If we are to compare the financial performance of Companies which have multiple verticals, which ratios/values does one need to take into account for the different verticals under the Consolidated parent business.
Any pointers would be quite helpful. I need to compare Edelwiess, JM financials and Aditya Birla Capital.
To consider of Edelwiss valuation , Why EX Insurance ROE (22%) need to be consider ? Why not actual ROE (17%)? When the Book Value will Increase , it will increase as per actual ROE right? After QIP ,itâs BV is 70 , so company is quoting at 4 P/B already for 17% ROE Business.It seems upside limited. Correct me if I am wrong.
Insurance business is a long gestation period business. it takes 8 to 10 years to turn around. Therefore, if one wants to compare company performance with past years than best is to do ex-insurance to understand the trend of performance.
Technically, yes all business should be considered for RoE, but in practice one aligns the parameter based on what s/he wants to see and derive. Different perspectives serves different purpose. And hence this approach.
Brilliant presentation by Rashesh Shah on Edelweiss growth story
Thanks for sharing. It was a great learning. I will hold on to Edelweiss
for as long as possible irrespective of market volatility.
One thing that I m concerned about low Promotors stack. Can any senior please clarify.
Disclosure :Invested
What I particularly like about them is that sow several seeds, way in advance, and few of them take care of next phase of growth.
Thatâs quite true for Edelweiss. They have a highly entrepreneurial culture and each of the businesses are run by CEOs with fair degree of operational freedom. Of course RS calls the shot eventually.
ET analyses scalability of ARC business. The news also mentions JM Financialâs ARC Business.
Am unable to find the ASSOCHAM-CRISIL Study âARCs headed for a structural shiftâ (Wrongly mentioned as âARC of Changeâ in the news report). That will be a good report to study further the scope of ARCs.
It is not possible to study a finance company without finding out the exact loan book. And then studying the people/cos to whom loans/financing have/has been advanced. Then Studying their capability to pay back. This is an almost impossible task. So when betting on a financial services company/bank the bet is always on the banker. Rashesh shah is a solid guy and the bet is on him as well as the edelweiss brand and Indian economy. But mostly on Rashesh shah.
I remember analyzing edelweiss in some detail almost 3 years back when they were getting off on ARC business and the question on my mind was why others are not doingâŚthis seems like a good business to be in.
So, essentially RS has had not just the foresight but right managerial skills ( directly and through his second rung) to build these businesses bottom up.
Edelweiss has alloted close to 62.7lac shares as ESOP during FY18 so far. Value of the same at current price is close to 160cr (~0.7%). Donât know what is the benchmark of alloting ESOPs like this. I am certainly not happy as a shareholder since this is not a tech company where we need to retain mission critical employees. Not averse to giving it to key leadership teams. Quite a few verticals witin Edelâs offerings are generic in nature. I am just worried if it becomes compensation tool in place of retention tool avoiding true reflection of employee costs.
Disc: Invested
Is the actual cost only 160 Cr? 160 Cr is todayâs value of the stock. By the time it is exercised, it might even be 3x or 5x that. 160 Cr is about one-third of the total employee cost as well. So in addition to making EBITDA and PAT look better, it also skews the valuation. I remember reading a complete chapter on the real cost of ESOPs in Mungerâs Poor Charlieâs Alamanack. It is fascinating how these small accounting trickery can make the P/L look rosy and make the EPS go up little by little while the real cost is hidden from plain sight.
How EPS will go up by providing ESOPs?Is not the number of existing shares also got increased which eventually decrease eps?
1,09,29,038 is the total number of ESOPs allotted during FY18. This is a staggering number (not so staggering if you see previous years) and is more than the 160 Cr by value pointed to by another boarder. I got this number by adding the numbers from BSE filing. If we take average price of stock as Rs.250 in fY18, this adds up to a staggering 273 Cr.
Number of shares is increased due to the dilution but the EPS increases because of the increase in EBITDA/PAT due to decrease in employee expenses. The increase in contribution of this to the PAT offsets the % of dilution. For eg. in Edelweiss, EBITDA will reduce by about 270 Cr if we expense ESOPs at current stock price. Since PAT is about 1/6th of EBITDA for EDEL, PAT will reduce by about 45 Cr roughly. which means TTM PAT will be 767 Cr instead of 812 Cr. Now number share of shares as of FY17 was 83.26 Cr. 767/83.26 = Rs.9.21 is EPS without ESOPs. Current TTM EPS with dilution is 812/(83.26 + 1.09) = Rs.9.64 is EPS with ESOP. You can see how EPS is higher with ESOP dilution magic by about 5%.
I have expensed the ESOPs based on current stock price but if you expense it higher, the difference will be even more! Expensing it at 2x for eg., will make the EPS 8.67 which is 11% higher! This is not even an unrealistic case since stock price has doubled from FY16 to FY17 and again between FY17 and FY18. The detrimental effects of this creative accounting will get even more deleterious when you use a P/E of 30 on the 90 Cr PAT difference, essentially making the stock 10% more valuable by just moving some numbers around.
You clearly havenât understood how Edelweiss operates.
First, the organization is focused on joint ownership and there is no rulebook that says only tech companies can give ESOP. It is one of the core tenets for RS. Each Edelweiss business unit is effectively a company in its own stead run by a CEO or equivalentâŚ
Second, I hope you realize that itâs ESOP not RSU and employees make money only if stock price at time of exercising the option is higher than at time of allotment.
Third, this is something you should have seen before investing. As you said, itâs not a new phenomenon.
Finally, remember that financial services is highly competitive industry. And talent is EVERYTHING!!!
Thanks .Very Helpful for the detailed explanation with proper data. You like guys made valuepick great. I will add this point in my investment checklist.
Agree. Cost/Tax to Edelweiss will depend upon at what price premium the ESOP has been offered. RSU could be at face value but ESOPs are not. Sometimes back Gruh has given ESOPs. I was wondering at the optimism of company because for months the stock price was below ~267, the esop exercise price. Now it is a different story.
@Gary24 - My point is simple. If you wanted your employees to own stock, purchase from the market and give them or advice them to purchase it from the market and pay them their full salary. That way the shareholders can value the stock more accurately and also be happy that their holding is not diluted year on year through ESOPs. Startups do it because they actually donât have money to pay employees and dilution and ownership are necessary there. For mature companies, ESOPs are just accounting gimmicks to produce rosy P/Ls.
