Edelweiss Financial Services

Stock Opportunities
1070

A decent set of numbers for Q4 FY22. As expected recoveries are continuing in credit vertical and it is expected that the recovery momentum to continue, considering the undergoing recovery in Real estate sector. This vertical was the most feared which was questioning the solvency of Edelweiss group itself some 3 years back post the liquidity crisis (ILFS & Pandemic). So the fear in Commercial lending book is ending. Good to see NNPA under 2%. They have become so risk conscious that they have stopped growing Retail lending book too, which is why market is not valuing the company properly . Management is very optimistic about co-lending and partnered with PSU & Fintech. The returns from this business model is not known and the question is when they are going to grow this book. The most heartening to see is the operating leverage getting unlocked in AA vertical and equity book share increase in MF, even though their significant share is in passive debt. I’m very much interested in Asset management and there is very significant value going to be made in the next 3/ 4 years.

Disclosure: Significant PF holding (@Rs.81).

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1071

The only concern which I have is what would be the conditional of EFSL stock post the listing of Edelweiss Securities (Wealth). I’m highly hopeful of a good valuation for Wealth (considering the valuation of IIFL Wealth) post the listing. Will EFSL be hammered since there is no growth visibility in Retail book, loss making insurance vertical (break even by 2025), under scale in MF business , less returns from Asset Reconstruction (with no big ticket NPA resolution pending)?

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1072

I believe all are discounted in current price levels. Management has taken hit for insurance business for last few years and hopefully that may be a game changer in next 2 years. Reduction of NPA should definitely give comfort to long term investors and I will be looking for adding additional quantities in coming week .

P.S- Invested at 58 levels and will add only below these levels

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1073

Net profit down, EPS down. As usual, Rashesh and the promise of future which never becomes a reality(or at least till now). I’ll wait what others here have to say abt the ER & what Mr.Market says tomorrow.

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1074

In financial services businesses, profitability comes down to scale.
Unfortunately, except ARC - none of the other businesses are of any meaningful size and it reflects in the profitability.

That combined with continuous over promises and under delivery make Edelweiss a difficult stock to own

That said I do own it and have for a while - in hopes that ultimately you get the SOTP value as entities get listed separately. Although as we’ve seen with wealth management, the management is retaining proceeds (to potentially misallocate capital) rather than do spinoff

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1075

Good info about Wealth Management. Likely to see more info about Wealth management in next few months as it approaches to listing time.

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1076

Wonderful interview ,this also helps in understanding the reason why mohnish pabrai who is one the best value investor in the world has invested in edelweiss, This falls directly in his circle of competence he gets his bread and butter by investing money of H.N.I all across the world.

I hope sooner or later ,i as a investor hear him bragging about his edelweiss investment thesis in one of his youtube videos like he does for Rain and Suntech.

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1077

Rating Update : Rating reaffirmed; outlook revised to Stable

https://www.icra.in/Rationale/ShowRationaleReport/?Id=112654

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1078

I believe there is an overestimation on their part here. IIFL Wealth on FY22 PAT is valued at 25 PE. On that basis, EWM should be valued at around 6000 crs with their FY22 PAT= 241 Cr. That is quite farfetched from 10000 Crs.

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1079

Scattered Thoughts on EDEL:

Mutual Fund Ownership:
A total of 5 mutual fund schemes own EDEL - all passive ETFs.
Stock is definitely overlooked, I’d have expected some value hunter fund manager to invest here.

Valuation
Annualised Q1 FY23 profit takes us to 14x earnings at the current price
(I’m using the ex-insurance PAT, thus assuming 0 value for insurance subs.)

All businesses, except Alternatives, generate terribly low ROE - no wonder stock trades at 0.8x BV.

Business Quality:
I think the key issue is while Financial Services is a great growth story in general - all of Edelweiss’ businesses are subpar - not in the top 3 or top 5 of the category.
(Except ARC (where ROE is <10%) and haven’t looked at the data in Alternatives which actually looks like a good business)

Three key things: Scale, Competitive Advantage, and Speciality. These businesses have none (0/3) - combined with the fact that the market doesn’t believe one word coming out of Rashesh Shah’s mouth (and I don’t think that unfair either)

Way Forward:
That said if you’re a shareholder, and I am - the expectations are low and the market is allocating very little or zero value to potential improvements in business prospects.

Any enterprising investor with a SOTP, please do share.

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1080

very well put @investor12321.

The star of the Q1 results is AIF and they are one of the leader in the segment in India. AIF needs lot of experience and it takes time to develop and needs track record to demonstrate it. The fact that their AUM (committed not deployed) is showing rapid growth auger well for the AIF business.

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They have deployed 20k cr so far and in last 2 quarters they have deployed around 2800-3000 cr. So if they continue their earlier momentum, fee paying AUM will cross more than 25k in next four quarters. Currently AIF is showing 21 cr PAT, so by next June, it is likely to be around 30cr and that is only fee paying income.

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The management (Mr Shah) said, that once they start exiting the investment there will be decent carry income. In last 2/3 quarts they have saying they have existed investment but they have not said how much is the carry income, neither they mentioned what is IRR for these investments. This is very basis things one would have expected them to report, so it looks like they may not have earned decent returns.

Having said, I think this business shall report 100cr PAT + going forward (with consistently and stability) in their fee income. Once they start receiving carry income, the PAT could double, but it shall take another couple of years to materialise once they start existing their investment. Untill then, fee income will be keep the momentum going.

As per this document in early 2022

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Also the good part is they own 100% of it. I wish and hope that they do not dispose it the way they dispose the Wealth management business at depress price.

Rest of the business are more or less same as Q4-Fy22, with same profitability, except insurance which is reporting higher losses because they have increased their shareholding in life insurance business from 51 to 66%.

Also they have been talking about co-lending since ages, but it is yet to show in their results. Looks like others NBFC (e.g. IIFL, Capri) are firing on all cylinders as far as co-lending is concerned, but Edel is happy to just talk about it now leaving the execution for some other day.

So in nutshell, pretty ordinary Q1 result, with nothing more to talk about it.

I found this info very helpful if one wants to know little bit more about AIF business of Blackstone, the biggest alternative asset manager in the world with AUM around $1 trillion.

Note- Invested and biased.

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1081

Aren’t they supposed to accrue carry income on the books anyway?

Not sure what the accounting treatment is.

If you look at KKR, BX, or BAM. They all disclose fee income and carry income.

1082

I agree, they are suppose to a accure carry income. But carry income is only accused only if they delivered beyond certain IRR/threshold.

I am not sure why they are not reporting carry income, is it because it is low IRR or too low, but it is not clear. Hard to find and as they are no more regular con call.

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1083

Market is assigning Credit biz close to 0 (or -ve value. Main equity guzzler)
Wealth / AMC / ARC businesses are solid business with leadership positions in 2 of them

They need to make substantial improvements in 3 things for markets to reward higher value

  1. Corp Governance
  2. Stop allocating more money to Also ran biz (GI / LI)
  3. Improve ROE

Having said that their 3 non-credit biz should be valued more than the current mkt cap. Unless they keep screwing it up in leveraged biz.

Disc: Invested at current prices

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1084

Not sure I agree with AMC being a good business.
They’re #13 by AUM, and more than 75% AUM is non equity resulting in much lower yield - plus largely ETFs, FoFs etc.

Radhika Gupta is particularly visible on social media but there’s not much substance in the actual business.

FY22 ROE was around 11%.
HDFC AMC and Nippon are in the 20s.

Best case scenario is that this business gets sold to one of the larger ones.

Regulators are more and more liberal in giving out AMC and PMS/AIF licenses - further increasing competition on the margin.

I remember discussing on VP that both Nippon and HDFC have cash piles as they’re looking to acquire.

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1085

Unlike businesses like platform biz, AMC biz can be 10th or 15th and still make money. AUM of ~100K cr means 2.5K - 3K valuation can be obtained by selling. It is a very long runway biz.

Radhika gupta is visible for her non-finance posts. I dont see much of her in Finance/market programs discussing ideas

1086

I fail to understand why people keep on saying they have corp governance issue ?

If you feel like Rashesh shah has corporate governance issue then you are completely wrong , if he had some personal motives he wouldn’t be bringing the credit business down at this hyper speed. Only leverage can ruin the business and he has bought the debt down from high of 48k crore to 22k crore as of today.

His motives are in line with the shareholders, he was poor back in 90s took the risk of putting all his personal savings along with the only house his family had on line, he will not try to do something stupid cause he knows all the money can go away if any of the scam ever comes out.

Market has discounted the business at worst case scenario. It is just a matter of time because as soon as a little bit of growth comes back ( which will take 2-3 years ) market will give it a double growth of increased P/E along with the actual value of the growth. This company should be a 5-6 bagger in next 4-5 years, however there is a possibility of credit market being hit again because of the staglation and in that case company will take a hit but the probability of another credit market hit is quit low.

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1087

Good report from rating agency, talking in detail various concerns

1088

The performance IMO, is moderate
The sector is largely dependant on growth (Indian +Global) slowing growth is not something which can lead to out performance. In this environment wealth and ARC are the only ones which will outperform.
ARC is very backended and Lumpy business. Investments are frontended. Insurance is cut throat, it’s stable business requires scale to be profitable. Slow companies can take upto 10 yrs to be profitable.
I am hopeful ARC business shows gd returns from this year.

Disclosure : Invested

1089

I dont see any Q1FY23 earning call Recording or Transcripts ? Anybody knows if they have stopped the Earning calls ?