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. Thatâs 2000 crore impact in aggregate âŚloss 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.