@jinushah, thanks for sharing the notes. It is always a pleasure to catch up with fellow VPer! Few additional points from my side
-
In India the democratization of credit is happening because of many factors i.e. better information availability, technology, increasing financialization etc. Rashesh shah mentioned that when PSU banks were formed, the idea was to ensure that credit reaches to the grass root level. However, eventually what happened was that a large part of credit got channelized to a very small section of society (the rich and corporate) and hence getting credit for large section remained pipe dream. However, with private sector banks and NBFCs growing in size and spreading wings this has changed. It got further filip in last 3 years because of the steps taken by current government. There is huge pent up demand for credit and both private sector banks and NBFCs are trying to address this
-
In terms of competitive landscape- the competition universe is 8-9 private sector banks and 8-9 large NBFCs. However in each business line/geography, the competition may be with 4-5 large players.
-
On asking about some of the high risk lending in their subsidiary ECL finance- and how it matches with their āfocus on riskā- he mentioned that it is very important to not just look at the name of the underlying company and decide the risk. When we underwrite we look at both collateral and cash flows that is attached with the instrument. We may get comfort from either of the two or the combination of these two aspects. One should also recognize that stressed company may not mean āhigher riskā especially when the instruments are structured instruments
-
He articulated his thought process around creating business lines - he mentioned that typically for all new verticals we build the base for first 4-5 years. We make investments, deploy capital smartly, build teams and refine the business model. Once we are confident about business model, we scale up fast. Fast scale up is possible because we have spent enough time in the beginning. He gave an example of ARC business- they set up ARC business in 2009- when no body was talking about it. In first 4-5 years, they lost 3-4 crores every year however they built strong team and business model. Post 2013-14, it has scaled up real fast. So, from edelweissās pocket they have deployed around 200 Crore over 5 years, however, in FY 18, they expect to make profit of 180-200 Crore from ARC business ( I think they made profit in ARC from FY 16/17 as well) and we can continue to generate similar profit or more for some years. He mentioned we like such kind of opportunities where investment made in early years yield results for a longer time. He gave another example of Insurance business- he said, we expect to put in around 1000 Crore over 8-9 years (till 2020-21) however post that we expect to generate profit of 300-400 Crore every year growing at 15% for many years.
-
Their agri financing business is in the build up phase right now. Edelweiss is among the top 5 warehouse managers in India for agri commodities. However, the idea is not to get into warehouse management. Edelweiss is doing warehouse management because it will give them control over the collateral quality/quantity while doing agri financing. Company has realized that the biggest risk for agri financing arises from mismanagement of collateral and hence they are creating a backbone to manage this risk. Agri financing is again a very big opportunity and Edelweiss will start financing meaningfully from FY19/FY 20
-
On Asset and wealth management he mentioned that āfinancialization of assetā is a clear trend. He mentioned that in last 20 years the bank deposits have grown from 5 lakh crore to 20 100 lakh crore plus inspite of India going through a tumultuous ride an Indian economy going through number of crisis. Hence, he expects that asset and wealth management businesses can grow at 15-20% for next many years. However, they will not grow in straight line. There will be cycles, peaks and troughs, and the role of management will be in managing these cycles well with people, processes and capital.He said, we again like these kind of opportunities where there are strong tailwinds and very long runway.
-
On the business lines- he mentioned that with their entry in general insurance- their product basket is complete. He said - there are now enough kids in the house
Now, our focus will be to raise these kids, educate them, get them married and help them find their own home!! -
They plan to cut number of subsidiaries to half by 2020.
-
In the lending business- in next 3 years, they want to make retail lending as 50% of the loan book. At the moment, the focus is on scaling up the business- and hence NIM are steady at around 7%. However, there is room for optimization on liability side which may help improve NIM
-
ARC business- it is LP/GP model- they get management fee on the value of asset managed which is 2-3% of the asset value (price at which it is purchased). Typically the asset management contract is for 5-7 years. Hence for asset of 100 Rs- in 15/85 scheme- ARC has to put in 15 Rs as capital which they generally get back over next 5-7 years in terms of fees. For the rest 85 Rs- security receipts are issued to bank- which gets paid as the resolution/revival happens and money comes to ARC. Typically, when company buys asset of 100 Rs- their expectation is that they will be able to get value of 130-150 Rs. Typically, the upside gets shared in equal proportion with bank till the price of the asset and there after the profit sharing is higher for ARC. Typical RoE for the business is 22-25%.
-
Interaction with their ARC head: The regulatory environment is turning very favorable for ARC. IBC is very good for ARC- for resolution- for e.g. it is helping in case of Bharti Shipyard. Another supportive development was directive from RBI to banks that they have to give first right of refusal to ARC who already holds 25% of the outstanding loans of any company. This is helping in aggregation efforts. Along with supportive environment- the turn in commodity cycle - such as steel/metals/cement is also helping in revival- many assets have started paying back- thus in cases they may realize value much beyond their estimate of 130-150. In some of these cases, IRR can go as high as 40% due to higher sharing of upside. Key players in the industry are - Kotak/ARCIL/JM- new players who are expected - Piramal/Bain and Ambit- However, in general, it is not easy to enter this business as in addition to capital- it requires strong team, financial engineering expertise and lot of patience.
Now, our focus will be to raise these kids, educate them, get them married and help them find their own home!!
