Edelweiss Financial Services Ltd

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About the Company

Edelweiss is one of India’s leading financial services conglomerates, offering a robust platform, to a diversified client base across domestic and global geographies.

Their key lines of businesses are

• Credit (Retail, Corporate)
• Investment & Advisory (Wealth Management, Asset Management, and Capital Markets)
• Insurance (Life, General)

Q1 2020 Updates

Financial Results & Highlights

Detailed Results

1. 1. The revenues for the quarter were flat YoY but down by 14% QoQ.
   2. Profitability took a big knock this quarter, down 49% YoY and 45% QoQ.
   3. Credit Business had a muted Q1FY20 due to higher liquidity management and higher credit costs.
   4. At the end of Q1FY20, Retail Credit book was INR 16,981 Cr and Corporate Credit book was INR 16,987 Cr.
   5. Total Credit Book including Distressed Credit stands at INR 42,599 Cr at the end of Q1FY20.
   6. Gross NPAs at 2.33% and Net NPAs at 1.24%.
   7. Overall Liquidity maintained at ~INR 8,800 Cr
   8. The consolidated Capital Adequacy Ratio for Edelweiss Group is 19.4% as on 30th June 2019.
   9. Debt equity ratio (Ex-treasury) has come down to a comfortable level of 3.7 due to infusion of liquidity and repaying of some old debt. Having a conservative debt-equity ratio would depress the ROE in the short term. However, it will help them to be better prepared for future growth.
   10. The Asset Under Advisory of the Wealth Management business grew to ~INR 1,06,600 Cr at the end of Q1FY20.
   11. The total AuM of Asset Management business stood at ~INR 36,300 Cr at the end of Q1FY20
   12. Customer Assets grew 14% YoY in Advisory business despite low client activity and volumes.
   13. Successfully executed 2 deals in Alternatives Asset Management to capitalize on the deployment opportunity.
   14. One of the fastest-growing Life Insurers on Individual APE basis; Embedded Value at INR 1,501 Cr as on 30th June 2019.
   15. In the insurance business, the company continues to expand its distribution footprint across the agency and alternate channels with presence across 121 branches in 93 locations and the agency channel force of ~ 44,506 Personal Financial Advisors.
   16. BMU losses which include the cost of liquidity management stood at INR 38 Cr.
   17. Ex-Insurance RoA at 1.7% and RoE at 10.2%.

Investor Conference Call Highlights

1. Management experiences the economy-wide slowdown and hence facing some cash flow related stress in their assets. However, the collateral value remains stable and average collateral cover remains 1.8 times the loan book.
2. Liquidity conditions have now remained tight for an unprecedented period of time. Consumer demand slowdown is now an economy-wide issue – this is not an NBFC issue anymore. Intense risk aversion prevails amongst both the lenders and investors. H1 profits will be muted primarily because of the increase in credit cost
3. The financial results have been impacted mainly due to high credit cost. Normally credit cost amounts to 100 to 120 Cr per quarter. However, this quarter the same has jumped to 250 Cr, thereby impacting the results heavily.
4. Management guides that this financial year will be the year of consolidation and cleaning up of the books.
5. Company has diversified its borrowing mix and have almost zero exposure to commercial paper.
6. Management is going to focus on improving liquidity and asset quality.
7. Key risk is in projects that are not being completed either due to lack of cash flow or due to lack of execution capability.
8. Out of 160 portfolios of projects, the company believes around 30-35 are those which need closer monitoring and focus.
9. Non-credit businesses and retail credit business have performed well. It is the corporate credit which has taken a knock.
10. Mutual fund distribution income forms a very insignificant part of the wealth management business. Hence, while the SEBI regulation related to rationalizing of expense ratio has affected them only partially.
11. Revenue is down 20% YoY in the Wealth Management business because of the low level of activity.
12. 20% decline in operating expenses (YoY) because of operating leverage. Technology investment is replacing people investment.
13. The company does not have much short term requirement of liquidity as there is almost zero commercial paper due for redemption. Hence, the overnight liquidity cover has come down and cash is more efficiently utilized in treasury assets.
14. Company is moving away from NPA provisioning approach to Expected Credit Loss (ECL) approach. They do not want to wait for the account to become an NPA and then provision for it. Rather they are trying to follow a mark-down approach in case of some of the sticky accounts where they feel there is a high probability of the account to become an NPA in the future.
15. Borrowing mix is largely to be from bank lines and retail NCDs. The quantum per quarter is reduced from 4000 Cr last year to around 2000 Cr this year as a conservative policy, given the challenging environment.
16. Provision coverage for the company as on date: Home loans: 10-20%, SME: 100% after 120 days, Collateralized Wholesale Loans: 45-50%.
17. Out of around 40000 Cr AUM in ARC business, the company has managed to get a recovery of around 12000 Cr and in FY20 they expect recoveries to be in the range of 12000-13000 Cr.
18. In ARC business, Edelweiss holds 60%, CDPQ holds 20% and other old HNI investors hold 20%.
19. The focus would be more on higher fee-generating activity to improve the ROA. Hence, going forward, the company intends to increase the ROE by increasing ROA and keeping leverage at check.

Analyst’s View

Edelweiss Financial Services Limited is one of India’s leading diversified financial services companies. The NBFC slowdown and liquidity tightening pressure have surely taken a toll on the company’s reported earnings. Their credit cost has risen substantially this quarter. As per the management guidance and the prevailing macro environment, in the near term, worries will persist for the company.  Lower ROA and leverage has impacted the ROE heavily. Nonetheless, there is one big news to cheer about for the company. An existing long term investor in Edelweiss, Kora Management, is investing a total of ~INR 875 Cr ($125 mn) of which ~INR 525 Cr ($75 mn) will be in Edelweiss Global Investment Advisors (EGIA), the advisory business. They are also close to finalizing other marquee investors for this first external investment round in EGIA, which will be limited to ~INR 1,400 Cr ($200 mn) in all. The inflow of patient capital would help the company withstand the challenging times in the near term. Due to the diversified business model they have in place in the financial service business, Edelweiss would be a company to watch out for once the economy starts moving upwards. However, in the near term, multiple challenges persist.

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