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Edelweiss Financial Services (EDEL IN) Summary

Core Content

Edelweiss Financial Services (EDEL IN) is a diversified financial services company that has evolved from a boutique investment bank into a quasi-bank with a strong focus on credit services. The company has a market capitalization of INR47.8B and a share price of INR59, with a target price of INR80 (a +35% increase). The company's share price has shown strong performance with a 29.2% growth over the past 12 months. EDEL has a free float of 34.8%, and its major shareholders include Rashesh Shah (28%), Carlyle Group (8.5%), and Venkat Ramaswamy (10%).

Main Points

• Diversified Business Model: EDEL operates in multiple segments including credit, investment banking, broking, asset management, and life insurance. It is structured as a non-bank finance company (NBFC) but functions similarly to a bank due to its diversified services and strong underwriting capabilities.

• Credit Business Dominance: The credit business forms more than 60% of EDEL's profit after tax (PAT) and is expected to grow to 70% of both revenue and net profit by FY18. It includes products such as mortgages, structured loans, SME and agri financing, and commodity financing. The credit book has grown at a 54% CAGR over the past four years, with 25% CAGR expected over FY16-18.

• Agency Business Reduction: EDEL has reduced its reliance on the volatile agency business from 65% in FY11 to 35% in FY15, which is viewed as a positive development.

• Strong Earnings and ROE: EDEL has delivered 37% CAGR in earnings over FY12-15. It is forecasted to maintain 22% EPS growth over FY16-18. The company's ROE is expected to rise from 15.6% in FY15 to 17.7% in FY18.

• Sum-of-the-Parts (SOTP) Valuation: EDEL is valued using SOTP based on its different business segments. The credit business is valued at INR44 per share, the agency business at INR26 per share, and other segments at INR10 per share, leading to a target price of INR80.

• Stable Asset Quality: EDEL maintains stable NPLs (gross NPLs at 1.3%, net NPLs at 0.4% in FY15). It has a collateral cover of 2.3x for wholesale loans, ensuring high recoverability.

• Asset Reconstruction Company (ARC): EDEL ARC, which is part of EDEL, is now the largest ARC in India with assets under management (AUM) of INR203b in FY15. It is expected to grow at 25% CAGR in the next few years.

• Agriculture Commodity Financing: This segment is considered the next big growth driver, with a projected 50% CAGR over FY16-18. EDEL has built a network of 160 warehouses and plans to expand to 300 by Mar'16.

• Liquidity and Interest Rate Environment: EDEL operates in a wholesale-funded model, which is supported by a benign liquidity and interest rate environment. The RBI has reduced interest rates by 125bps YTD, and EDEL's capital adequacy ratio (CAR) is currently at 19.3%, expected to drop to 15.2% by FY18.

• Management and Strategic Growth: EDEL has a strong management team with experience in financial services. It has been focused on scaling up its business through diversification and investment in technology and infrastructure.

Key Information

• Share Price: INR59
• Target Price: INR80 (+35%)
• Market Cap (USD): 731M
• Average Daily Trading Value (USD): 1M
• 52-Week High/Low (INR): 76/46
• 3-Month Average Turnover (USDm): 1.5
• Free Float (%): 34.8
• Issued Shares (m): 809
• ROE (FY15): 15.6%
• ROE Forecast (FY18): 17.7%
• EPS Growth Forecast (FY16-18): 22% pa
• Loan Growth Forecast (FY16-18): 25% pa
• Gross NPLs (FY15): 1.3%
• Net NPLs (FY15): 0.4%
• CAR (FY15): 19.3%
• CAR Forecast (FY18): 15.2%
• AUM of EDEL ARC (FY15): INR203b
• Target AUM of EDEL ARC (FY18): INR50b
• Warehouse Network (as of FY15): 160 warehouses in 100 locations
• Planned Warehouse Expansion (by Mar'16): 300 warehouses
• Warehouse Capacity (as of FY15): 600,000 tonnes
• Planned Warehouse Capacity (by 2020): 3m tonnes
• Shareholding Structure:
  • Promoters: 37.2%
  • Foreign Institutional Investors (FII): 31.5%
  • Domestic Institutional Investors (DII): 0.7%
  • Others: 30.6%
  • Key Shareholders:
    • Rashesh Shah: 16.7%
    • Carlyle Group LP: 8.5%
    • Venkat Ramaswamy: 6.6%

Risks

• Systemic Liquidity and Interest Rate Risks: Tight liquidity or adverse interest rate changes could hamper EDEL's ability to borrow from markets.
• Regulatory Changes: Regulatory shifts, such as the 2014 change in the contribution of ARC in loan acquisition, may affect growth trajectories.
• New Business Pressures: The introduction of new business lines such as commodity financing and loan against property (LAP) could put short-term pressure on asset quality.

Conclusion

EDEL has successfully transformed from an investment bank into a diversified financial services company with a strong emphasis on credit and asset reconstruction. Its diversified business model, improving ROE, and strong asset quality support its BUY rating. The company is well-positioned to benefit from ongoing growth in the credit and agriculture financing sectors, as well as improving capital market conditions. The SOTP valuation of INR80 reflects the potential of its core businesses and the management's strategic direction.