Edelweiss Financial Services Ltd

Transcription

1 Banking & Finance 29 March 217 Edelweiss Financial Services Ltd Analyst Details Jaymin Trivedi

2 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Relative Performance Edelweiss Financial Services Ltd CMP: Rs146 Target: Rs2 Led by Rashesh Shah, A veteran in Indian financial services industry, EFSL is emerging as a welldiversified financial services conglomerate. EFSL has successfully transformed from a broking entity to NBFC (~7% profit is from credit) which is growing at a healthy pace. Key Investment Arguments: Diversified credit book growing at a healthy pace: It has a well-diversified credit portfolio including Structured collateralized credit (29%), Developer funding (25%), Retail mortgage (12%), Loan to ARC company (14%), SME & others (9%), LAS (7%), Agri & rural finance (4%). EFSL mainly lends to 2nd & 3rd tier companies wherein it is able earn high yields while taking measured risk. ARC business is now largest in India with ~5% market share: EFSL is amongst the handful companies that has significant focus and stake in ARC business. Strong underwriting and efficient management can lead to disproportionate returns, thereby boosting profitability in medium term. Company Data BSE Code NSE Code EDELWEISS Equity Capital (` bn) Face Value (`) 1 Market Cap (` bn) Avg Daily Volume (Qtly) week H/L (`) 149/54 Source: NSE, BSE, Capital Line Shareholding (%) Strong underwriting skills enables the company to maintain stable asset quality: Before extending credit, EFSL follows its own set of protocols which includes i) understanding the counterparty i.e. borrower and its background completely ii) having 2-2.5x collateral which provides cushion in case the loan goes bad iii) analyzing Cash flows of borrower iv) Water tight loan contracts for quick enforcement of agreement. These measures shall enable it to maintain asset quality. Valuations: EFSL is expected to deliver steady profit growth over next few years given favorable Industry dynamics and company specific levers. Profitability from Non-credit business is set to improve as operating leverage kicks in. Insurance business to break-even in FY21 as current losses narrow down over next 4 years. We value the company at 3.1x FY19E ABV and PE of 15.3x which is reasonable for a company expected to grow its profits at 37.2% CAGR over FY17-19E Others 28.6 GDR/ADR 5.4 Source: BSE FIIs Edelweiss Vs Sensex performance Promoters Financial Snapshot: In ` bn Revenues YoY (%) PAT YoY (%) EPS (`) ABV (`) RoA (%) RoE (%) P/E (x) P/B (x) FY % % % 14.6% FY18E % % % 18.% FY19E % % % 2.8% Source: ABML Research Edelweiss Fin. Return Source: ABML Research, Bloomberg Sensex Return 2

3 Strong Management Pedigree Incorporated in 1996 by Mr Rashesh Shah, Edelweiss has evolved over a period of time with its wide-ranging operations from Investment Banking to NBFC. Management has made majority of investments in trough phase and the company was well-positioned to reap the benefits in bull phase. This gives us the confidence in the management s ability to take favorable risk-reward bets going ahead which shall percolate in healthy profit growth Investment Banking Institutional Equities & Treasury HNI Broking Corporate loans & Asset Management Precious Metals & Debt Capital markets Retail Capital markets Housing Finance & Agri Commodities Life Insurance SME Finance & Small ticket Housing loans Asset Reconstruction EFSL was well-placed to make most of the opportunities created in majority of the above metioned businesses during their bull phase. The ability of Management to understand the risk matrix and adapt to ever-changing business dynamics provides comfort to us. Mr Rashesh Shah, the co-founder and chairman of Edelweiss has over 2 years of experience in financial services. He has served on the Executive Committee of NSE & been appointed as Chairman, Maharashtra Council of FICCI. Total promoter shareholding is 37% as on Q3FY17. 3

4 Diversified Business Model In FY8, Edelweiss was mainly a broking company with ~15% contribution from credit business. Post 29 crisis, Management has been able to successfully grab the opportunity in lending business which supported overall profit growth. Credit business now constitutes ~71% of the consolidated profit. Non-credit business constitutes ~41% of consolidated profit as Insurance business is a loss making unit. Edelweiss Credit book - (` 214bn) excluding loan to ARC of ` 35 bn Wealth Management - AUM (` 537 bn) Asset Management - AUM (` 172 bn) Broking ADV of (` 67 bn), Asset Reconstructi on - AUM (` 316 bn) Insurance Premium (APE of ` 82 cr for 9MFY17). Wholesale credit (AUM of ` 136 bn) Retail credit (AUM of ` 78.2 bn) Profit (` cr) FY13 FY14 FY15 FY16 FY17E FY18E FY19E Credit Business Growth (%) 62.5% 33.2% 35.7% 46.5% 33.% 32.1% 29.4% Non-Credit business Growth (%) 57.8% 3.8% 47.5% 19.7% 26.3% 43.7% 23.5% Adj profit Ex-Insurance Growth (%) 6.4% 2.3% 39.8% 36.2% 3.6% 36.% 27.3% Insurance Adj Profit Growth (%) 39.1% 24.1% 48.5% 25.8% 39.4% 4.6% 33.9% Source: ABML Research 4

5 9, , , , (Rs bn) (%) (%) A) Credit Business India amongst the most under-penetrated credit market Shadow Banking to GDP ratio also amongst the lowest UK US China Korea Russia Turkey India BrazilIndonesia Banks UK US China Korea Russia Turkey India BrazilIndonesia Shadow Banking Source: Global Shadow Banking Monitoring Report 215, ABML Research Shift from Physical savings to Financial savings shall increase pace 45, 4, 35, 3, 25, 2, 15, 1, 5, FY12 FY13 FY14 FY15 Gross Savings Gross Financial saving Saving in physical assets Source: RBI, ABML Research Source: Global Shadow Banking Monitoring Report 215, ABML Research India is amongst the most under-penetrated credit market which leaves enough room for sustainable credit book growth at industry level and for EFSL Within Banks, PSU banks have 7% market share which are consistently losing out to private banks & NBFCs. Once the capex cycle picks up, the banking industry shall start delivering healthy credit growth mainly led by private banks & NBFCs. Edelweiss will be one of the major beneficiaries with all the system, processes and technology in place. Financial savings to significantly pick-up post Demonetisation. We expect Government to continue with reform measures that shall increase the pace in shift from physical savings to financial savings, thereby enhancing liquidity for the BFSI space. 5

6 (Rs cr) Diversified credit book Diversified credit book which is expected to grow at a healthy pace of 24.5% CAGR over FY17-19E 4 8.% 68% % % % 37% 36% % % 3.% % 24% 2.% 5 14% 1.%.% FY13 FY14 FY15 FY16 FY17E FY18E FY19E Credit book Growth (%) Agri & Rural finance 963 SME & Others 2138 Loan against shares 1725 Retail mortgage 2997 Diversified Credit book (Rs cr) Wholesale mortgage 6346 Structured collateralised credit 726 Edelweiss mainly lends to tier 2 & tier 3 companies wherein it finds better risk-reward ratio. The philosophy of company (as discussed below) in terms of strong underwriting skills provides comfort in terms of asset quality A) UNDERSTANDING THE COUNTER-PARTY I.E. BORROWER AND ITS BACKGROUND COMPLETELY B) HAVING 2-2.5X COLLATERAL WHICH PROVIDES ADEQUATE CUSHION C) ANALYSING CASHFLOWS OF BORROWER D) WATER TIGHT LOAN CONTRACTS ENABLING SWIFT ENFORCEMENT OF AGREEMENT 6

7 Focus shifting to Retail credit book Particulars (` cr) FY15 FY16 FY17E Proportion (%) YoY (%) FY18E FY19E CAGR over FY17-19E Wholesale book % 22.5% % Structured collateralised credit % 15.% % Wholesale mortgage % 32.% % Retail book % 34.1% % Retail mortgage % 22.% % Agri & Rural financing % 6.% % Loan against shares % -8.% % SME & others % 15.% % Total credit book (Ex loan to ARC) % 26.4% % Distress asset book* % % Total credit book % 14.4% % P&L of credit business (` cr) FY16 FY17E FY18E FY19E Int income Int exp NII Operating cost Provision PBT Tax PAT PAT Growth (%) Edelweiss retail book is growing at a much faster pace (expect 33.3% CAGR over FY17-19E) which shall provide stability to earnings growth. EFSL credit business is expected to deliver profit CAGR of 3.7% to ` 7.7 bn over FY17-19E. We are valuing the credit business using twostage Gordon growth model. We value the business at ` 73 bn i.e. ` 87/share. Implied P/ABV is 2.2x P/ABV on FY19E ABV and 9.5x its FY19E EPS. Source: ABML Research 7

8 (Rs cr) Financial parameters improving NIM expected to be maintained as cost of borrowing comes down Asset quality to remain stable 18% 16% 16.2% 16.% 15.8% 15.5% 1.8% 1.6% 1.4% 1.4% 1.55% 1.65% 1.7% 14% 1.2% 12% 1% 1.7% 1.5% 1.2% 9.9% 1.%.8%.6%.47%.55%.6%.7% 8% 6% 6.85% 7.7% 7.13% 7.4% FY16 FY17E FY18E FY19E Avg. Interest yield Avg cost of Borrowing NIM.4%.2%.% FY16 FY17E FY18E FY19E GNPA NNPA Healthy PAT growth expected, mainly supported by business growth Return ratios to improve as operating leverage kicks in % % 33% 32% FY16 FY17E FY18E FY19E 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 2.4% 2.3% 2.2% 2.1% 2.% 1.9% 1.8% 23.7% 22.% 2.3% 18.3% 17.% 2.2% 2.1% 2.% FY16 FY17E FY18E FY19E 25.% 2.% 15.% 1.% 5.%.% PAT PAT growth RoA RoE 8

9 B) ARC A business with long gestation period It shall take about 5-7 years for an ARC to recover money. Management guiding for an IRR at 22% p.a. 1 Loan book is transferred to ARC at a discounted value which is mostly at ~5% discount. For e.g. ` 2bn loan is sold to ARC at ` 1bn. Start 2 ARC gives upfront payment of 15% in the form of cash and Security receipts (SR) for the balance 85%. In the given e.g., ARC shall pay ` 1.5 bn in cash and provide S` of ` 8.5bn. 3 ARC receives commission fee of ~2% on discounted BV. Here, ARC shall receive `.2bn. 9 4 Now, the onus is on ARC to turnaround the company. Various measures including sale of collateral, efficiency improvement, etc. shall be considered 5 Finish Amount recovered from loan shall be shared in ratio of 15:85. In case where receipts are higher than discounted value, a part of it (~2% or so) is given as bonus. For e.g., if receipts are ` 14 bn, `.8 bn will be given as bonus to ARC while ` 13.2 bn will be shared in ratio of 15:85.

10 Rs. bn (Rs bn) Edelweiss now a largest Indian ARC Robust AUM growth propels Edel to be largest Indian ARC by AUM Low acquisition cost in context of BV provides comfort % % 32 25% 35% 2% FY15 FY16 FY17E FY18E FY19E ARC AUM Growth 7% 6% 5% 4% 3% 2% 1% % FY1 FY11 FY12 FY13 FY14 FY15 Book value of asset acquired Acquisition cost Source: Financial Stability Report 215 ABML Research Edelweiss ARC currently contributes ~1% to consolidated profit of EFSL. In FY16, it made a profit of ` 45 crore, which is mainly in the form of commission income. Management intends to increase the profit contribution of ARC business to almost 2% by FY2. A large part of assets bought belong to companies which are EBITDA and cashflow positive, but do not have enough cash to service the debt. Asset reconstruction is relatively a new business for Edelweiss ARC as majority of growth (Assets acquired) has been witnessed post FY14 as shown in the chart above. NPA s in the banking system have soared to ` 6tn+ which provides huge opportunity for ARC companies. As asset quality woes further intensify and resolution of current NPA s is prolonged, there is a reasonable probability that banking system could offer higher business to ARC. We value the ARC business using DCF methodology. Conservative IRR of 19% has been assumed (vs. management guidance of 22%) on the amount invested by Edelweiss ARC in the bad asset. We value the business at ` 43.4 bn i.e. ` 52/share CDPQ targeted investment of ` 5 bn to provide next leg of growth CDPQ has targeted investment of ` 5 bn over four years in the Edelweiss ARC business. It will be acquiring a 2% equity stake in Edelweiss ARC. The partnership aims to channel between ` bn (including CDPQ s ` 5 bn). 1

11 Rs. bn C) Wealth management Wealth Management AUM has grown at a robust pace Particulars (` cr) FY16 FY17E FY18E FY19E AUM 99% % 66 66% % 2% FY15 FY16 FY17E FY18E FY19E AUM Growth 12% 1% 8% 6% 4% 2% % AUM Growth 66.2% 86.4% 2.% 2.% Commission & Fee income Growth 68.3% 52.1% 2.% Operating exp Operating Profit EFSL is amongst the largest wealth management company in India in terms of AUM size. Its AUM has grown at stupendous pace of 82% CAGR over FY Edelweiss Wealth offers financial planning for family offices, Real Estate offering, Estate planning and offshore advisory, enabling stronger penetration into this market. It offers services across all client segments and across multiple product lines with focus on suitability, portfolio and operational risk management. Yield of 8-9 bps on Assets under advice is commendable which shall support profitability in medium term. EFSL is in investment stage with cost to income ratio ranging around 9% currently. It has been investing heavily in technology and manpower. This is keeping profitability under pressure. Cost to income ratio is all-set to decline to ~78% by FY19E which shall support profitability. We are valuing the wealth management business at 2.2% of its FY19E AUM (3.2% of FY17E AUM) to arrive at a business value of ` 17.6 bn i.e. ` 2/share. On P/E basis, we are valuing it at 2xFY19E EPS. It shall contribute ~1.6% to our target price. Last year, General Atlantic Singapore agreed to buy 21.6% stake in IIFL wealth management business for ` 11.2 bn valuing the firm at 6.5% of AUM and PE of 25x on TTM basis. IIFL makes ~95 bps yield on topline and ~24 bps from PAT perspective. 11

12 Rs. bn Rs. bn Rs. Tn D) Asset management Acquisition leads to bump-up in AUM during FY17E Indian MF industry AUM growing at a healthy pace AUM Mutual Fund Industry AUM % % % 2% -7% FY14 FY15 FY16 FY17E FY18E FY19E 3% 25% 2% 15% 1% 5% % -5% % % 19% % FY12 FY13 FY14 FY15 FY16 35% 3% 25% 2% 15% 1% 5% % ARC AUM Growth Mutual Fund AUM Growth Fund closures leading growth in AUM FY14 FY15 FY16 9MFY17 Mutual Fund AUM Alternative Assets AUM EFSL has acquired schemes of JP Morgan and Ambit alpha schemes which has led to bump up in AUM of FY17E. The company has onboarded 3 employees from JPM EFSL has recently made first closure of two funds. i) Edelweiss Real Estate Fund with AUM of $ 38 mn and ii) Edelweiss India Special Assets Fund II with AUM of $ 26 mn. Currently, contribution to profitability from Asset management business is low. The company has strengthened the organisation structure and hired senior resources for fund management. We expect operating leverage shall lead to meaningful profit contribution in medium term. We value the business at 4% of AUM to arrive at a value of ` 1 bn i.e. ` 12/share. 12

13 Rs. cr Rs. cr Rs. cr E) Broking & Balance sheet Management Unit Average Daily Volume consistently rising Generates healthy revenue from IB & Advisory business Average Daily Volume FY14 FY15 FY16 9MFY17 Investment Banking & Advisory FY14 FY15 FY16 9MFY17 Balance sheet management unit provides liquidity cushion Balance Sheet Management Unit Govt securities Liquidity cushion Fixed & Tax assets 346 Others Broking Edelweiss is one of the largest domestic institutional broking company. It has made significant investment in technology in new business lines. It has good mix of retail & institutional clients. Edelweiss has been ranked 1st in IPO in Retail and HNI category. It has maintained leadership position in public issue of bonds. Broking business contributes ~13% to PBT. We expect steady all-round performance to continue. Balance Sheet Management unit (BMU) EFSL maintains good liquidity with large G-sec book of ` 33.2 bn. Balance sheet management assets constitute 15.5% of total assets as on 9MFY17. BMU contributes ~8% to PBT. 13

14 Rs. cr F) Life Insurance business EFSL launched Edelweiss Tokio Life Insurance company in 211 in partnership with Tokio Marine of Japan. Edelweiss is amongst the fastest growing life insurance company albeit on a low base. It is now a loss making unit (~` 1 bn in a year for Edelweiss 51% stake). Management has guided that insurance business shall break-even by 221 as it has a long gestation period. We value Insurance business at 1.2x its FY19E networth to arrive at a business value of ` 7 bn i.e. ` 8.4/share. Average Daily Volume consistently rising Generates healthy revenue from IB & Advisory business Insurance Premium 35% 32% % 187 6% 3 55% % FY14 FY15 FY16 FY17E FY18E FY19E Insurance Premium Growth 4% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 3% 25% 2% 15% 1% 5% % Edelweiss Tokio Life Insurance 7% Peer set.2% Industry Particulars FY15 FY16 FY17E FY18E FY19E Generates healthy revenue from IB & Advisory business Gross Premium Income Investment & Other income Total Income Total Expenses PAT Edelweiss share in PAT Networth % 7% 65% 6% 55% 5% Persistency (Individual & Group Combined) 71% 7% 61% 56% FY14 FY15 FY16 9MFY17

15 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Valuation Historical 1 year forward PE band Historical 1 year forward P/ABV band Close -Unit Curr 5. X 9. X 13. X 17. X 21. X Close -Unit Curr 1. X 1.5 X 2. X 2.5 X 3. X Source: ABML Research, Bloomberg EFSL has a well-diversified business model across various business lines. Going ahead, we expect operating leverage for majority of businesses to improve which shall enable the company to deliver steady earnings growth trajectory. On consolidated basis, EFSL is trading at PE of 11.2x on its FY19E EPS and P/ABV of 2.2x on its FY19E ABV. We value the company on SOTP basis to arrive at a target price of ` 2. At our target price, the stock will trade at PE of 15.3x on its FY19E EPS and P/ABV of 3.1x on consolidated basis. The company is expected to deliver consolidated profit CAGR of 37.2% over FY17-FY19E. We believe valuations are reasonable for the company expected to grow at such a healthy pace. Particulars Valuation basis Multiple on FY19 fig Business Value (` cr) Business value /share Credit P/ABV 2.2x ARC DCF Broking PE 12x Wealth management PE 2x AMC % of AUM 4.% Insurance Networth 1.2x BMU & others PE 8x Total EFSL value CMP 146 Upside 37.% 15 Source: ABML Research, Bloomberg

16 Consolidated Financials EFSL Balance Sheet Financial Year (`cr) FY16 FY17 FY18E FY19E Sources of Funds Equity Capital Reserves Networth Other Liabilities Borrowings Total Liabilities Application of Funds Loan book FDs and Cash & Bank Balance Govt Bonds Other assets Total Assets Source: ABML Research 16

17 Consolidated Financials EFSL Income Statement Financial Year (` cr) FY16 FY17E FY18E FY19E Interest income on credit business Interest exp on credit business NII Non-interest income Net total income Emp Exp Other operating exp Total exp PBT Tax PAT Shares of Minority interest PAT after minority interest Growth 26% 39% 4.6% 33.9% Source: ABML Research 17

18 Consolidated Financials EFSL Ratios Financial Year FY16 FY17 FY18E FY19E Growth ratios Credit growth 33.1% 14.4% 25.% 24.% NII growth 49.3% 32.7% 26.% 23.% PAT growth of credit business 46.9% 32.6% 32.1% 29.4% Consolidated PAT growth 25.9% 39.4% 4.6% 33.9% Other Key ratios Cost to income ratio 83.2% 82.% 79.5% 77.4% RoA 1.4% 1.6% 1.8% 2.% RoE 12.9% 14.6% 18.% 2.8% Dividend payout ratios 25.1% 22% 2% 18% Dividend per share GNPA ratio 1.4% 1.6% 1.7% 1.7% NNPA ratio.5%.6%.6%.7% Valuation ratios (x) EPS P/E BV ABV P/ABV Source: ABML Research 18

19 Research Team Vivek Mahajan Hemant Thukral Head of Research Head Derivatives Desk Fundamental Team Avinash Nahata Head Equity Analyst Jaymin Trivedi Banking & Finance Naveen Baid IT Suresh Gardas Pharma & Chemicals Mahavir Jain Equity Analyst Quantitative Team Sudeep Shah Sr.Technical Analyst Ammolh Paatil Sr. Derivative Analyst Rahil Vora Technical Analyst Smita Dhale Sr.Executive Derivative Desk Advisory Team Salim Hajiani Advisory Desk Pradeep Parkar Equity Advisor Mohan Jaiswal Sr. Exec.-Research Support ABML research is also accessible in Bloomberg at ABMR 19

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