Be Wise, Invest In EDELWEISS!

Edelweiss Financial Services Limited (EDEL), incorporated in 1995, is a diversified financial services group. Since its inception, the company's total revenue has grown at a CAGR of 85 per cent up to FY17.

Here, at DSIJ, we present an exclusive analysis of Edelweiss Financial Services Limited, a leading financial services group in India.

COMPANY OVERVIEW:

Edelweiss Financial Services comprises three scalable business segments, namely, credit, franchise and insurance. The credit business of Edelweiss consists of retail credit, corporate credit and distressed assets resolution business (DARB). Its franchise businesses include wealth management, asset management and capital markets. The company has a client base of about 1.1 million, which it serves through more than 6900 employees based out of more than 275 domestic and international offices in more than 125 cities. The company also has a network of over 4500 sub-brokers and authorized persons.

Over the years, Edelweiss has expanded its business from capital markets to credit, asset management, life insurance and asset reconstruction (ARC).

Although Edelweiss remains a niche player in the credit business, it is among the market leaders in asset reconstruction, wealth management and domestic capital markets. It is also one of the fastest growing life insurance company in India over the last three years. So far, the credit business has been the major contributor to the bottomline. However, the non-credit businesses have improved and will soon start to make a meaningful contribution to the bottomline of the company. The company's board has recently approved raising up to Rs.2,000 crore through various modes, including bonds, rights issue or qualified institutional placement (QIP). Recently, CRISIL assigned the rating of 'CRISIL A1+' to the two proposed short term debt issues of the company having issue size of Rs.3000 crore each.

RETAIL CREDIT BUSINESS TO INCREASE 

The Company’s credit book has grown at a three-year CAGR of 46 per cent. In FY17, the credit business contributed 73 per cent to the company's consolidated profit. At the end of June 2017, Edelweiss had an outstanding credit book of Rs.299 billion. Currently, about 49 per cent of the credit book comprises of corporate credit. Over the next few years, the company plans to increase the share of retail segment in its credit book. In Q1FY18, retail loans formed 34 per cent of total credit, which is likely to increase further. Maintaining credit quality is the key to sustainable growth in the credit business. The company follows conservative risk management practices and focuses only on collateral lending. We expect growth trends to remain strong given the company's low share in the credit market and presence across niche product categories.

CAPITAL MARKETS BUSINESS

Edelweiss is a formidable player in the capital markets business and also a leading domestic broking house. It enjoys a sizeable market share in the broking and investment banking businesses. In FY17, the company's revenue from the capital markets business grew by 22 per cent YoY to Rs.556 crore, while the profit grew by 69 per cent YoY to Rs.115 crore. Given the buoyant outlook for the Indian capital markets, Edelweiss is well placed to gain.

AGRI SERVICES BUSINESS TO EXPAND

Edelweiss is expanding its wings in the agri-services business. Currently, the company provides warehouse and agri-credit services. As of March 2017, Edelweiss operated about 435 warehouses across India. Its agri credit book stands at Rs.463 crore, up by 77 per cent YoY. We believe this business is highly niche in nature from a risk management perspective and offers strong growth opportunities. Edelweiss is among the few organized players in this space and with adequate risk mitigating measures in place, the company is poised to grow profitably in this segment.

PROFITABILITY FOR ARC BUSINESS

Edelweiss Asset Reconstruction Company is one of the largest ARCs in the country and has bought stressed assets worth Rs.35,000 crore in the last four years. The company is planning to buy Rs.1500-2000 crore worth of bad loans in the current fiscal. The company is further looking to buy assets in the steel sector as there are viable assets which could be recovered given the change in commodity cycles, policy changes and also aided by the insolvency and bankruptcy law. A strong growth path is visible for the company's ARC business as resolution of some large deals are already within sight, precarious stressed assets situation in the Indian banking sector and the resolve of RBI and the government to address the NPA issue. We expect this segment to deliver a healthy profit growth going forward.

WEALTH MANAGEMENT BUSINESS

Edelweiss' assets under advice surged to Rs.603 billion in FY17, adding Rs.308 billion during the year. It further scaled up to Rs.659 billion at the end of Q1FY18.

Edelweiss has restructured its client on-boarding process, reducing turnaround time from seven days to only thirty minutes. Speedier client addition will ensure growth in its assets under advice. The contribution of wealth management business to the bottomline is negligible at present; but it is likely that it will increase in the coming years.

FINANCIALS

Edelweiss' quarterly profits have been improving consistently since FY12. The company has recorded five straight years of consistent growth. Since its inception, the company's net profit has increased at a CAGR of 80 per cent up to FY17. In the last five years, the company's total revenue and net profit have grown at a CAGR of 32 per cent and 37 per cent, respectively.

Edelweiss posted 28.82 per cent increase in its net sales to Rs.1887.87 crore in Q1FY18 from Rs.1465.4 crore in Q1FY17. The company's net profit rose 40.5 per cent from Rs.139.68 to Rs.196.3 crore for the corresponding period.

On an annual basis, the company's net sales rose 25.46 per cent to Rs.6592.08 crore in FY17 as compared to Rs.5253.94 crore in the previous fiscal. The company's net profit soared from Rs.335.70 crore in FY16 to Rs.548.48 crore in FY17, registering 63.38 per cent increase. In the recent analyst meet, the company's management restated targets of 25-35 per cent PAT growth and continuous improvement in return on equity.

On the valuation front, the company maintained a PE ratio of 37.99x, as against its peers' Max Financial Services (136.19x), IIFL Holdings (26.05x) and Bajaj Holdings & Investment (12.54x). The company's P/B ratio stood at 5.59x, as against its peers' Max Financial Services (8.19x), IIFL Holdings (4.2x) and Bajaj Holdings & Investment (1.78x). The company's ROE stood at 15.24 per cent and its ROCE at 17.50 per cent. The company has been maintaining a healthy dividend payout of 21.38 per cent.

With its diversified business model and expected growth in agri-services business and ARC business segments, we recommend HOLD on the stock for our reader-investors.