Edelweiss Financial Services

I never Said that edelweiss is BAD, I just said that if I need to choose I will choose Bajaj Finance and I dont believe in “little bit of this & little bit of that” and then keep your finger crossed at least one of then will come good… in Simple term I believe in concentrated PF and as per your response you also feel that Bajaj finance ie better than edelweiss as they have more diversified business Model and superior parentage which get the edge to get money from market… I dont have anything against Edelweiss but I prefer Bajaj finance Over Edelweiss…

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OK got the point that you prefer Bajaj Finance more than Edelweiss and you believe in Concentrated portfolio and not little bit of this and that…
In that case i am not sure what is the need to create Posts on This thread with no value addition? just to tell that you like some other script more, well if that’s it , point taken!
No more arguments needed just for the sake of it.
Disc: Invested in Edelweiss & Bajaj holdings

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Hello All,

The recent series of posts had very little constructive discussion and value addition. Kindly see whether your post is helping add value and carrying the discussion forward.

It is always good to have arguments both for and against an investment, but please bring in structured points backed by hard facts and let the other side defend them with counter facts.

@basumallick @manish962 Please delete non value additive posts to clean up the discussion

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ESOPs are quite a common practice in big companies worldwide… They are a great tool to align the interest of employees and shareholders… The ESOPs generally are vested if the performance KPIs are met by the employee. The company would otherwise pay cash bonus instead they pay the money in options which are not vested immediately but over a period of time. To give an example, if an employee achieves its sales target he is entitled to a bonus of 100. Company would pay his cash bonus of say 50 and remaining 50 in the form of shares which he will get over say 3 years if he stays with the company. So at any point in time, an employee will have an incentive to stay with the company given the unvested options.
From an accounting point of view, Indian standards are fairly clear and the costs related to ESOPs are included in the P&L. Please note the extract from the AR of Edelweiss on their policy re accounting for ESOP.

When you like companies with higher promoter holding, the same principle should be applied managers with shares because they have skin in the game and our interests are aligned with their interests.

What should be a concern is if the ESOP are way higher than what the industry norm is.

Disclosure: Invested and forms big part of my portfolio

Esop is a common practice in many companies but is not good for shareholders as stated by @phreakv6. The stock options are not accounted for in financial statements. They are not listed as a cost and therefore result in an understating of true employee costs and a corresponding overstatement of net profits.
Here is the similar view of Warren Buffet on ESOP https://www.gurufocus.com/news/147031/warren-buffett-discussion-on-stock-options

Some more extracts from the 2018 AR suggesting that the ESOP cost is included in the P&L. It’s a standard accounting practice…

Any CA who could confirm if the accounting standards in India have changed to not require the inclusion of ESOP costs in the P&L…

ESOP accounting under intrinsic value - If share
Price is 200 and option is issued at 200 with vesting period of 5 years. At the end of 5 years, the share price is say 300. Then gain to employee is Rs 100 (300-200). However intrinsic value at year zero is NIL (current market price - issue price). Therefore there is no cost booked in PnL. Not sure about Edelweiss but Most IT companies issue options at prevailing market price at the date of grant.

However, ESOP accounting under fair value method - Fair value of option is measured at the date of grant using a valuation model like Black & Scholes or Binomial model. In the same e.g. above, fair value would be say Rs 80 after taking into account rate of discount, volatility, expected rate of return etc. Now this fair value of Rs 80 is recognised as cost over the vesting period.

Under previous IGAAP, which method of accounting to chose was optional and most chose intrinsic value method. But now under IND AS 102 - Fair value accounting is mandatory.

To summarize, cost booked in P&L is higher under Fair value method vs Intrinsic value method

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Below are things that’s is pulling down
General market sentiment about NBFC after ILFS episode
Rumour that Edelweiss borrowed at 11%
Having Infibeam as ‘Arbitrage position’ in Edelweiss wealth management ,even though I know 'Arbitrage 'will not have any impact

Please correct my understanding ,if there is something else to be worried about .I am hoping to increase my holding further

adding to the list
Asset management and broking is a cyclical business and with market perception on a bear market the growth in that segment could slow down as well

Disclaimer: invested and would add further

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Good update on liquidity and growth expectation. They are admitting slower growth but diverse biz to see them through

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Taken from Edelweiss liquidity report

Demand for credit is steady, however, growth may taper down by around 10 -12 percentage
points for the market; NIMs likely to see an expansion.

Both Edelweiss and PEL has pointed to rise in NIMs ? Do we know why?

Shorter term liabilities (CPs, Banks loans etc) and variable rate assets get repriced faster in the rising rate environment. When they are attempting to reduce shorter term liabilities and with unchanged ability to price their assets higher means NIM expansion.

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Rashesh shah in his latest interview to business news channel has mentioned that they have already hiked the rates in anticipation of higher cost of borrowing going forward so NIM will expand.

Good NBFCs would be facing capital scarcity (as usage of CPs as a funding tool would reduce from current 15% of funding need to ~5% of funding needs, NBFCs have to depend upon undrawn bank lines, Medium Term Bonds and Tier 2 Bonds for their capital needs which would increase their cost of borrowing), so one way of preserving capital is by asking for better risk adjusted rates from client (currently being flush with money NBFCs were really chasing Book size more than profitable growth) and since loans are not so easily available clients would be forced to accept higher rates leading to higher NIMs (right now good projects and bad projects had virtually little Interest rate difference)

P.S - I won’t call it higher NIMs per se more like better risk adjusted returns

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This is a very good development for Edelweiss ARC. They could make a killing here as they have good exposure. Just few weeks back they bought loan from HDFC Bank @60 cents to $ and now they can hope to make a full recovery.

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Note sure why everyone is going into a dozen interpretations, this is just classic mean reversion. Edelweiss operates a risky whole sale lending book with cyclical capital markets on top. It is not a comparable to a Bajaj Finance by any metric (which doesnt deserve a 7x P/BV as well but thats a different story…

The froth in valuation post the demonetisation liquidity boom, is just being taken off. See the rolling P/BV chart of Edelweiss and Bajaj finance below. When the P/BV hits Oct 2016 levels, we are back to sane territory

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Cud u post the link or transcript of this interview please?

It was posted by me already. Refer the link that’s posted along with the message where during the conversation Prakash Diwan has mentioned that few days ( few days from fall of DHFL ) back only edelweiss raised funds at 11% and no one/mkt paid much attention to it etc etc

Any thought on (1) Main reason of serious correction and not holding ? (2) Red flags