Edelweiss Financial Services

[princevegeta]

Theoretically I disagree with the above computation. Assume that the NBFC advances this entire Rs 1142 to a single customer. The total Debt in the system is the debt of the Final Customer only ie - Rs 1142 My logic is as follows

1- Suppose one makes a Consolidated Balance Sheet of the Bank and the NBFC, the loan given by the Bank to the NBFC will be offset against the Loan taken by the NBFC from the Bank. Therefore in the Consol BS, advances will be only what the NBFC has lent to their customer. Also, if the NBFC has sources it’s equity from its own funds (whether out of share issue proceeds or retained profits), the same will be addiditinal equity. So the total equity in the Consol BS will be Rs 100 of the bank and Rs 142 of NBFC= Rs 242.

2- Another way of looking at it is let’s assume a scenario where the final customer fully defaults on his debt. What will be the total loss in the system?

Scenario 1) if NBFC fully bears the loss and fully repays its Loan to the Bank. Loss to NBFC - 1142. Loss to Bank - 0.

Scenario 2) if NBFC only bears loss to the extent of its equity and in turn fully defaults on the loan taken from Bank. Loss to NBFC - Rs 142 (to the extent of equity), Loss to Bank - Rs 1000.

You can make this calculation for Any scenario in between where part of the loss is borne by Bank and NBFC - the total loss will not exceed Rs 1142.

Therefore in theory, the total debt to equity would be Rs 1142/242 = 4.72

However in practice, one would never be able to make such a detailed computation because of the cobweb of inter-se lending between banks and NBFCs. At the headline level, one would only hear that leverage of Banks is 10x and leverage of NBFCs is 7x.

That is why I believe Mr shah is stating that there is some safety built into the system. (Which people may not be fully appreciating)

Also, there are regulations like minimum capital adequacy norms that would prevent the situations you are fearing - large increase in leverage. I believe presently no Bank can go above 12x leverage in India, in 2007 you can check the data for American banks the leverage was incredibly high sometimes around 30x also.

[phreakv6]

@princevegeta

Therefore in theory, the total debt to equity would be Rs 1142/242 = 4.72

I don’t agree with this D/E calculation because it will keep reducing as the chain of (ir-)responsibility is extended which runs counter to basic logic I feel.

Debt creates credit creates debt and the cycle goes, in feedback loops. We cannot, not consider the total debt as debt on every individual balance sheet because that is the sum total of pain in the system because each entity is responsible for repayment of debt on its balance sheet.

I agree with what you are saying that the problem is solvable at a system level by making small calculated moves. It boils down to the problem being a liquidity problem or a solvency problem. If it’s the former, the reserve bank can step in (and it did proactively last week) and solve the issue and if it’s the latter, the govt. will have to step in, along with the central bank. Already every govt entity from LIC to SBI to NHB is stepping in, which means that this could also be a solvency problem. Time will tell.

[deeps2884]

Exactly. Banks do not have capability to lend plus they face policy restriction from RBI in lending to certain sectors. For example banks are not allowed to lend for “Land purchase” or “Capital Market” activities. Whereas NBFCs / HFCs are allowed to do the same.
Basically RBI does not want banks to lend in this sector as they believe banks do not have adequate risk assessment to give such loans (PSU banks tend to follow a checklist approach and may incorrectly lend). By lending to NBFCs / HFCs who in turn further lend, banks are in a way transferring the risk of such lending to NBFCs/HFCs.
Also their is a question of reach - reaching out clients in tier 2/3 cites and MSME clients is easily acheived by NBFCs & HFCs

[BreakingBad01]

Edel for its part has collateral cover on most of its credit origination and in general lends at 40-55% LTV. They are a risk averse lender. One can’t control temporary MTM’s but if they are able to hold these loans for the tenor, the defaults will be a tiny number. MTM and NPA are less important than loss given default. In the latter, Edelweiss’s credit origination has been excellent and with time that will show.

People can keep freaking out about wholesale funding issues but these are natural and par for the course for wholesale funded lenders. If anything such moments are rare opportunities if someone has a perspective of a full cycle. 7-10x leverage is nothing. Lehman and Bear sterns went belly up because leverage was 25-30x and temporary liquidity issues became permanent erosion of confidence and capital. With proper risk control, Banks can do 15-20x leverage without issues (look at some Australian banks for eg)

[princevegeta]

Connect the dots

1 - “Essar Steel is among the first 12 non-performing assets that RBI had directed banks to take to insolvency resolution in June 2017. The Ruia family-promoted company owes Rs 49,394 crore to its financial creditors and approximately Rs 5,000 crore to operational creditors.”

2 - “ArcelorMittal Picked As Winning Bidder For Essar Steel.”

3 - “As reported earlier by BloombergQuint, the global steel major had bid Rs 42,000 crore, the most among the three players in the second round of bidding. Numetal had bid Rs 37,000 crore and Vedanta had offered Rs 35,000 crore, reported Bloomberg.”

4 - “As on 10 September, Edelweiss ARC had ₹ 14,666 crore admitted claims of ₹ 49,394 crore of all Essar Steel’s financial creditors put together”

5 - Average discount on Edelweiss’s purchase price seems to be 30-50%

6 - If winning bid is at 80% it Face value of creditors, it means the overall haircut is only 20% (Ofcourse it would be wrong to take this overall average as the same haircut for all creditors, as some would preferred). My guess is that Edelweiss would have got atleast 10-15% extra realisation over purchase price (most of which would be abt 1 year old).

Again another example of disproportionate payoff in a successful resolution.

If the transaction is concluded in the next few weeks, the monetisation of security proceeds would be bonus cash inflow in these liquidity starved times.

Disclaimer - Invested and views biased, not a recommendation. Do your own due diligence

Source for 1-3 https://www.bloombergquint.com/insolvency/the-race-for-essar-steel-narrows-to-two-players

Source for 4 https://www.livemint.com/Companies/SSBMbaQ09wZisAPjP1rqxL/SBI-does-a-Uturn-on-stressed-assets-sale-seeks-deals-with.html

Source for 5

HDFC sells Rs 1000 crore Essar Steel loan to Edelweiss ARC

[princevegeta]

“In fact, for Edelweiss ARC, a large part of SR redemption will be due in the next two-three years as bulk of the assets were acquired after 2014. The SRs are generally redeemed over a period of five to eight years. Last year, Edelweiss actually redeemed SRs worth Rs1,000 crore. According to sources, Edelweiss is expected to redeem more than Rs2,700 crore SRs in Binani Cement alone. If Essar Steel also sees a resolution, Edelweiss will redeem another Rs3,000 crore to Rs4,000 crore. There are some estimates that Edelweiss would redeem around Rs10,000 crore SRs in the current year. “This will be the highest by any ARC in India since its inception,” say sources.”

Source -https://www.businesstoday.in/magazine/the-hub/distressed-companies-asset-reconstruction-company-bankruptcy-essar-steel-arcelormittal-edelweiss-group-stressed-asset-investor-nclt/story/273851.html

The above article says , “The SRs are generally redeemed over a period of five to eight years”. I am not clear about this part. In case of successful resolution - Won’t the SRs be redeemed in year 1 itself?

[vinay_new07]

Thanks for sharing and the brilliant analysis.

What I can understand is that perhaps ARCs guarantee payment to Banks within 5-8 years of debt transfer, while SRs are redeemed by default in case the stressed asset is monetized early.

[sumi00]

Good conversation and clarity of thought. Looks like they want to be fixed income champion of India.

Don't expect midcaps to deliver meaningful alpha in next three years: Nitin...

[dd1474]

There are no guarantee payment. Based on trust document between SR investor and ARC, cashflow waterfall is determined. After meeting expense of resolution, managment fees of ARC, the left over cash is available to SR investor. There also possibility of superior and subordinate SR class. The superior class SR would get principal along with interest yield for period held. Whatever left after that is distributed to subordinated SR investor first towards principal and then towards stipulated yield of period of investment. In case there is further cash is available same may be shared between SR holder and ARC as success fees which is mentioned in trust document. So not very simple to assume cashflow for ARc and SR investor from publicly available information in my view.

Discl: No investment in Edelweiss.

[sumi00]

great set of numbers again

186f77bb-6ead-4bfb-b29e-c4517b2580f0.pdf

[analyst_i]

This is from results release "We will in the next six months continue to strengthen focus on asset quality and liquidity, long term business and
building customer value while we remain relentless on heightening our risk management and corporate
governance practices, technology investments, building foolproof systems and processes across businesses and
strengthening our leadership pipeline. Once profitability adjusts, we will again come back to the growth path. "

Looks like they want to go slow for next couple of quarters.

[hnk_so]

@analyst_i

Looks like they want to go slow for next couple of quarters

I think great management always look first risk management and try to adjust bad time by strengthening processes instead of taking hasty decision to maintain growth for praising market !! I love PEL and Edelweiss and started accumulating PEL and Edelweiss at this level as I see future for such management is brigther than other. Be greedy when other are fearful !!

[sumi00]

We should wait for concall but this is essentially function of diversified biz they have. They can keep the growth contained for any temporary issues without disappointing investors. What I understand is that they will most probably slow down their corporate/retail loan segments. Distress credit is anyway in a sweat spot. I think they also need to raise longer term liabilities asap to keep the growth going.

[princevegeta]

Very detailed and more importantly FAIR presentations by Edelweiss on Q2 overview and path ahead for H2 FY19.

Top Finance Company in Mumbai, India | Best in Investment & Advisory...

Top Finance Company in Mumbai, India | Best in Investment & Advisory...

Key takeaways on the lending business (comments in brackets)

• “We are in an environment where liability management models are being tested. Liquidity is returning to the system steadily and slowly. We have raised ~ INR 2,600 Cr since September 21st, including INR 1,450 Cr in CPs. We have bought back around INR 1,000 Cr in CPs”

(Re: liquidity returning - as per various info, rate of CP issues is going up https://twitter.com/deepakshenoy/status/1055798219291090944. However, As funds are expected to get costlier, hence chucking out costlier source of fund seems to be a margin protecting move, which is welcome)

• "We have been here before in 2008 and also in 2013. This is a passing phase; we expect normalcy to return in next few months.We expect to see a return to the growth path in FY20.

• We expect the corporate credit book on our balance sheet to reduce while simultaneously investing in such opportunities through our funds in Asset Management"

(In a recent interview on a TV channel, Mr Rashesh Shah mentioned that NBFC’s growth would moderate to ~15%. Looks like management is prepared for even zero or marginally negative growth in Loan book in next few quarters. Again, not too concerning as markets seem to have already priced this. But nice to hear the management being up front and fair about this)

• “We will continue to grow our SME and small ticket housing loans in a focused manner. Our customer understanding and product suite in these segments enable us to have pricing power and hence protect NIMs”.

(To be fair, the management has walked the talk in the past on the aspect of increasing Retail as a % of Total book.Against the self set target of 50% of Retail by 2020, it has already reached 42%.
Further Management has significantly reduced proportion of risky Structured Lending with increase in proportion of relatively less risky Retail Mortgages and LAS in the last 2.25 years, refer tabulation below

However, the concern here is that to achieve the target blended yield of 16%, if the high yielding Corporate Book is to be replaced with SME loans - there would either be a reduction in spread or an equally risky SME loan book as a consequence. This I feel is an inherent problem of an NBFC which borrows at 9.5-10.5%. A lot of these SME loans would have to be unsecured. As per management their unsecured SME loans have an average yield of 21% and average ticket size of Rs 10 lacs. Another factor is what would be the demand for these loans, especially in times of rising interest rates and the competition. I think it would be reasonable to expect a contraction in spreads of Edelweiss, relative to banks. Refer tabulation for spread analysis of Edelweiss QoQ

IIFL, which has a more retail oriented Loan book had an Yield of 14.5% as on 30.06.18.

• Long term borrowing as a % of Total borrowings has gone up from 34% in FY 15 to 59%. (Aggressive long term borrowing when interest rates were lower, will certainly help spreads in short - medium term)

• Management has disclosed ~ No of groups in Wholesale Loan Book.
  

• “Wholesale Mortgage market is ~INR 5 Lac Crore”

• “Edelweiss Wholesale Mortgage book size is ~INR 12,000 Cr (~2.4% market share)”

• “All lending post land acquisition and key approvals”

• “Sole lender status gives exclusive control - 95% of Total”

• “Well collateralized at ~1.9x cover; Exclusive charge on the collateral and cashflow control”

• “Strong legal documentation with step-in rights - eight Asset Resolutions done through a mix of stepping in, bringing in new developer and end customer sales through captive distribution team”

(I feel the management is telling us that they have most of the controllable risks under control. For eg: a builder having approvals will largely eliminate the risk of unfavourable political, environmental events which will jeopardize the project; sole lender and escrow mechanism will largely ensure crony promoters dont divert inflows of projects; management capability to ‘resolve’ potential deadlocks by bringing new developers, end customer sales etc.
The inherently non-controllable risks like slowdown in demand cannot be addressed by any lender.
I feel Edelweiss’s RE lending book is more seasoned and less risky vs someone like a Piramal which gets into pre-approval lending and loans for land acquisition.

However, having ~50 groups in a Structured Loan book of Rs. 9000+ crores and ~ 100 groups in a Wholesale book of Rs. 11,000+ crore is something that Im not very comfortable with. Even One or two groups turning Non-Performing would cause a significant spike in NPA %.)

Overall, it is very comforting to see the management attitude in being upfront and sharing such information. If one is able to read between the lines, there is plenty to digest This is a welcome change from the lop-sided investor presentations released by some peers.

The risks of contraction in margins, slowdown in growth and asset quality continue to loom over the horizon, but management performance (and perception) has been equal to the challenges faced in the recent past.

I continue to hold and add on dips. Views invited

[sumi00]

Nice summary! in fact quite a few worries have been answered with adequate detail.

• Funding: available for them but they remain cautious and not boasting like others in the town.

• Growth: Some slowdown in credit growth was given but ARC should pick up the slack

• Real Estate: very few know that Edel has RE book since 2008 and has been well managed despite many mini crisis. Still they do not want to grow I guess it is also to do with the fact it consumes capital faster and locks funds for longer period. They will have raise longer duration liabilities to grow this book.

• Structured book: the problem is that there are not enough buyers of these structured books in the market so growing it will require good enough funds on their own side. Best done through fund based route.

[deeps2884]

My rough cut valuation

1) Non Credit Business
PAT of Rs.308 Cr. in FY18
Estimated PAT of 339 Cr. for FY19 (10% growth)
at very conservative (High ROEs & high teen growth business) 15x of PAT - Value of Rs.5,082 Cr

2) Credit Business
Book Value of Rs.6142 Cr. @ 1 B/V is Rs.6,142 Cr.
(Book Value assumes the book is not majorly cooked up and can take losses of 10 to 15% due to its Real Estate & Structured Finance book the ARC business would compensate with its huge profits - Essar should itself give Edelweiss Rs.500+ Cr of profit and secondly retail portion of the book has now reached ~42% share thus providing necessary diversification and lenders with retail books are trading at minimum ~2x)

3) Insurance Business @ Rs.1200 Cr. (Edelweiss stake at last deal plus some time value)

All the three add up to market value of Rs.12,500 Cr. or a stock price of Rs.135/-

chance to buy a strong business which has diversified income streams and has potential to grow very fast when dust settles.

Please provide your comments.

[vignesh]

Any one has the details on when the Con call is going to happen ?

[sjk096]

[princevegeta]

Con call Notes (Left after 1 hr due to professional commitments)

On CPs

• Current volume of CP issues is 30% of normal
• CP used only for Treasury assets and Loan against Shares. We don’t use CP for long term Assets
• Growth in these assets will come when normalcy will resume. Till then growth may not be there
• 50% lower volume in CP will cause 40-50cr reduction in Annual profit of Edelweiss

On RE book

• RE book built slowly and steadily over 10 years
• Various investors have done due diligence on this book and have co-invested via Fund Route
• Housing market outlook: Last 5 years- Inventories have come down, prices have fallen. Most purchases are from end users and not investors. There will be demand for housing as long as India’s growth continues.
• Last mile funding may be needed for some projects
• Major risk in housing projects is completion. Once completion is over, there is comfort on repayment as they are self liquidating assets
• Funding is done at SPV level (project level)
• With RERA, diversion of funds into another project is a criminal offence and this gives us extra comfort
• All RE projects are under construction projects : No LRD
• When asked about naming top customers : Management has a policy of not giving names as it would not be fair and also as investors, just the name does not tell much about the project, one has to take into account other things also
• Management has a cap per Wholesale customer - Cannot exceed 1% of Total Loan Book
• Geographically, Mumbai MMR and Pune forms around one third of total RE loan book, NCR is around 25-30% and rest is in Chennai, Bangalore and Hyderabad

On ARC

• Seeing good recoveries. In H1 FY19, ARC has recovered 2000cr, in H2, recoveries can be 10,000-12,000cr.

• We will deploy more funds out of these inflows

• We have also invested in RE projects through ARC and capable of doing more. May create focused RE fund for distressed RE assets.

• On asked about profits from specific transaction of Essar : Management has policy of not disclosing such info.

• LAS portfolio - around 75% is Financing against ESOPs for HNI executives. Balance 25% is margin finance. Average LTV is 50%

• after 21st Sep, incremental borrowing cost is 40-50 bps higher

• Can pass on increased cost on assets so that NIMs are maintained

[smehta]

Edelweiss Financial Services Ltd

Highlights of Q2 FY19 and H1 FY19 Results

Financials

• Total revenue grew by 32 % to 2672 Cr compare to last year same quarter.
• PAT grew by 47 % to 272 Cr compare 185 Cr to same quarter last year.
• EX-Insurance PAT grew by 46 % to 372 Cr from 207 Cr last year same quarter.
• ROA stood at 1.9 % and ROE stood at 14.7 % for the quarter
• ROA EX-Insurance stood at 2.5 % and ROE EX-Insurance stood at 19.1 % for the quarter
• Assets stood at 2,47,900 Cr
• Credit book stood at 49,000 Cr out of which 29000 Cr is EX-Insurace
• GNPA stood at 1.78 % and NNPA at 0.79 % for the quarter
• ARC business has done well, Wealth Management business also grew to 1 lakh Cr of asset and Asset management grew to total 35,000 Cr .
• 9-10 % of total balance sheet and 10-11 % of total borrowing stood as liquidity portion.
• Company will be working on Diversified model.
• Capital adequacy ratio stood at 16.6 % for the quarter.
• Long term borrowing stood at 59 % of total borrowing
• Company aim to maintain liquidity at 11-13 % of total borrowing.
• Company had raise 2000 Cr by public issue Bond in NBFC EFL Ltd.
• Asset to Equity ratio remain at 5.2 times as on 30th Sep 2018.
• Company continue to get funding from money market and Banks. Company had raise 2500 Cr and 2450 Cr as on 31st Aug-2018 in form of commercial paper.
• Company have adequate liquidity for next 6 months
• Company have 7600 Cr of which 550 Cr is in form of commercial paper.

Segment Wise Highlights

• Credit Business
  • PAT grew by 54 % to 245 Cr compare to same quarter last year.
  • Share of retail credit grow to 42 %compare to 41 % in Q1 FY19.
• Financial Advisory Business
  • PAT grew by 9 % YOY to 76 Cr for the quarter
  • This segment impact due to capital market activity during the quarter.
  • Cost to income stood at 47 % for the quarter
  • GNPA stood at 1.78 % and NNPA stood at 0.78 % for the quarter.
  • Fund Base income grew by 36 % to Rs 1914 Cr for the quarter
  • Fees and commission income grew by 33 % to Rs 515 Cr for the quarter
• Life Insurance Business grew by 63 % to 184 Cr for the quarter.

Business Highlights

• Company outlook on liquidity in the market
  • In last 8-10 days things are starting to open up and seeing volume in commercial paper. 30 % of normal value are back. Bank line are still there but on Bond market side it is 30 % of normal volumes and by end of November there will be 60-70 % of normal volumes.The fear is now getting low. In next few weeks liquidity will be normal.
• Company Liquidity
  • Company have obligation of around 12,000 Cr to repay till march. Around 3000 Cr will come to ARC business in next 6 month and get 400-500 Cr flow monthly from company credit business which will be another 2000-3000 Cr and company have Bank line of 6000 Cr. Inflow from mutual fund market will open up soon and commercial paper and NCD will also start soon. Company will manage the liquidity. Company wait for opening of NCD and bond market and liquiditycoming to normal so that was there… For next 5-6 month all company will be careful in managing the liquidity. Thing like ECB and international market will also on the source of liquidityfor HFC.
• Impact of Non-availability of Commercial Paper
  • Company have never use Commercial Paper as ALM Arbitrage tool so in profitability there is no excess profit which come with commercial paper utilization. Commercial Paper borrowing was directing for treasury and liquid credit Book. If commercial paper market shrink and remain half of normal than around 4000-5000 Cr of borrowing opportunity will go in commercial paper.Which was funding company treasury and liquidity credit book.These books have average ROA of 100 basis point . From profitability point of view shrinking of Commercial Paper by 4000-5000 Cr will impact 40-50 Cr in profitability for company which can be handled in a diversified way. Company will use loan against security with which the cost may go up but company will pass it on to the customer and continue to provide this product.
• Strategy and composite of Credit Book
  • Of total 40,000 Cr of loan book 12-13000 Cr is retail asset book and 14000 Cr is real estate book and wholesale mortgage and 9000 Cris the corporate book , 8000 Cr is share and agribook which is keyin nature as liquid book and 7000 Cr of ARC and distressed book.
  • Company was having access credit of 140 Cr when company had converted to IND-AS .
  • Most of credit book if collateral with almost LTP of between 44-55 % and in all deposit loan and there was also high rate of recovery.
• Real Estate Book & Mortgage Book
  • It was 12,000 Cr earlier with 2.4-2.5 % of total market with credit strategy. Company has build the book over last 10 years in a very slow and steady manner. Company showcase its book to RBI and credit rating agencies and bankers creditors. Also raised real estate funds. Company have multiple investors here who have done due-diligence of strategy . In this company duly do home loan at FPV level. 95 % of book is having finance project. 80 % of inventory is under 1 Cr price where demand and velocity both are good,
• Outlook on Real estate book
  • It should continue to do well. There is no asset bubble because price had not gone up in last 5 years.In first half there was 8 % growth in home sales over last year. India economy grew at 7-8 % without having interest risk . India is selling 12 million house a year and there will be demand .If any project get stuck it will be because of lack of fund. Completed projects is not very hard to sell . Home sales will not slow down so the real estate portfolio should continue to do well.
• ARC Business
  • Robust and deployed further fund in the quarter and company has seen good recovery during the quarter of almost 2000 Cr and expect to recover 12-13000 Cr n the next half on the large recovery of Essar and Binanai will start coming. So company will receive funds back. Company have lot of opportunity to deploy the funds over next 3 quarters;.So once fund come company will deploy back because current pipeline look very good.
• Distress Assets
  • Business will continue to do well . Also have 10,000 Crfund available which is still undeployed. So company have 4000-5000 Cr of deployable surplus in the dis-stress credit fund that company manage. ARC is in talk with investor to focus on real estate distress fund which will focus on providing completion and test by fund on real estate project which may be stuck because of lack of financing
• Company Strategy
  • Company is doing well diversified business and NBFC is not the only business. Liquidity will be normal. NBFC has been responsible for Credit delay in India. NBFC and bank coming high in a robust model for credit book of the country. Their might be some headwind because of liquidity crunch and this will handle by diversified model .In credit business company continue to balance book by growing retail faster than wholesale that has been strategy of company. Company will do wholesale from the fund it manage. Continue to deploy fund on corporate fund as well as real estate credit through the fund that company manage. In whole sale credit company had raise more than 1 Bn dollar over last few years and quite of it is un-deployed capital is available so company will grow in wholesale and retail too.

Q&A

• Kindly provide the detail of loan toward wholesale which are collateralized ? What will be the effective tax rate going forward ?
  • On the wholesale book company have fix CAPon per account which is 1 % of the total credit book. Company current account CAP is 400 Cr for accounts. Company have 60-65 accounts on the real estate book and another about 40-45 on the corporate book. Top ten clients could end up of 35 % of total book. It is same from the last 10 years where there is a tail and there are few accounts . Company look on more account CAP and it should never be more than of total credit book which is currently about 49,000 Cr. On the tax rate the insurance rate which company have higher tax rate on the consolidated Tax account.
• If interest rate become positive than does tax rate will come down ?
  • It will actually been better because insurance business is carry forwarding the loss so hopefully it won’t pay tax . Currently company have loss on that and not getting the offset.
• What are the number of account in the wholesale book and how they are specifc in geographically in Mumbai, NCR , Bangalore ? What is the risk management system in Loan and what kind of promoter funding is there in loan against securities?
  • Company is largely present in six large markets Mumbai including MMRand Pune are 1/3rd of the book then NCR would be 25-30 % andbalance would be distributed in Bangalore , Chennai and Hyderabad.The total number of projects can be 60-65 at any point of time.
  • On Loan against shares the large part of it is ESOPS funding because company is of the leader in ESOP funding almost 75 % of the book is ESOP financing which are to individual and High level in Banks when they exercise the ESOPS the balance 25 % is also margin funding book. There is no promoter funding and promoter financing it is mainly for wealth management customers and LTC in that is about 50 %. In this there has been no fall in deliquesces and NPA in this book.
• How much borrowing was done from the banking channel post September?
  • Company got approvals of about 2500 in which 1500 Cr is from the Commercial paper and 1000 Cr from the Banking line.
• What has been the borrowing cost from both bank and commercial papers ?
  • Its about 40-45 bps more from the normal one.
• Now 40 % of the book is large wholesale to corporate side so with increase of cost of fund does company is able to pass it on to new customers or company will slow down the lending ?
  • Company can pass on the cost and company has done that where company NIMS has been steady to given on the SME book and small ticket home loan if the cost has gone up than company has been able to pass it. It get pass on in form of reducing the processing fees wave off and adjust the actual yield on NIMS.So there are parts of book where company can pass on the cost and company Liability is also 1/3rd of the book and it is getting reprised. Company borrowing is also more than 3 years at a fix rate. 65 % of company borrowing is above 18 months so there is no reprising. Assets get reprised when liability get reprised. Company NIMS got impacted by 20-30 basis points so from last many years company NIMS have been around 7 and 7.5 % and they borne above 20-30 basis points or below that depending on the interest rate sensitivity. Company will maintain NIMS at 7.5 % half percent here or there and that is achievable in spite of increase in cost of borrowing.
  • Company is not looking to slow don the lending because of interest rate but liquidity is always a reason. For next 5-6 month company will continue with retail and SME. On wholesale one there will be slowdown until the liquidity conditions come back to normal. For next 5-6 month everybody will be looking on liquidity and carry forward with the liquidity available in the market.
• How company is going on with underwriting as there is concern on the whole real estate segment ?
  • There are two parts of it one is underwriting and other is post underwriting. Company is focus on housing because housing is a self liquidating asset unlike an insurance project where there is no exit available. 95 % of company loan is in housing and all are RERA approved. In94 % of the project company is the sole lender because at the FPV level company risk management is much easier if one control the project. Apartments or houses which are below 1 Cr demand is very strong about 50-75 lakhs in all India basis and around 1-1.5 Cr in Mumbai. So this is the range at which demand is very robust so 80 % of inventory is below 1 Cr category. Company has developed a robust post disbursement also. Company do project management for the people who work in real estate for years so company do very active monitoring and company also have sales and distribution team which also can sell apartment and homes and on an average company sold 20-30 apartments in a month to 30-40 apartment on an ongoing basis.Company have sales capability , project capability as well in ARC company also have distressed asset management capability when project get completed because in real estate completion of project is most critical part . If one complete the project everything get handled. Company have sold about 100 thousand sqft per month in the last few months on own inventory. The distribution channel had sold 1 lakh sq foot every month.
• What amount company will receive from Essar ?
  • 2500-3000 Cr cash will come in from Binani and Essar
• How comfortable is company on its retail book and in this back drop will company reduce the wholesale book ?
  • Real estate corporate book is a very good risk to reward book but there is always difference between NPA and actual recoveries . Recoveries are very high almost 100 % on this deal but they do have chunky NPA. In last 3-4 year company have raised parallel fund in slowly and steadily and then only keep it low on NBFC side. So the wholesale book together is 20,000 Cr .Company expect to get about 4000-5000 Cr comaing back every year and average tenure is 4.5 %. If company receive 4000 Cr every year then company will deploy 4000 Cr again in the market. This will come down over years but company ARC book will grow and the retail book will continue to grow. That is the strategy for last 2-3 years of Now direct ship is more use for retail strategy
• On the entire contagion on the sector , SO how company see the risk in the sector ?
  • The loss given in the while are 7.5 % on stage-3 . One have NPA but very high recoveries in this books also. At a project level there is not much requirement of incremental funding. If incremental funding will not happen than new projects will not get launch In next financial year . If project will get completed than most of the risk get mitigated because it don’t erode the collateral cover too much. So the Key is the Home loan will continue if the project get completed. Therefore FPV level management is very important. In Infra also If a road project get completed than there is no risk in that also and in road there is no liquidity event but in home they are self liquidating assetsso as long as that continue there is no worry.At a project level there will some project with funding gap and that will also struggle to get additional funding but there will be other stress funds even company is also looking at some fund to provide last mile funding for good projects. Other ARC has also done that with Malls , Hotels and other commercials in past.
• With the regulations changing on mutual fund TER so how company see both asset management and Mutual fund business going forward ? Will TER will also affect the PMS business also ?
  • There is a lot more focus on alternatives and this will shift some of the strategies into alternative funds and it is not with credit funds because they don’t have ALM and they don’t have NPA issues because they are not borrowing so given that as NPA issue and borrowing issue is not there the risk-reward is good and recoveries are there into NPA. This is bring more focus on private credit fund or more alternative. So on both asset management and wealth management there is huge focus on alternatives. So recent mutual fund changes will not affect much and it will give boost to the alternatives credit funds because different strategies will come out from different organizations such as NBFC , HFC , Private Funds. In company asset and wealth management business company build a strong franchisee as customer satisfaction rates are very high and lot of company customer are not looking for innovative products which happen to alternatives. Mutual fund always be there and alternatives will be there… Alternatives fees will not come down.
• What is the overall view on Mutual fund TER going down ?
  • The volumes will go up . Fees and commission will come down. One will use a more technology scaling benefits to compensate and hard profiting. Profit will go up and that will be for next ten years because India is stilling scaling up. In the brokerage industry also the commission coming down but the scale is going up because of use of technology and scale going forward.
• Due to liquidity issue will there be some large defaults that might happen ?
  • Most of the real estate project financing is at SPV level. Most of the finance can control the project and company change even the developer on a particular project if they cannot complete it. Even is any project get stuck thanbig developer come in with touch to company in a DP model. There is lot of mis-understanding that developers will default remember funding is at project level and it is very insulated. If a developer default on one project then he will not be able to continue on other projects atleast if the financial closure on a particular project are going well. Earlier developer was moving money from one project to another project as they see financial crises on any project but from new law now developer cannot move money from one project to another project. 70 % of the cash flow of project has to remain under project under law and it is criminal offence now to take money out of project.Earlier finance company have to do project monitoring at a intense level to make sure the finance is going at right place and now the law has been place so no body will try that. In real estate now every project is independent and every project is insulated.In 95 % of projects company is sole creditors so company can change the developer, fund last mile funding, cut prices and forsee to sell more inventory all of that can be done if one have control on the SPV at project level.
• Does the consolidation in the real estate will be more slightly for next 3-5 years ?
  • It is going on from last few years and in most of the industry there is no oligopoly market. India is a large market and every city is different. Consolidation will be there but the weaker developer who have a good project will partner with the stronger one and there are so many such cases in the last 3-4 years where strong developers don’t bring their capital and now the biggest constraint in the Oligopoly market is how much capital should put to work. Company has also funded 10-12 such cases.
• When will company plan to raise capital ?
  • In Fiscal 2020 H1 company will raise capital because there will be growth strategies and that require capital.
• If company change the developer than what happen to the prices of that real estate project will It become contingent ?In recovery 84 % is cash and rest is other assets so kindly share company experience in other assets of recovery in the prices of asset revolution so was there any haircut on the recovery part of asset ?
  • In last 5 years prices has not gone up but actual come down as a result of that there will no cutting of pricing but there will be structuring that will happen . People will take more cash upfront and they will be willing to reduce price for that. The outcome will be the more cash one is willing to pay upfront the more lower price one will get. Because in last 5 year prices have not gone anywhere. Actual demand is there so people will try to incentivize to do cash payment.
  • Other asset is personal guarantee and other assets that are pledge with company is also have power to liquidate that . At a project level company will be able to recover 84 % money after that company will use other ways of recovering.
• Did company do end to end financing from starting to end ?
  • No company come after the land approval been done when developer put some equity and he have some equity partners of equity funds coming there and after that company do project funding where there is construction financing then there is actual sales that happens so either company do construction financing or get help from banks to do construction finance which is usually a small part but at a project stage that is only finance here.
• Liquidity cushion on balance sheet is 3300 Cr and cash in liquid asset are 6900 Cr so is there an additional cash of 3600 Cr ?
  • Yes. Company do differentiate between liquidity cushion and treasury assets Treasury assets can be in form ofG-SECor Cash future arbitrage usually the treasury assets or part of the charge that company give to the bank. The liquidity cushion is free of charge while treasury assets have a floating charge. The treasury assets is also liquid assets.
• What is the nature of this liquidity cushion of the 3300 Cr ?
  • Mutual funds , Government Sec, FD in Banks.
• How will be the NPA trend going forward ?
  • It will remain in a control upto 2 % Net NPA.
• What is the buyers side borrowing mix when they finance from Banks or HFC on retail side ?
  • Company has taken 56 % Provisioningon the NPA. This is slightly higher than the loss given default because this is actually expects. This will maintain company recovery rate .On the home loans almost 80-90 % of these are with home loans and there will be very rare apartment which got sold without home loans and it is about 55 % from Banks and 45 % from Non-Banks which include HDFC and others also. If there is a slow down in home loans by HFC than also it will not materially impact the overall profile. Infact every project in which company had funded there are usually 3-4 home loan companies have a stall there and most often is PNB Housing , HDFC , SBI etc.
• How will company see its borrowing strategy going forward to ensure that company have diversified source of funding ?Does company wealth management and asset management is also link to capital market or the correlation is on the lower side ?How should one look at the aspiration of growing by 25-30 % ?
  • Mutual funds are almost 32 % of borrowing in that half is from CP andhalf is from NCD. So NCD is more important CP is a smaller part of the problem because the total outstanding CP is even shrink by half would not change much for the industry as a whole. If one is leveraging from CP then its profit got impacted. Retail is 17 % of company borrowing and company long term target on retail is 25 % . Borrowing should be about 30 % banks , 30 % retail , 15 % NCD , 5-8 % Commercial Paper and other would be Insurance companies and international borrowing . So part of mutual fund will get replaced from retail on a longer term basis which might be slightly higher cost but more longer term and stable. Company have always kept band between 35-40 years and that will continue to be there. Borrowing from bank is also another source of stability in this time also. The mix will continue.
  • On the cyclist of asset management so the asset management is alternative and credit . The equity market cyclist doesn’t affect it that muchand lot of credit will start move from NBFC and also Mutual funds to the private credit funds. Last part of this problem happen because mutual fund exposure to IL&FS because as an industry mutual funds are comfortable to take interest rate risk but are not comfortable taking credit risk. So whenever there is a credit risk investors in mutual fund get spooked .So ultimately the credit part of that risk goes to other credit fund and that has been the hypothesis for many years and it will get accelerated with development in recent market.
  • In terms of liquidityit is going slightly lower on growth and in coming couple of quarters the growth will take a back but on longer term basis nothing will change much and definitely everybody will have good growth in the first half so little bit of scaling back of growth in the second half just adapt and adjust to the liquidity environment and it will be more prudent also. In Q3 and Q4 some growth is inevitable because everybody is going to hold cash to be on the safe side. There will be no structural changes in wealth management and asset management business. So on the longer term side the 25-30 % growth will not change slow down will be just for some quarters.
• What is the outlook on the second half and which factor will be positive and negative for the industry as well as for the company ?
  • Next six month depend on how things come normal and companies will hold cash and holding cash is an expensive thing .Company is currently holding about 7000-8000 Cr equivalent of cash and cash equivalent activity. So next 5-6 month the growth will be slow. In next couple of years company have some tailwind on the ARC business as recovery will happen and some incentive will also come.Same will happen in Real estate . So company diversified model allow to change every challenge into opportunity. So ARC and asset management will clearly see some benefit and opportunity out of it.