Credit biz to aid growth; expect 20-25% PAT: Edelweiss Fin

Rashesh Shah, Chairman & Chief Executive Officer (CEO) of Edelweiss Financial Services expects the second half of FY16 to be slow. Volitality in the global and domestic markets will continue in the second half of this year, he told CNBC-TV18.The company’s net profit grew 4.8 percent to Rs 95.7 crore quarter-on-quarter and the total income rose 7.4 percent to Rs 1,240 crore for the second quarter. The operating margin came down to 63.6 percent from 69.7 percent in the Q1. The company’s overall debt stands at Rs 25,000 crore and the Balance Sheet grew by Rs 10,500 crore. Shah is not worried about the company’s non-performing assets (NPA) situation and said the net NPA fall within the tolerance range of 45-50 basis points (bps).The company is seeing accelerated growth in credit business, especially in retail and agriculture commodity financial segment, he said adding that demand is prominent in tier two and tier three cities. Shah expects the credit business aid growth in coming quarters and expects a profit after tax (PAT) of 20-25 percent, which falls in line with the company’s yearly guideline. The company recently announced will be issuing level one sponsored ADRs according to which the Indian companies can do a sponsored ADR without raising capital. Existing investors can convert their shares into depositary receipts under this. Shah said this will open up more opportunities for global investors. Below is the transcript of Rashesh Shah’s interview with CNBC-TV18's Mangalam Maloo and Reema Tendulkar.Mangalam: Steady set of numbers, but two concerns. Could you tell us why the asset quality in your fund based business has marginally worsened. In fact quarter-on-quarter (QoQ) it has come in at 1.45 versus 1.32 that is the Gross non-performing asset (NPA). Secondly net NPAs have also expanded to 0.44 versus 0.39, that and secondly could you also break up the growth of your loan book in terms of what sector contributed maximum to the growth?A: I must first say that gross NPAs of 1.42 and net NPA of about 40 bps is within the tolerance range that we have set up. The long term estimates for the business would be that your gross NPAs will be between 150 to 160 bps and the net NPAs would be between 45 to 50 bps because that should be the norm because there is going to be some clients who may not be of the service interest and as you know the economy is still not completely recovered and a lot of corporates are still under fairly liquidity crunch.So, we have had a fairly good growth in the last few years. We are currently not very worried because in this range is where your NPAs should stabilise and we expect it to be here. Our idea is that if you can maintain the NPA gross and net numbers in this range and continue to grow the business by 20-25 percent a year that should be a good opportunity in the credit business.Overall, we're seeing a lot of growth in the credit business on the retail side and the agri commodity financing side. On the retail side as you know we do home loans, we do Loan Against Property (LAP), we do small and medium enterprises (SME) LAP and we are seeing a fair amount of traction in that. Especially from tier II, tier III cities where one of our products - the small ticket home loan - has been growing fairly well.We are also seeing a fair amount of traction on the SME side and the third business as I said our agri commodity financing businesses where we are pioneers and we are seeing a lot of that which is currently informally funded which is getting formally funded.Mangalam: Could you also give in your opinion on this issue which has come by, the Nestle has been saying that their Maggi Noodles are safe, 100 percent of the samples which are tested and all the three labs are clear, could you give your word on that?A: Tthis is good news and it is an issue that had to be resolved because this has been a long going kind of saga. So, the faster we get certainty on this the better it is for everybody and from what we have heard from the government, the government is also very keen that if there is no real danger to allow them to resume. For investors, this is good news, for India this is good news because we want to be an easy place to do business, we do not want certain shocks to the business. So, all this enhances the process that India follows to even get thing back on track.Reema: We ask you by habit, when we see some news breaking, so apologies for that. But, before the news broke, this fiasco for Nestle, the stock used to be at levels of Rs 7,000 thereabout and then it crashed all the way. It has been rebounding over the last few months, but now that it seems that this overhang has been cleared for Nestle, do you see it go back to its levels of Rs 7,000. How much could be the potential upside in Nestle India and would it make sense to enter in at current levels?A: Actually, unfortunately, I do not follow the stock, I am sure our analysts, our fast-moving consumer goods (FMCG) analysts will have a view on this. I have not been able to study this and analyse it. Reema: So, we will come back to Edelweiss Financial Services. You have announced that you will be issuing level one sponsored American Depository Receipts (ADR). Could you walk us through the rationale for that and what it means for the company?A: The new guidelines that have been released in part, but the final guidelines are still awaited which allows Indian companies to do a sponsored ADR without capital raising where you convert existing shares, existing investors convert some of their shares into a depository receipt. I think it is a great programme because A) partly it will convert some of the key-note business into a depository receipt (DR) business which is a lot more transparent and stable. But along with that also it allows you to access a much larger breadth of global investors, because there are a lot of global investors who do not have the foreign portfolio investment (FPI) access into investing into Indian stock. But if you have the depository receipts listed in the US, that is a fairly big advantage for them from investing and accessibility point of view. The other advantage is that if you are not doing a capital raising and you are just converting existing shares into depository receipts, then the Sarbanes-Oxley and the other onerous regulations do not apply to you in the US because as you would have seen in the last few years a lot of Indian companies have been reluctant to go for the US for listing in the US because of the onerous requirement of Sarbanes-Oxley. So, this relaxation that companies which are not raising primary capital in the US, they do not have to adhere to Sarbanes-Oxley and they can follow the corporate governance norms of their own country is also a very positive sign. So, on that we thought it could be a good option to explore where we can enable some of our existing investors to convert their shares into depository receipts which can have a much wider audience in the US market. This is still early stage, we have only taken in-principle approval and we will await the final guidelines from Securities and Exchange Board of India (SEBI) before making the final decision.Mangalam: Your finance costs quarter on quarter have come up by nearly Rs 32 odd crore. What is the kind of debt that you raised in this quarter?A: Our overall borrowing continues to be about Rs 25,000 crore. We have grown our balance sheet by about Rs 1,500 crore in this quarter. So, our overall growth in debt has also been commensurate with that. In this quarter, credit businesses were the larger growth vector because both agency businesses, because of the market volatility, have not been as robust in this quarter. Given the growth in the credit business, the interest cost is commensurate with that. Our net interest income (NII) has improved in this quarter.Reema: In the first half of the year, you have managed to clock in a revenue growth of 40 percent, can we assume that to be the growth rate for the entire year?A: Hard to say. The second half is going to be very interesting.Reema: But second half is typically better right?A: We do expect that the environment will continue to be volatile. I think the uncertainty on global account is still fairly high. In India, we have the elections in Bihar and then the Annual Indian Budget will come in the fourth quarter. So, we expect high volatility. Our internal target can be maintained between 20 to 25 percent of profit after tax growth and if we can continue to maintain that, we think it will be a good thing for a financial services company. Our internal target continues to be that and we are currently as per the first half on track for that.