Moneycontrol Research Team
Highlights:
- A ‘bank-like’ structure with diversified revenue streams
- Niche in distressed credit business
- Rapidly gaining scale in the wealth and asset management space
- Risk-reward favorable at this juncture
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Edelweiss Financial Services, that commenced operations as a capital market player, has incubated several business segments like credit (wholesale and retail lending), distressed assets, insurance, and wealth and asset management over the past few years.
We are enthused by the fact that over a period of time Edelweiss Financial Services has evolved into a ‘bank-like’ structure, with diversified revenue streams. More importantly, it has identified and created a niche in certain non-traditional growth segments like distressed assets and structured credit and is rapidly gaining scale in the wealth and asset management space.
Its lending business is currently facing sectoral issues in form of high interest rates, reduced liquidity and intense competition. However, with presence across business segments, there are multiple growth levers for the NBFC. Value unlocking through potential stake sale in any of its business stream can be a key catalyst for the stock in medium term. Read: What Edelweiss' reported stake sale in wealth, AMC business means for stock
Edelweiss’s profitability has improved over the past few years. However, it still remains sub-optimal as the costs associated with incubating new businesses is dragging down group’s overall profitability. A significant portion of the group's capital is employed in businesses that are either low-yielding or loss-making currently like insurance. However, we expect the Edelweiss group to build a significant market presence in its chosen lines of businesses, resulting in higher earnings and accruals to capital over the long term.
In the medium term, despite the expected moderation in its lending business, we see the NBFC’s profitability to be supported by steady growth in wealth and asset management businesses as well as healthy recoveries in its distressed credit business. It is worth noting that both these businesses have the potential to provide huge RoE (return on equity) fillip.
The wealth and asset business does not have high capital requirement, hence it can possibly generate non-linear profit growth and RoE expansion. The prospects of its ARC business also looks promising as it can generate high carry income (more than 16-17% IRR) in case the asset realisation is higher than the price at which was acquired.
As per the management commentary, ARC recovered around Rs 2,000 crore in H1 FY19 and expects to recover another Rs 10,000-12,000 crore in H2 FY19 on resolution of delinquent assets under Insolvency and Bankruptcy Code (IBC).
The stock has witnessed a sharp fall since September end following the liquidity concerns that engulfed the sector. Of late, it has seen smart recovery as access to funding has improved for the sector over the past 3-4 weeks. However, it is still down more than 40 percent from its 52-week high. The recent stock price correction has eliminated valuation froth creating favourable risk-reward for the stock, making its worthy bet for long term.
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