Edelweiss Financial Services Ltd

Last modified by Asif Farooqui on 2021/03/29 10:55

Overview

Edelweiss Financial Services (NSE:EDELWEISS)is one of India's leading financial services conglomerates, offering a robust platform to a diversified client base across domestic and global geographies.¹

The company's continuous and single-minded focus is on understanding customers’ needs and offering the right financial solutions. Present in every financial life stage of a customer, helping them create wealth, grow wealth and protect everything, are its key lines of business.

Credit (Retail, Corporate)
Investment & Advisory (Wealth Management, Asset Management)
Insurance (Life, General)

This diversified business model reflects its experience across India's multiple consuming facets, from industrial behemoths and large companies to small business as well as the average Indian urban and rural household.

The company's 1.2 million strong client base is serviced through a network of over 476 offices, with close to 11,000 employees. Together with a strong network of Sub-Brokers and Authorized Persons, the Group has a presence across all major cities in India.

Business Segments

Edelweiss has a wide range of products and solutions in different market segments for institutional and corporate clients.

Credit

Retail Credit

As India transforms its lending models to cater to the myriad credit needs of its economy, Edelweiss keeps pace with this transformation through its varied initiatives.²

With a focus on being asset light and tech heavy, the company leverage Co-Lending and other evolving models of credit, to ease loan lifecycles for its customers – be it MSMEs, Entrepreneurs, Agri & Rural Supply Chains or Individuals.

Corporate Credit

At Edelweiss, the company aim to meet the myriad financing requirements of corporate India, through a wide range of customised structured solutions that meet liquidity and investment needs.³

Backed by a strong team and adhering to high standards of risk and compliance, the company offer efficiency in operations and service delivery to Indian conglomerates, multinational companies, financial institutions and promoters seeking to leverage their shareholding.

Structured Collateralised Credit – Edelweiss Financial Services is one of the leading players in structured finance, offering bespoke solutions to promoters and corporates, for their capital needs. The company's team has in-depth experience concluding complex trades, evaluating and mitigating associated risks and maintaining a healthy portfolio of loans.

Wholesale Mortgage – The company cover the entire lifecycle of a developer’s needs in entirety, from construction finance to inventory funding. Edelweiss Financial Services is equipped to deal with the highly regulated complexities prevalent in real estate sector and are adept in handling dependency on multiple authorities.

Investment & Advisory

Wealth Management

Increasing wealth in India, greater interest in equities and other asset classes including non-traditional alternatives assets and the emergence of an aspirational middle class, creates a favourable landscape for significant expansion in wealth management.⁴

A robust and cost-effective business model focused on improved transparency and compliance, synergistic partnerships and efficient technology solutions, supports its highly customised approach to wealth creation.

The company offer differentiated value propositions to its customers, delivered through its specialist financial advisors as well as through its user-friendly digital platforms.

Asset Management

Edelweiss Asset Management Limited (EAML), is part of the Edelweiss Investment & Advisory Business. EAML is one of the youngest and fastest growing AMCs’, in India. At EAML, the company aim to do things differently, adding continuous value, to both its partners and investors.⁵

Edelweiss Financial Services has two investment platforms catering to varied investor needs – Mutual Funds and Alternatives.

The company's Mutual Fund product suite encompass the entire risk-return spectrum and is designed to offer the best opportunity for investment growth in Indian & Global asset classes. The company believe in providing simplistic True-To-Label products and solutions for its investors. The company also provide world-class knowledge platforms for its partners and investors, to keep them updated. The company's endeavour is to provide the best digital experience to investors and partners, through continuous innovation and cutting-edge technology.

Edelweiss Financial Services is one of the largest players in the Alternative Investment solutions space, in India. Edelweiss Financial Services has been managing alternative investments for investors since 2009, offering investment strategies and portfolio management services.

The company strongly believe and value teamwork. Edelweiss Financial Services is an exciting place to work with young team with diverse experience. Edelweiss Financial Services is present across the country in 12 locations, with robust teams and in-depth expertise, across the Asset Management industry.

Capital Markets

The company's Capital Markets businesses include Investment Banking, Institutional Equities, Forex Trading, Prime Brokerage and Financial Products Distribution.⁶

With a team strength of over 700, Edelweiss Financial Services is present across the spectrum of Capital Markets, with long standing industry relationships dedicated to providing highest quality financial advice and transaction execution.

Edelweiss continues to be among the leaders in Investment Banking and Fixed Income Advisory. The company's Equity Capital Markets business has been ranked No.1* lead arranger for IPOs. The company continue to maintain its leadership position in Public Issues of Debt as lead arranger, as well as in the short-term commercial paper (CP) segment, as per Prime Database.

The company also continue to be among the largest Indian domestic Institutional Broking Houses in the country, with a market share of 4 to 4.5% by revenue.

Insurance

Life Insurance

Established in 2011, Edelweiss Tokio Life Insurance Company, is a joint venture between Edelweiss Financial Services Ltd. and Tokio Marine Holdings Inc., one of the oldest and largest insurance companies in Japan. Edelweiss Tokio Life Insurance Company Limited, brings a need-based approach to life insurance, based on its values of quality, cost-consciousness and customer-centricity.⁷

As a brand, the company believe in making Zindagi Unlimited for its customers, partners and employees. The company do this by going beyond offering life insurance and proactively seeking insights into protecting customer dreams and aspirations. These insights form the basis of its service excellence and effectively translating into products that fulfil and protect.

General Insurance

Edelweiss General Insurance aims to bridge the distance between customers and insurance, by making insurance disarmingly effortless. Understanding the pulse of customer requirements, its products are based on real needs and relevant to what is currently needed to protect you and your family.⁸

Backed by a strong regulatory framework and a service that is prompt and caring, the company help you protect what you love and take tremendous pride in saying you can take it for granted!

Industry Overview

The global economy had been enjoying a modest recovery on the back of the US Fed’s balance sheet expansion since late 2019, until it encountered a speed breaker in the form of the Covid-19 pandemic.⁹

The Indian economy was stabilising post the economic slowdown, owing to large liquidity injections from the Reserve Bank of India (RBI). Systemic liquidity has been running in surplus in the last twelve months. On the reforms front, India made considerable progress with a reduction in corporate tax rates.

On the monetary policy front, the RBI has been accommodative by cutting policy rates by 250 bps since April 2019. It indicated in its announcement on May 22, 2020 that post the pandemic, real GDP is likely to contract in FY21 and hinted that if inflation progresses as per expectation, it will open up more room for rate cuts.

On the fiscal front, the Government maintained fiscal prudence in FY20, though the recent stimulus package would cause a dent. This has resulted in India’s macro stability being significantly anchored. From being a current account deficit country, India is on its path to having a current account surplus.

With the ongoing Covid-19 crisis, operating conditions are challenging in the near term with the FY20 GDP growth at 4.2% and real GDP likely to slip into negative territory in FY21. Bringing back the economy on a growth path would be arduous. However, the company see two big opportunities for India. First, the sharp fall in oil prices. Second, the global narrative to diversify facilities from China. In this context, it is important that the company capitalise on these opportunities.

Overall Outlook

While the near-term outlook post lockdown is clouded with challenges, the company believe that the medium-term looks brighter. As developed markets continue with fiscal and monetary expansion, emerging markets will benefit significantly on the exports front. In this context, India could potentially be a big winner. On the flip side, however, a prolonged Covid-19 crisis across the world has the potential to play spoilsport. Therefore, it is expected that while economic activity will remain muted in FY21, it should gradually start to gain traction.

Industry Structure and Developments

NBFC Industry

The past few quarters have been volatile for Non-Banking Financial Companies (NBFCs) triggering fear of a liquidity crisis. However, this fear has remained largely unfounded as most players were well-capitalised to handle any short-term market dislocation. Although, funding did become more expensive in this backdrop. As a result, risk appetite waned, impacting growth of the NBFC sector, as it focused more on liquidity management rather than asset growth.

Going forward, while the segment is not entirely out of the woods, comfortable capital position, control on asset quality and strengthened liquidity management practices will continue to provide comfort.

Retail Finance

India has one of the lowest credit penetration among larger economies and retail credit presents a large growth opportunity driven by long-term trends in democratisation of credit, rising household income and increased consumption. However, current challenges turn the consumption-driven story on its head.

Asset financing and consumption financing may be subdued as lenders focus on existing customers before they embark upon a growth trajectory again.

Asset Reconstruction Industry

Asset Reconstruction Companies (ARCs) play a significant part by not only purchasing Non-Performing Assets (NPAs) from the banking system, but also by helping companies restructure and revive, while putting productive assets back into the mainstream economy.

For ARCs, the end of FY20 turned challenging due to Covid-19, which impacted recovery from potential assets. At the same time, as the lenders registered higher delinquencies, this increased the pool of assets for acquisition by ARCs.

At the end of FY20, AuM of ARCs, as per market estimates, was ~ Rs 1.1 trillion, with underlying Gross Loans of ~ Rs 4 trillion.

Wealth Management

Financialisation of assets, democratisation of wealth and increasing sophistication are some of the key emerging trends in the Indian wealth management industry in the medium-term.

Investors are increasingly becoming more aware. Coupled with structurally low interest rates and increased investment choices, they are willing to explore newer options. Simultaneously, UHNIs and affluent clients are keen to look at sophisticated investment strategies and turn towards more personalised investment advisory services in their quest for higher yields which augurs well for the industry.

Asset Management

The asset management industry in India offers mutual funds and alternative investment funds (AIFs). Mutual funds’ AuM recorded a negative growth of ~6% and stood at Rs 22.26 trillion as on March 31, 2020, compared to Rs 23.80 trillion a year ago, due to higher redemptions and fall in indices (Source: AMFI reports).

Alternative assets funds in the structured credit, distressed assets and real estate space also saw lower inflows of ~US$4.5 billion during the year, compared to ~US$7.5 billion in FY19. Their AuM stands at ~US$44.5 billion at the end of this year in India.

Capital Markets

FY20 was a volatile year for equity markets. Nifty scaled lifetime highs after the ruling Government came back for a second term with a larger majority. Corporate tax cuts also supported Indian equity markets. However, all the gains were wiped off as the world grappled with the Covid-19 pandemic. Nifty declined by 26% in FY20, as compared to +15% in FY19.

For the debt capital markets, overall risk aversion persisted with sub-AAA spreads remaining elevated.

As a result of the above, the issuance volume in the debt capital markets came down in FY20. Public issuance of bonds, which stood at Rs 368 billion in FY19, fell to Rs 150 billion in FY20 (Source: Prime Database).

Life Insurance

The life insurance sector in India suffers from a low level of penetration at 2.7% and per capita insurance density of only US$55, while global insurance penetration stands at 3.3% with a density of US$370 (Source: IRDAI Annual Report 2019).

In FY20, the individual Annualised Premium Equivalent (APE) growth of the industry dropped to 6%, compared to 9% in FY19, with APE of Rs 735 billion in FY20, compared to Rs 692 billion in FY19. The private sector life insurers recorded a growth of 5% and their Individual APE market share dropped marginally from 58% in FY19 to 57% in FY20 (Source: Life Insurance Council).

General Insurance

The general insurance industry continued to show promise in FY20, despite the slowdown observed in March 2020. However, growth prevailed for the year under review with private general insurance players leading the charge at ~12% growth and continuing to marginally increase their share further to 48.2% in FY20. For private general insurers, Motor Third Party Liability and Group Health segments drove growth, with an increase of ~22% and ~32% respectively, during the year (Source: IRDAI).

The year also saw many regulatory changes in the product space with a focus on enhancing transparency and inclusivity in health insurance and encouraging overall innovation. The progressive regulatory regime, along with new players leveraging a tech-led operating model, aided the introduction of new products, partnerships and business models, which augurs well for the industry, as well as consumers.

Financial Overview

Income

Total revenue for FY20 was `96.03 billion compared to `111.61 billion for FY19, a drop of 14%. Out of this, interest income, which constitutes the largest component of the revenues, was `59.02 billion for FY20 (`68.38 billion FY19), down 14%. The drop in interest income reflects the degrowth in credit book during the year, as explained later in this report.

Fee & commission revenue was marginally lower at `20.99 billion for FY20 (`21.33 billion FY19) because of the subdued market environment, despite scaling up of various Advisory businesses.

The Net Interest Income for FY20 was `11.09 billion (`20.55 billion FY19), down 46%, due to interest income being lower in FY20, whereas the interest and finance cost was flat compared to FY19. Though the overall borrowings at the end of FY20 were lower compared to the previous year, interest and finance cost did not decrease correspondingly in FY20, due to overall increase in the cost of borrowings for NBFCs in general, following the liquidity squeeze and increased risk aversion.

The Net Revenue for FY20 was `48.10 billion (`63.78 billion FY19), down 25%, mainly due to lower revenues and finance cost not falling commensurate with the fall in borrowings as explained above and higher credit impairment and expected credit loss as explained under Expenses below.

Insurance business recorded a net premium of `10.57 billion for FY20 (`8.84 billion FY19), a growth of 20%.

Presence in large and emerging opportunities in India has helped it diversify its earnings base to be able to withstand volatility in the market during the year.

Expenses

Total costs for FY20 was `120.59 billion (`94.22 billion FY19), up 28%. Within total costs, other operating expenses fell by 7% in FY20, as the company controlled costs during the challenging environment, despite continuing to invest in scaling up younger retail businesses.

Employee expenses declined by 15% in FY20 as the company witnessed an overall reduction in its head count in view of the tough business environment that was not conducive to growth. The company saw a fall of about 684, decline of ~6%, in its employee strength during FY20 taking the year-end head count to 10,726.

Finance cost was flat at `47.93 billion for FY20 compared to `47.83 billion a year ago, despite lower borrowings during FY20 caused by the resources crisis for the NBFC industry. The cost of funding thus went up in FY20, despite RBI reducing rates in the year, due to risk aversion of lenders towards NBFCs. At the end of FY20, borrowings were lower at `366.57 billion compared to `461.48 billion a year ago, degrowth of 21%. Liquidity crunch resulted in repayment of maturing borrowings from Mutual Funds without rollover. In this environment, the company considered it prudent to focus more on risk management rather than asset growth. During the year, the company considered it judicious to maintain an adequate level of available liquidity in view of the volatile environment though it resulted in a negative carry.

While other expenses and employee expenses were lower and finance cost flat in FY20, the reason for an overall 28% increase in total expense was due to higher impairment cost on financial instruments and change in valuation of credit impaired loans. During the quarter ended March 31, 2020, the company completed re-assessment of the probability of default loss, with respect to exposures to certain sectors that were experiencing operational challenges. Credit and market risks for certain counter parties increased significantly, relative to such risks at initial recognition, resulting in recognition of higher amount of expected credit losses and gain/loss on fair value changes for the quarter ended March 31, 2020. The company's judgement for expected credit losses and gain/loss on fair values changes has been accentuated on account of factors caused by the Covid-19 pandemic. Accordingly, for the quarter ended March 31, 2020, Edelweiss Financial Services has recorded an amount of `26.24 billion towards expected credit losses, write-offs, loss on sale to ARC Trusts and Funds and net loss on fair value changes. Total impairment cost for FY20, including Covid-related impairment, was `35.62 billion. As a result of its conservative approach, as well as upfronting expected credit loss arising out of Covid-19, Edelweiss Financial Services has recorded higher impairment and expected credit costs as above, leading to the overall 28% rise in total expenses in FY20, over the previous year.

Profit after tax

Profit/(Loss) post Tax and Minority for FY20 was `(20.45) billion compared to `9.95 billion for FY19, which was mainly due to 14% decline in revenues and total expense being higher by 28%, on the back of its decision to take credit cost upfront, rather than spreading it over several quarters, amid challenging business environment as explained above. These, along with the cost of maintaining adequate available liquidity during FY20, mainly contributed to the decline in profitability.

Edelweiss Consolidated September 2020 Net Sales at Rs 2,222.82 crore¹⁰

NOVEMBER 04, 2020; Net Sales at Rs 2,222.82 crore in September 2020 down 6.98% from Rs. 2,389.55 crore in September 2019.

Quarterly Net Loss at Rs. 48.50 crore in September 2020 down 194.78% from Rs. 51.17 crore in September 2019.

EBITDA stands at Rs. 974.88 crore in September 2020 down 28.26% from Rs. 1,358.86 crore in September 2019.

Edelweiss shares closed at 50.50 on November 03, 2020 (NSE) and has given 33.42% returns over the last 6 months and -46.50% over the last 12 months.

Recent developments

Edelweiss Financial Services to raise up to Rs 200 crore¹¹

DECEMBER 21, 2020; Edelweiss Financial Services said it will raise up to Rs 200 crore through issuance of secured redeemable non-convertible debentures (NCDs).

The base size of the issue is Rs 100 crore, with an option to retain over-subscription up to Rs 100 crore, the company said in a release.

The bonds are offering an effective yield (cumulative) of 9.95 percent per annum for 120 months tenure, 9.35 percent per annum for 36 months tenure and up to 9.80 percent per annum for 60 months tenure.

An additional incentive maximum of 0.20 percent per annum will be offered for all category of investors in the proposed issue, who are also the holders of bonds previously issued by the company, and/ or its group companies- ECL Finance, Edelweiss Housing Finance, Edelweiss Retail Finance and Edelweiss Finance and Investments and/ or are equity shareholders of Edelweiss Financial Services, the release said.

The company said 75 percent of the funds raised through the issue will be used for the purpose of repayment /prepayment of interest and principal of its existing borrowings and the balance is proposed to be utilized for general corporate purposes.

The issue will open on December 23, 2020, and close on January 15, 2021, with an option of early closure, it said.

Care Ratings has rated the offering CARE A+; with stable outlook and Brickwork Ratings India Private has rated it as BWR AA-/Stable (Assigned).

The lead manager to the issue is Equirius Capital Private. The bonds will be listed on BSE.