Check the below link ️:slight_smile:️
There are 2 key issues (i will not call them concerns because I believe they can and given management expertise probably will be dealt with);
a) Rising cost of funds will definitely hit Edelweiss, I have heard from a reliable source that already their latest round of funding was 2% higher than the previous one and this was just before all this turmoil. Post this it would definitely be higher for the entire industry.
b) High exposure of business to capital markets, unlike a Bajaj finance Edelweiss’s excellent RoE is heavily dependent on capital market linked businesses, the AMC, wealth management etc. With capital markets being what they are and given they will possibly take time to recover, this end of the business may stay a bit depressed.
Some excellent analysis has been done by @Anant on the bond portfolio but tough to get a handle on how serious that situation is, if there is contagion investors are probably screwed but one can maybe give benefit of doubt to management given past record.
However it seems to me most of those concerns are more than captured in current valuation. I mean these prices we seem to think the industry is having some Lehmann moment. I mean IL&FS all said & done the problem is more of a cash flow mismatch and immediate term liabilities from what i understand are some 7000 odd cr in a total debt of 91000 cr. What is the probability of systemic contagion for an amount 7000 cr in a situation when you have shareholders like LIC!! (sarcasm intended).
We have come out of a bad loan problem many magnitudes higher and till yesterday all NBFC’s were darlings with excellent assets, stunning growth, 5-10 year story of taking away market share from PSU’s, riding the Indian consumer growth story, financialization story etc etc. Has any of this fundamentally changed, not really - only perception has…
Broadly while growth will slow, the real risk in Edelweiss IMHO is that while business will still do well but valuations may not in the short term. Just in the way post demonetisation Ujjivan and Equitas have not commanded the valuations they used to even though business has recovered because of the change in risk perception. So business may be impacted marginally but valuation may be impacted more substantially, but if one is willing to play a waiting game and add positions slowly (not catch the falling knife at one go), in 2-3 years this “crisis” may be a excellent entry point…
HDFC Bank has issued 24.84cr shares as part of ESO schemes in last 6 years bringing their stake down from 23.73% in 2010 to 20.93% in 2018. ESO schemes have been issuing decent chunk every year lately. Below is the screenshot for everyone’s reference:
Not trying to defend Edelweiss’ ESO practices. Just wanted to share the data so that we all have better look at how ESO schemes are being practiced at the best bank of the country (compared to Edelweiss) and interpret the data in a rational manner. I have seen similar practices at most NBFCs and private banks too.
@phreakv6 - would HDFC Bank’s ESO scheme practice (and ignoring all other factors) in last 6 years keep you away from it? You don’t have to answer if you don’t want to but I was just curious to know your comment here.
Thanks for bringing HDFC’s ESOS into the picture. I did not know this was an industry-wide practice. This does not make this any better in my mind though just because HDFC is doing it. I have a negative view towards financials in general as I explained in this post. I can understand ESOPs in start-ups but I did not expect to see these in mature businesses like these. I feel that a 1% dilution of market-cap if expensed in P/L under employee cost could skew valuations quite a bit. I don’t believe these incentives are required in the financial space which is already rife with enough bad incentives.
Financials have max weight age in Sensex and Nifty. Because they have created the max wealth till date in the country as a sector.
No other sector comes close to this level of wealth creation.
Guys simple question and correct me if my analysis is wrong:
Edelweiss raised money in troubled times at 11%, Bajaj Finance in the same time at 8.5% isn’t this separating men from boys.
In lending business this is huge GAP and all the more case to stick/move to Bajaj Finance
@ Raman - we would be comparing apples and oranges
We need to understand that the books are completely different. Bajaj Finance lends to Retail where market perceives lower risk and hence borrowing cost is much lower. Plus the parentage of Bajaj Finance is definitely a big advantage (you do get support from financiers if you are part of a big business house for example borrowing of Tata Housing and Godrej Housing is at least 25 to 50 bps lower than any other similar well managed standalone real estate companies)
Edelweiss has a corporate book (though it has now diversified the book to retail and is targeting a 50% retail book) and market rightly perceives that the risks are higher which is reflected in their borrowing costs (spreads of Edelweiss are lower but I am just comparing charges here)
Correct, for the same reason why not buy Bajaj finance than edelweiss as we are here to to make money than satisfy our EGOs isn’t it…Bajaj finance is leader of NBFC space and best stock available in this space…
Do you have any source to suggest Edelweiss raised @11%. I never saw this as confirmed news anywhere and I believe this is part of rumour mill. As far as I know Edel’s liquidity position is quite comfortable. Their balance sheet management unit is precisely for this reason. Bajaj’s consumer durable loans are for 6-8 months and hence there is no comparison.
If TCS is better than Infosys, does it mean Infosys is bad, or for that Matter any such comparison?
Edelweiss gets loan at 11% and Bajaj at 8.5% so we should buy bajaj, if that’s the logic it is totally flawed…
If it was so simple how could Edelweiss even exist, Bajaj Finance can capture all the Business of Edelweiss and why only Edeleweiss of all other NBFC’s in the market with that 2.5% or whatever Heads UP?
The two companies have different strategies and cater to different needs, this is not a Monopolistic market where a single player can capture all the market!
Yes if someone believes in highly concentrated Portfolio with only and only one stock per sector, he will need to evaluate what to do. But if someone takes a basket approach, he knows what is the right strategy.
I would love to buy Bajaj Finance (definitely a great business) but not at this market prices the price. Maybe at 1000 levels it’s worth a look.
Edelweiss is currently rated AA which would improve with time as they are diversifying its books with retail portion set to touch 50% of the book & with more cash on books (management after recent scare has indicated it would maintain 15% of the same from 10% currently) its rating would improve to AA+ / AAA and the cost of borrowing would automatically come down by 50 to 100 bps and help Edelweiss improve its ROE and ROA in medium term.
Further the free cash flow Edelweiss is currently making from it’s Non Credit Business is roughly Rs.400+ Cr. would allow it to grow its credit business with lower equity dilution.
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…
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
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.
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
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