CSB around 19 lac shares around 2010. This investment has been carried on the books of different subsidiaries of Edelweiss at Rs 225 a piece. In my opinion there is a case for significant diminution in value. CSB made a rights issue in 2015 at Rs 75. It was followed by dilution at Rs 120 and the book value at the end of FY18 was 105, now most recently a stake sale has happened at Rs 140 to Fairfax,

CSB investment was present in the books of Edelweiss Finance and investment last year not sure where it has been moved to this year.


(sachit) #246

@Anant, Gonibedu coffee estate is part of Cafe Coffee Day I think. I saw their name in the prospectus. So not much risk there.

Not sure about CSB, but figure looks small. Although I do have 1 question - Why did Edelweiss not subscribe to rights issue at 75? That would be a very silly thing to do on their part after investing at 225. Do you think we may be missing something? The above snapshot that you presented, is it for the last year? Because number of shares are still 19 lakhs, ideally they should have been more after rights issue. Also, I could not find Edelweiss name in the list of top 10 holder of CSB, ideally it should be there. Is it possible they have sold their stake?


(ANANT JAIN) #247

Thanks for clarifying on Gonibedu as I said there could be possible business reasons but the point is to explore them.

On CSB: Around 2010 there were many institutions interested in acquiring CSB so that they can get a universal banking license and Edelweiss too was interested due to the same. Why Edelweiss did not participate in Rights isssue could be that they no longer had the strategic objective of becoming a bank.

Both the CSB rights issue and Gonibedu loan could have a valid business explanation. The concern is more in terms diminution in value of financial assets which probably has not been addressed properly.

With dilution done last year Edelweiss no longer remains in the top 10 shareholders.


(1.5cr) #248

Cant these be coming from their arc vertical??
This could be from the ARC business right?
Is this a long term hindrance for shareholders of edelweiss? So far mgmt seems to have done everything right!
Im sorry Im not a veteran investor please excuse my lack of understanding.


(rupaniamit) #249

Anant - my comment on your point that you raised above regarding MTM adjustments in the bond values:

As we know, if there was any MTM loss taken because of decrease in value of corporate bond, it would have passed through P&L decreasing bottom-line (gain in bond value also passing through P&L increasing bottom-line).

I looked at last 5 years financial statements of ECL Fin and Edelweiss Consolidated to check if/how MTM in current assets impacted the numbers. Below is what I found:

I would take Consolidated numbers with big pinch of salt as we know there are tons of moving pieces in the consolidated numbers. If MTM loss come under “Other Expenses - Diminution in value of investments”, then ECL Finance has not taken any big MTM hit. In fact, for FY18 there has been reversal of 12.8cr for ECL Fin.

I would request someone else to reconfirm my findings. Also, please correct me if MTM losses don’t come under “Other Expenses - Diminution in value of investments”.

Without going into the technicalities of valuing a bond - I noticed most of these bonds had coupon greater than 12% and some were as high as 20% with duration of 2-4 years left for maturity. I don’t know what their current Yield to Maturity is. To keep things simple - if 10 year GSec yield is 8% (it would be much lower for smaller durations) - and if most bonds coupon is north of 12%, Gsec yield moving from 8% to 9% would not impact as much to price of shorter duration bonds with very high coupon rate. It would impact more to longer duration bonds with their YTM/coupon closer to 8-9%. A bond downgrade or late/default coupon payment would be a bigger drag on price than 100-200 basis points yield movement for such short duration high yield bonds.

Re: Long term viability of ECL Finance corporate debt and ALM and liquidity issues: If above findings confirm that major MTM losses were not taken in the past, then it shows that BMU team is capable of managing liquidity and ALM.

Please note that I am not giving Edelweiss BMU team a 5 star award for best treasury management based on above findings. Just wanted to share my findings with you and other participants.

On a separate note - I found that PEL (housing finance subsidiary) has about 2136cr (current) and 9354cr (non-current) investments in unquoted debentures to many private small players which makes up approx 25% of their assets. Below is a screenshot. These definitely don’t seem like super liquid investments. IMHO - it’s part of business to invest in such instruments and having a top-notch management to maintain ALM and liquidity is the differentiation between quality and ordinary lending business. For me management is super critical in lending business.


Disc: I hold PEL and intend to hold both PEL and Edelweiss forever unless there is structural change in lending business or any corporate governance issues are uncovered. Hence my views may be biased.


(ANANT JAIN) #250

I agree with you on this that for shorter duration bond the impact is not significant since there is no compounding of interest and also I agree with you on that higher the coupon lower the impact. Very simplistically the loss for Rs 100 bond for a 10% coupon and 1 year in maturity and with annual payment is 100 * (1.1/1.11) = 99.09 and the same bond with 20% coupon 100*(1.2/1.21) = 99.17 when yields go up by 1%. But as maturity goes up the losses increase, so the same bond with 2 year maturity would now be at 100*(1.1/1.11)^2 and so on. Rough loss are in multiples of .9Years to maturity.for 10% coupon and .8Years of maturity for 20% coupon. So on a 7000 cr portfolio held for ‘Stock in Trade’ and an average maturity profile of 2 years the MTM losses would be roughly 140 cr (I am not considering the rating downgrades) for a 1% yield going up.

Piramal Housing: A cursory look at Piramal Housing makes me think that they have done it the right way and feels good to look at it after looking at ECL. The key difference being that there is no ‘Stock in Trade’ portfolio. The current and non-current Corporate bond investments are in all likely on account of their maturity in the coming year or years after that respectively. Most (or all) of their portfolio looks HTM. Also the Current investments:Non-current investments ratio is 4:1. The only thing which I did not understand is that all the investment origination is new (probably moving from one subsidiary to another).


(atul1082) #251

In my opinion, if the shares of CSB r kept as colletral​, the ownership does it get transferred to the lender.


(jainnitinp) #252

(jinushah) #253

funding through structured bonds is one way of corporate lending book. Its part of structured financing including promoter funding. These structures are being done by large corporate funding books like Piramal, ECL, ABFL, Kotak (through various entities), avendus, Indostar. These are part of collateral based lending. After this quarters INDas adoption, NBFCs will have to be transparent in disclosing their credit losses, its now akin to Insurance reserving, it will be based on expected credit loss and life time loss has to be taken in to consideration along with data of portfolio performance of past few years. These deals prima facie looks risky, however it totally depends on structuring and underwriting of these structures. Many Wealth management entities does this for their wealth clients. We need to trust management for these structuring and underwriting.

For Edelweiss there the headwind is interest rates however it doesnt seem to be a long risk. However there are many tailwinds. The SEBI cap will give level playing field for smaller Asset Management companies, also large part of their Asset management is AIF ( not MF). AIF is still at nascent stage in India.
Wealth management has just started off the tipping point.

Insurance also will eventually have level playing field considering regulations. NBFC and ARC is doing well and eventually am hearing they have banking aspiration.


(dprashant) #254

He has mentioned that edelweiss raised some funds at 11% recently during last 8-10 days.
Does any one knows about it ? Purpose , duration etc ?


(1.5cr) #255

Why would edelweiss raise at 11%?? Seems to be an odd move. This entire saga might give us a good entry price. Unfortunately Ive take bulk of my allocation at 260… Edelweiss getting into banking could be a massive story. I would like some views on that:)


#256

(Growth_without Debt) #257

Nothing changed in recent past but only sentiments. Why Edelweiss is hammering seriously? It has unique difference compare to simple NBFC - (1) ARC (2) Wealth Management (3) Life Insurance , etc. Excellent management proved by more 15 years of excellent growth and profitability. I thinks this is good opportunity if you believe India story where BFSI is crucial for projected GDP growth.
This bad time will consolidate sector and company with excellent underwriting and management will grow faster than past !!
Disc - started buying at this attractive level (waiting since long !!)


(niravacharya) #258

I think that this scenario will bring excellent entry points for NBFC sector.
My personal opinion is that nothing of this will matter if you look 5 years in future… Only thing matters is that good companies will continue to perform over long periods of time…

Everything is forgotten within 3 years…
e.g. Demonitisation, GST impact, Trump in White House, Brexit, Greece scenario, etc… which is long long list…

Disc: Invested and increased position.


#259

Be cautious since the fall is extraordinary and it has fallen relentlessly. Mr Rashesh himself is saying that lending biz will be slow going forward and raising funds from banks is problematic. No doubt this is cheap on historical basis but one needs to keep his/her mind open. Liability side of the equation needs to resolved for the market to return the favour. Additionally, earnings in Q2 will differentiate men from the boys. Market will hammer down everyone and reward those who perform eventually. I would not be in hurry to increase my holding here.


(niravacharya) #260

Totally agree and that will give signals of good companies along with good entry points.


(phreak) #261

The Promoter holding has been on a steady decline for many quarters

This is not because the Promoter is selling stake but because of the steady dilution. This is normal for financial institutions but Edelweiss’s case is a bit different as a bulk of these are ESOPs.

What got my goat the last time I looked at this company was the ESOPs I mentioned here and here.

Looks like 2.8 Cr Equity shares were allotted in FY18 on exercise of options

16%20PM

In FY17 it was 1.8 Cr.

32%20PM

This seems to have been much lesser in the earlier years

Looks like the company and employees made hay with a QIP (5.4 Cr shares at Rs.280 is 1527 Cr) and stake disposed/pledged going by the disclosures. I still believe these skew the P/L in terms of accurate reporting of Employee costs. At least that’s what kept me away primarily the last time.


(dprashant) #262

They also have added employees very aggressively , currently their employees strength is 10K plus and are adding regularly and their target is to have around 12k by end of this year.
So may be it’s increasing with addition of new employee.
That’s purly a guess …have not checked or validated it basis data.


(Growth_without Debt) #263

Good news…stability in growth, improving margins and improving asset quality