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.