Edelweiss Capital

Dear Shareholders,
 
 We can safely say that the last year was a cataclysmic year with
 unparalleled wealth destruction throughout the world. However, we are
 now seeing an optimistic slant in the world view as well as a certain
 weariness towards the gloom and doom of the last 14 months.  Today,
 economic indicators the world over and especially in India, have begun
 to see the green shoots of a revival that is heartening.
 
 At some level, Edelweiss is stronger for having experienced the
 uncertainty and tumult of that period.  These events ensured we
 continue to focus on the fundamentals and understand and swiftly act
 upon the velocity of the problems as they arise.
 
 We believe this orientation is part of the Edelweiss DNA and will
 protect your company whatever be the market cycle and however the
 global winds may blow.  We are humbled by the knowledge that while we
 did not or could not anticipate the world changing events of the past
 year, we were able to respond swiftly to ensure the organisation and
 all that are associated with it were sheltered from the worst of it.
 
 Some part of our actions were already instilled - our ability to ensure
 capital conservation, analytical and objective risk assessment, high
 degree of variability in our cost structure and the means to act
 swiftly unburdened by large capex or fixed costs. Mostly, it has been
 the intrapreneurial spirit and high levels of emotional energy of the
 people of your company, Edelweiss, that continues to ensure business is
 run as usual.
 
 Some of the businesses were scaled down while others were scaled up -
 both these steps helped us better respond to the volatility of the
 market and changing consumer needs. While the former meant certain
 realignment of priorities and postponements of revenues, the latter
 placed before us opportunities to seize without compromising on the
 quality of the business or the diligence with which we would pursue the
 same.
 
 While most of this is explained in depth in the preceding pages as well
 as the MDA Report, I thought it important to pen some words on what we
 believe will allow us to respond both to a downturn as well as the
 expected return to growth.
 
 Edelweiss has a simple approach to running and managing our various
 businesses. This approach has worked both in good times and bad as has
 been demonstrated by the extremes of FY08 and FY09.
 
 A look at the FY09 numbers of your company show total revenue of Rs. 9
 billion (FY08 Rs 10.89 billion), a drop of 17% y-o-y and a PAT of Rs.
 1.86 billion (FY08 Rs. 2.73 billion), a drop of 32% y-o-y.
 
 The year has also seen a stable PBT margin of 36.5% (FY08 41%). A
 significant cause for the drop in the PBT margin is attributed to the
 Securities Transaction Tax (STT) where weve paid Rs. 720 million STT
 for FY09, accounting for about 8% of the PBT margin.
 
 As a capital market facing firm, we were directly impacted by the
 downturn in the market where we are correlated with capital market
 activity and not as much with direction. In the case of FY09, we
 witnessed both a southward direction in the markets as well as
 negligible capital market activity in the form of capital raising,
 advisory and withdrawal of Fll interest and moneys. However, though
 market values fell by half, we have had a 17% fall in revenues and we
 believe that we have managed the year reasonably well. I have listed
 below, the factors that differentiate and protect your company.
 
 We have always consciously focused on ensuring diversified revenue
 streams, product segments and client type and base so that we are not
 pole axed when one of the pillars runs low.
 
 The ability to shrink or expand infrastructure, capital expenditure,
 investments, growth strategies and manpower, across different verticals
 allows us a flexibility that is core to our organisation.
 
 To give you an example, while the equity markets remained dull, we
 moved rapidly and scaled our corporate debt business that has done
 well. In just over a year this business has been ranked 2nd in
 commercial paper placements. Similarly, while our Equity Capital
 Markets (ECM) business was negatively impacted due to negligible
 capital raising activity, the Advisory side saw renewed interest.
 Again, our Financing business stepped in during the severe credit
 crunch experienced in the third quarter of FY09, disbursing loans to
 good quality companies. Our diligent risk management processes ensured
 adequate collateral cover in the loan portfolio.
 
 Your company has worked hard to ensure that all revenue streams
 contribute equally, even if it means sacrificing short term gains that
 detract from our long- term goal of limited dependence on any single
 business, asset class, product or client.
 
 Balance sheet liquidity and flexibility allows us capability to scale,
 invest and expand in spaces that
 
 are relevant to the times. While our networth, including minority
 interest, stands over Rs. 25 billion, our balance sheet size is Rs. 33
 billion, which effectively means a gearing of as low as 0.3 times. We
 have also placed almost Rs. 13 billion in bank FDs that are short term
 in nature.
 
 All of this provides us with a large liquidity cushion ensuring
 business is run as usual. So during the credit crunch of Q2 and Q3 of
 FY09, we strengthened our balance sheet, while today we are back to
 reviewing and evaluating opportunities that fit in with our business
 goals.
 
 In an industry where the market size can shrink and expand very
 rapidly, it is imperative that our costs are flexible and we are not
 leveraged with long-term assets that build stress into the system.
 
 Cost control measures helped bring down the costs by 11 % y-o-y (with
 STT taken out, costs are down by 20%). Our compensation has largely
 been variable in nature and so also our operating costs, both of which
 can be retracted or expanded depending on the market environment.
 
 Your company has always been a growth-hungry organisation and our
 ability to seek out adjacent opportunities remains constant. Through
 the past fiscal we have continued to invest in opportunities that are
 synergistic to our long-term vision. We have consciously seeded our
 retail brokerage and financial products distribution businesses,
 alternative asset management - distressed assets and the corporate bond
 business. As we ready to change gears once again in FY10, we are well
 prepared and staffed to scale up businesses - in fact almost 25% of our
 current employees are already engaged in new businesses that are yet to
 contribute to the current years revenue.
 
 At Edelweiss we believe that a strong culture is the bulwark of the
 organisation. Be it in strengthening the present management, the Senior
 Leadership Group (SLG) or endorsing the second line of the Leadership
 Group (LG), the culture of empowerment is a visible and encouraged
 outcome.
 
 I have maintained that to build a strong business, we need to make our
 employees own the business whether in the form of a belief in the value
 of Edelweiss through ESOPs or initiatives on new business ideas. We
 continue to be single minded in our message that Edelweiss will always
 be home to employees with the right attitude and ability.
 
 At Edelweiss we approach things differently. Your company has always
 had an aspiration and a plan.  The plan is for the next 18 months but
 the aspiration is for the next 18-20 years. Therefore while some
 actions may seem conservative in the short run, we will always adopt a
 long-term approach when we commence any operation.
 
 We are happy to experiment and remain low-key till the time we are
 confident that our offering is differentiated and relevant to the
 segment we are targeting. However, the need to balance all decisions is
 the key to our success. Further, maintaining an objective, analytical
 and all round risk aware approach will help us keep accidents at bay.
 
 On the Financing side, we have brought down our risks significantly
 with a current collateral cover of 2.8x. Our Risk Group has significant
 controls and is completely empowered to independently take decisions
 that protect the company.
 
 The ability to focus on cost, risk, liquidity and people while
 continuing the emphasis on growth has been an ongoing approach. This
 consistency has helped us in FY08 when we saw almost everything going
 right; it has also helped us in FY09 which was just the reverse.
 
 India - a long term perspective
 
 Given the current backdrop with India largely having withstood global
 recession, I see the next decade to be a golden age for the financial
 sector. The kind of growth and retail penetration witnessed by the
 telecom sector over the past decade will probably be replicated in the
 financial sector.
 
 Banking, insurance and capital markets form the backbone of the
 financial sector and with each of them reporting robust growth
 well-aided by technology augurs well for an India strongly poised for
 expansion.
 
 Just a quick look at some numbers is encouraging.  The Indian BFSI that
 is considered to be more insulated than those in developed and emerging
 economies is also one of the least penetrated. Of an estimated
 population size of 1.17 billion people (63% between 15-64 years, 5.5%
 above 65 years) about 400 million are said to hold a bank account. If
 we were to account for multiple accounts this number would be lower by
 at least half - approximately 200 million accounts or about 18% of our
 population. On a comparative note, 94% of UKs populace has either a
 savings or a current bank account.
 
 The Indian banking industry still has a long way to go and large
 grounds to reap benefits from; even it means lower deposits and
 slightly higher transactional costs initially.
 
 A similar story unfolds in the capital markets with approximately 14.7
 million demat accounts in both the depositories - NSDL and CDSL as of
 May 2009 - together accounting for a bare 1% of the populace.
 Interestingly, over 180,000 demat accounts were opened in the last 14
 months despite the bearish market sentiment and volatility.
 
 When we at Edelweiss are asked on our plans to tap the global market, I
 can only point at these statistics to refer to the sheer size and value
 of the potential that exists today in India - a potential that is
 deceptively at a non-discretionary stage of consumption and largely
 young. Capital markets, with all its allure, would be the natural
 bastion for these large numbers of Indians who will begin to consume
 and invest in the next 3-6 year horizon.
 
 The outlook for the future seems positive with an advantage for India
 and other emerging economies.  While there have been deep rooted
 changes globally and developed countries continue to struggle, it seems
 that the worst may now be over. This will bode well for Asia as a
 region and emerging countries in particular in terms of unprecedented
 growth opportunities. India is well poised to take advantage of the
 renewed interest and will move in a linear upward direction.
 
 A number of factors over the recent months have further contributed to
 cementing Indias importance in the recovery of the world economy.
 
 A stable government at the center is expected to bring clear direction
 to economic boosters such as disinvestment, infrastructure building and
 progressive reforms that will bolster consumption. Indias large
 savings pool and non-discretionary consumption also adds value to the
 potential in the domestic growth story. Your company should be able to
 make the best of this dynamic situation and aspires to do so.
 
 Sadly, FY09 also witnessed the tragedy and horror of the 26/11 terror
 attacks that was condemned world over. While the nations security was
 undermined, it also had far-reaching and wide ranging impact in the
 Government as well as on the citizens, particularly of Mumbai. The
 spontaneous show of solidarity that had hundreds of thousands of
 Mumbaikars gathering at the Gateway of India a week after the event
 was
 
 unprecedented. It was also a period of shock and mourning for many who
 had lost their near and dear ones. Like most organisations, Edelweiss
 was also affected by the events as they unfolded on the evening of 26th
 November 2008. Our Business Continuity Plan (BCP) ensured trading
 operations ran fully on 28th November 2008, when trading resumed.
 
 On the economic front, FY09 will go down in history for leaving a
 lasting impact on the existence and fortunes of organisations. While
 some companies have structurally changed, there are others that have
 become even more resilient. At Edelweiss, we are satisfied with our
 role in the industry and our ability to have come through stronger.
 
 We immensely value the faith that you have reposed in Edelweiss and
 would like to thank you for your continued support.
 
                                 Rashesh Shah
                                    Chairman