Edelweiss Financial Services (EDEL IN) Summary
Core Information
- Share Price: INR59
- Target Price: INR80 (+36%)
- Market Cap (USD): 738M
- Average Daily Trading Volume (USD): 1M
- ROE (ex-insurance): Improved from 15.1% to 17.4% YoY
- ROE (ex-insurance) Forecast: Expected to reach 17.7% by FY18F
- Valuation: Current P/BV is 1.2x FY17F, considered attractive
Key Performance Highlights
2QFY16 Performance
- EPS (ex-insurance) Growth: 33% YoY, in-line with estimates
- Loan Growth: 64% YoY, driven by SME, retail, and agriculture segments
- Retail Loans: Now 30% of total loan mix
- Asset Quality: Gross NPLs at 1.5%, provision coverage ratio at 93%
- NIM: Dropped 10bps QoQ to 6.6% due to retail loan mix
- Fee Income: Dropped 9% QoQ due to capital market volatility and lower IB deals
- 2HFY16 Outlook: Improved from capital market business with planned IPOs
Business Segments
| Segment |
FY15 |
FY16F |
FY17F |
FY18F |
| Credit Business |
2,300 |
2,812 |
3,423 |
4,196 |
| Agency Business |
1,340 |
1,536 |
1,728 |
1,930 |
| Corporate & B/S Mgt. Unit |
180 |
189 |
198 |
208 |
| Total Ex-Insurance |
3,820 |
4,537 |
5,349 |
6,335 |
| Insurance Business |
-520 |
-468 |
-421 |
-379 |
| Total |
3,300 |
4,069 |
4,928 |
5,955 |
ROE (ex-Insurance)
| Year |
ROE (%) |
| FY15 |
15.6 |
| FY16F |
16.4 |
| FY17F |
17.1 |
| FY18F |
17.7 |
Valuation and Forecast
Sum-of-the-Parts Target Price (INR)
| Particulars |
FY17F (INRm) |
Multiple (x) |
Value (INRm) |
Per Share (INR) |
| Credit Business - NW |
23,225 |
1.5 |
34,837 |
44 |
| Agency Business - PAT |
1,728 |
12 |
20,734 |
26 |
| Insurance (74%) - NW |
4,801 |
1.0 |
4,801 |
6 |
| Investments/BMU - NW |
2,976 |
1.0 |
2,976 |
4 |
| Total |
63,348 |
- |
63,348 |
80 |
Key Financial Metrics (FYE Mar)
| Metric |
FY14A |
FY15A |
FY16E |
FY17E |
FY18E |
| Operating Income |
12,715.8 |
19,227.7 |
23,184.7 |
26,909.5 |
30,997.0 |
| Pre-Provision Profit |
4,142.0 |
6,425.6 |
7,838.9 |
9,199.4 |
10,909.6 |
| Core Net Profit |
2,202.3 |
3,287.1 |
4,069.2 |
4,928.2 |
5,955.5 |
| Core EPS Growth (%) |
15.4 |
45.0 |
23.8 |
21.1 |
20.8 |
| Core P/E (x) |
20.6 |
14.2 |
11.5 |
9.5 |
7.8 |
| P/BV (x) |
1.6 |
1.5 |
1.4 |
1.2 |
1.1 |
| Net Dividend Yield (%) |
1.2 |
1.8 |
2.0 |
2.4 |
2.7 |
| Book Value (INR) |
38 |
40 |
44 |
48 |
54 |
| ROAE (%) |
8.2 |
10.9 |
12.3 |
13.6 |
14.8 |
| ROAA (%) |
1.3 |
1.4 |
1.2 |
1.2 |
1.2 |
Loan and Borrowing Composition
Loan Growth (2Q16)
| Loan Type |
2Q15 |
1Q16 |
2Q16 |
YoY (%) |
QoQ (%) |
| Mortgages |
41,730 |
65,320 |
67,480 |
61.7% |
3.3% |
| Wholesale |
42,250 |
63,450 |
60,350 |
42.8% |
-4.9% |
| Distressed Asset Loans |
8,060 |
12,640 |
14,420 |
78.9% |
14.1% |
| SME & Agri. |
5,470 |
10,830 |
13,280 |
142.8% |
22.6% |
| LAS & Others |
8,440 |
12,070 |
17,680 |
109.5% |
46.5% |
| Total Loans |
105,950 |
164,310 |
173,210 |
63.5% |
5.4% |
Borrowing Mix (2Q16)
| Borrowing Type |
2Q15 |
1Q16 |
2Q16 |
YoY (%) |
QoQ (%) |
| Debt Market |
49,556 |
93,670 |
100,183 |
102.2% |
7.0% |
| Bank |
48,054 |
64,090 |
61,651 |
28.3% |
-3.8% |
| ASB |
28,532 |
41,905 |
48,807 |
71.1% |
16.5% |
| Retail |
22,526 |
34,510 |
35,963 |
59.7% |
4.2% |
| Others |
1,502 |
12,325 |
10,275 |
584.2% |
-16.6% |
| Total Borrowings |
150,170 |
246,500 |
256,880 |
71.1% |
4.2% |
Financial Ratios
| Ratio |
FY14A |
FY15A |
FY16E |
FY17E |
FY18E |
| Net Interest Income Growth (%) |
33.9 |
33.3 |
31.4 |
18.8 |
22.7 |
| Non-Interest Income Growth (%) |
14.5 |
65.5 |
13.6 |
14.0 |
9.4 |
| Operating Expenses Growth (%) |
14.0 |
49.3 |
19.9 |
15.4 |
13.4 |
| Pre-Provision Profit Growth (%) |
44.3 |
55.1 |
22.0 |
17.4 |
18.6 |
| Core Net Profit Growth (%) |
23.4 |
49.3 |
23.8 |
21.1 |
20.8 |
| Gross Loans Growth (%) |
36.9 |
68.6 |
25.0 |
25.1 |
25.6 |
| ROAE (%) |
8.2 |
10.9 |
12.3 |
13.6 |
14.8 |
| ROAA (%) |
1.3 |
1.4 |
1.2 |
1.2 |
1.2 |
| Shareholders' Equity / Assets (%) |
15.9 |
10.4 |
9.4 |
8.6 |
7.9 |
Outlook
- EPS Growth: Expected to grow at 22% pa over FY16-18, driven by credit and agency businesses
- Loan Growth: Forecasted to grow at 25% CAGR over FY16-18F
- Diversification: Strategy is on track, reducing dependence on volatile agency business
- Valuation: Current P/BV is 1.2x, attractive for investment
- Dividend Yield: Expected to increase from 1.2% to 2.7% by FY18E
Insurance Business
- Gross Premium Income: Grew significantly in 2Q16
- Loss for 2Q16: INR329m
- Expected Share of Loss: Reduced due to increased stake in Tokio Life (from 26% to 49%)
Summary
Edelweiss Financial Services (EDEL IN) has demonstrated strong performance in its credit business, with consistent EPS growth and improved profitability. The company's diversification strategy is on track, with a reduced reliance on volatile agency income and an increased focus on retail loans. The target price of INR80 reflects a 36% increase from the current share price, based on a sum-of-the-parts valuation. The stock currently trades at an attractive P/BV of 1.2x FY17F, and is expected to see further valuation improvement as ROE continues to rise. The company's financial metrics, including operating income and core net profit, are showing positive trends, supporting the BUY recommendation. The insurance business, while incurring losses, is expected to see a reduction in the company's share of those losses due to increased ownership in Tokio Life.
