Edelweiss Financial Services

Edelweiss suspect exposure is in the real estate book where as per reports 3000 crore are under significant stress. The question one has to ask is what is the likely loss given default? Given strong collateral and conservative LTVs (unlike Indiabulls), even with a 30-40% drop in real estate prices, the collateral cover is sufficient protection. It may not be readily monetizable but the eventual loss given default will not be more than 30% of this or 1000 crore even in the worst of cases unless one assume most of the book is fraud, which is unlikely to be the case. So it becomes a liquidity issue not solvency unless the crisis continues for 2-3 years. Moreover, aggregate leverage is 4-5x for the entire book so not like Edelweiss is highly levered.

Most of the remaining book is likely to be statistical losses - perhaps 5% of the book are NPAs with 50% write-off. Thats another 1000 crore hit on equity. That’s 2000 crore impact in aggregate …loss given default. Assume it is actually double of that or 4000 crore and equity reduces to 6000 crore.

At nearly 1.3 adjusted p/b you are paying almost nothing for a diversified NBFC. It is not easy to build multiple lines with significant scale as Edelweiss has done. Their wealth division has been around longer than IIFL Wealth and is a top 3 in the country now. Similarly, the ARC is a top 3 one in the country.

NBFC growth model is not dead. It is just uncompetitive right now in the credit crunch as hitherto 800bps cost of funds via NCDs has risen to 1300bps so they are not viable against Banks. That will normalise as the crunch alleviates and risk spreads reduce. Edelweiss is not an aggressive lender - even at the worst they took care not to be higher than 60% LTV when lending. Most of the ARC book is fee focused one with little capital at risk. Wealth mgmt has no write-off risk.

These are very attractive levels, all the fear mongering aside.

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Your post has wrong facts and conclusions. Seems you are carrying some kind grudge against the company or the promoter. You could avoid watching his interviews if he is too smooth for your liking and start reading his ARs/interviews and verify facts and figures independently.

  • Any financial intermediary works on profit pool concept and it is important to move early in the business. e.g. in consumer lending Bajaj has taken pole position but many other sectors are still open. Edel or any NBFC need to move fast and take initiative in incubating any business.

  • Their wholesale lending and ARC business was started in Fy08-09 when others were thinking about survival and not in FY14. They scaled both only after gaining sufficient experience.

  • They exited commodity for 2 reasons a) gold went out of favour b) they had to exit this as they are in the hunt for banking license. I don’t think they should have exited but the business was prone to bringing reputational risk.

  • Mr. Market ignored them before FY16 since they had not established consistency of earnings before. Their rise to 300 was backed by earnings so not all gas here especially when they incur losses in insurance and almost 300-400cr in incubating business (mentioned in CRA reports). You adjust it and it would among few who could make 20%+ ROE consistently

  • Won’t write anything on real estate lending since market has discounted more than what is required.

  • Don’t know what is so difficult to understand ARC which works on LP-GP model. Please find a business which can generate 4-5% RoA with 20-25% growth consistently and let me know what is overrated here! If ESSAR Steel is resolved, they would recover 50% of deployed funds in 4 yrs. They are recovering DESPITE horrible legal system. Please find a comparable record anywhere in the world including in USA as you seem to know the market well.

  • Keep in the mind that he started with 1 cr in 1995 and we have 10k cr book value today with 2-3 big dilutions along the way. He survived 2-3 big downturns and I am confident they will do it again. Of course I am biased here. .

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What I learnt on this Forum is management quality is a good bet for the medium/long term. Also with frauds all around.

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Here is the different perspective. Banks are lending to NBFC’s

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Thanks for the link… the key message from this interview remains the same.

Of these 160 projects, around 10-20 per cent are under watch, they are largely dependent on last-mile financing and Edelweiss’s focus is on project completion, thereby unlocking value. While most players in this sector concentrate on originating and underwriting real estate projects, we also have a large team that is entirely focused on collection, resolution and recovery. That’s also one of our core capabilities. (This is) similar to project completion experts globally. We are seeing projects that were under stress four to six months ago now completed and receiving bookings on the day of launch.

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The liquidity problem is clearly receding as the latest NCD of 100cr got 40% subscribed in the very first day. Existing shareholders and debt holders would get additional 25bps yield. This is a good sign despite the fact that the yield is still high but better than current bank funding of 11-12% for wholesale NBFCs.

https://www.bseindia.com/markets/publicIssues/DisplayIPO.aspx?id=2003&type=DPI&idtype=1&status=L&IPONo=4085&startdt=11%2F04%2F2019

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What is yield on this NCD?

https://www.edelweiss.in/primary-issues/ncd-listing/ecl-finance-ltd-nov-19-ncd-6-213-28528

You could check the link above but largely 9.9-10.4% and existing investors of shares and bonds will get 0.25% extra if you remain so on the respective record date of interest distribution. I think one could lock 10.65% for 10yrs if anyone wants to remain a shareholder for a decade. Seems to have got good response so far as is it 90% subscribed within 3 days.

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Hopefully this will end all speculation about their balance sheet strength. They are delivering what they committed for FY20 i.e. reduction in 3-4k cr worth of wholesale loans from their own balance sheet. Need to be confirmed by the management though.

Disc: invested

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Can’t this be considered as a competitive advantage of edelweiss and management foresight to figure out where the opportunity exists ?
We have many NBFCs but no one made any move in this direction and moreover they also have project management team that will work on completion of the projects .

Would like to know can be considered as a relative advantage over other NBFCs ? That in turn gives them an edge when it comes to taking over the projects and complete it instead of selling it off at lesser than the potential value that can actually be realized by completing it.

Please share your views

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Think about it carefully. How many times has Edelweiss raised funds successfully in the last 1-1.5 years? Lenders who are able to raise capital in such a crunched environment end up differentiating themselves. Leave the narrative which usually follows the price for most people aside. On a private basis, they’re being valued at 230Rs a stock by Cdpq and Kora. Not even considering insurance in this right now.

Disclosure

Invested (Rationale of purchase - Egia was at 10times)

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Well, AIFs have always been their strength being the largest one so far so it doesn’t come as surprise to me. They had acquired Milestone’s real estate funds so their capabilities are known. The key is to convince marquee global investors to raise large sums of money and deploy them. One must note that there is no exit for 5-7 yrs for these investors.

Mr. Market is worried about their balance sheet currently. No doubt that these AIFs will generate handsome fee based income as it is deployed over the year or so. I have stood by this stock as the company has followed due process of conducting business prudently akin to a disciplined investor who follows a process based approach with high governance standards. You might have few setbacks but you would win eventually if you follow the process.

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Result out:

Doesn’t look good. Decline in PAT, Revenue, Credit cost has increased.

Disclosure: holding in portfolio.

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How much is the stake of Edelweiss in ARC business? I think it is not more than 60%. And some stake is take by Kora in EGIA. Egia makes a profit of around 800 cr per annum. Can anyone tell me how much is edelweiss’ stake in EGIA (including ARC)comes out to be?

They are also getting investment from Sanka:

How much is their stake in EGIA as a whole?

Don’t know, but the profits generated by EGIA are about 50% of Edelweiss profits.
https://blog.pawealthadvisors.com/2019/08/12/edelweiss-group-business-model-and-outlook/

Kora picked up max 10% stake in EGIA.

Sanaka (and certain others) also paid the same as Kora (Rs 525 Cr or $ 75 m), so I expect Sanaka also got 10% stake.

" At that time Edelweiss had said it is looking to get more investors on board with a hard target of as much as $200 million for EGIA. "

So, looks like Edelweiss plans to sell off almost 50% of EGIA.

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Edelweiss Financial Services Limited, India’s leading diversified financial services company, declared its unaudited, limited reviewed results for the quarter ended 30th September, 2019 today.

Q2FY20 Highlights:

  • Total Revenue INR 2,405 Cr (INR 2,676 Cr for Q2FY19)
  • Ex-Insurance Pre Provision Operating Profit INR 373 Cr (INR 677 Cr for Q2FY19)
  • Ex-Insurance Profit After Tax INR 93 Cr (INR 322 Cr for Q2FY19)
  • Ex-Insurance RoA for the quarter at 1.0 % and RoE 5.1 %
  • Consolidated Profit After Tax INR 51 Cr (INR 272 Cr for Q2FY19)
  • Group Gross Networth INR 9,870 Cr which includes CDPQ investment in equity convertible instrument
  • Debt Equity reduced further to 3.4x (5.2x for Q2FY19)

Edelweiss is a diversified financial services firm with presence in India’s most scalable and profitable sectors. Our various businesses address the needs of multiple client segments and demographics. During the last few years, several of Edelweiss’ “young” businesses have gained ground, while the mature businesses have scaled up into sustainable business models, with increased market share in their respective segments.

The diversified model has helped us in this tough environment as Capital Light businesses anchored the profits this quarter.

Speaking on the occasion, Rashesh Shah, Chairman and CEO, Edelweiss Financial Services Limited said: “Q2 has been an eventful quarter for us. Close on the heels of the Government’s announcement of a Rs. 25,000 Cr. fund for stalled realty projects, we have announced the launch of our first completion financing platform and the first fund of its kind in the private sector in partnership with the South Korean firm Meritz Financial Group. Also as stated in the last quarter, we are well on our way to completing the investment cycle in our investment advisory business with Sanaka Capital partnering us. Our strategy to create three well-capitalised verticals in Credit, Insurance and now Advisory, with independent governance and great growth potential is complete. This quarter we also signed three Co-origination agreements with SBI, Central Bank of India and Punjab National Bank enabling us to expand our SME and home loans businesses.

We are the only firm to have raised equity thrice over the last challenging year; and the first tranche of funding from investors has been received. This shows the confidence that investors have reposed in us and our business model. We now have sufficient firepower to enable us to scale up our existing businesses in Retail Credit, Wealth Management and Alternatives Asset Management significantly.

Our six businesses across three verticals are a blend of dominance (ARC, Wealth Management, Alternatives Asset Management, Capital Markets), growth (Retail Credit, Life Insurance, General Insurance) and maturity (Corporate Credit). Each one of them is now well-capitalised to benefit from the tailwinds of the India opportunity. We have repeatedly shown agility in how we capture the opportunity based on market conditions, and our conviction in the India growth story – and in ours – remains undimmed.”

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How Interest Income has declined 17%

They havent done major securitization nor is the impairment very high.

Can anyone throw light on it ?

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