Rating Rationale Ecap Equities Ltd. 16 Nov Brickwork Ratings assigns Rating to the Proposed PP-MLD of Rs. 500 Cr of Ecap Equities Ltd.

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1 Rating Rationale Ecap Equities Ltd. 16 Nov 2018 Brickwork Ratings assigns Rating to the Proposed PP-MLD of Rs. 500 Cr of Ecap Equities Ltd. (ECEL) Particulars Facility Proposed PP-MLD Amount (Rs. Crs) 500 (Rupees Five Hundred Crore Only) Tenor Long Term *Please refer to BWR website for definition of the ratings Other outstanding NCD ratings of Edelweiss Financial Services Ltd are: Rating Assigned* AA+ (Pronounced as Principal Protected Market Linked Debentures - Double A Plus) (Outlook:Stable) Instru ment NCD PP-MLD Amt Outstanding Amt Previous Ratings (Rs. In Crs) as on Oct 31, 2018 Present Ratings* 100 Nil BWR AA+ BWR AA+ 300 Nil BWR AA+ BWR AA AA+ AA AA+ AA AA+ AA+ Rationale / Description of Key rating drivers / Rating Sensitivities: BWR has essentially relied upon the audited financial results of the Company up to FY18, 1HFY19 provisional financials, draft term sheet of the PP-MLD, publicly available information and information/clarifications provided by the company Nov 2018

2 The rating has factored, inter alia, ECEL s strong parentage [being a 100% subsidiary of flagship company of Edelweiss Group, Edelweiss Financial Services Limited (Listed)], experienced & professional management team, synergies achieved with other group companies, long track record of arbitrage trading with adequate systems in place for risk management, diversified asset classes in which the Company takes exposure and financial flexibility and satisfactory ALM profile of the Group,. However, the rating is constrained by moderately high gearing at the Group level, high exposure of the group to capital markets, dependence on arbitrage opportunities and trade volume which are cyclical and other inherent risks associated with arbitrage business, and the loans/investments to group entities. Analytical Approach: Though ECap Equities Ltd. is reviewed as a stand-alone company, group support from Edelweiss is taken to derive the rating, considering the fact that this is a 100% subsidiary and the financials of EEL are consolidated with EFSL. A Edelweiss Financial Services Limited is a listed company having outstanding rating of BWR AA+ which has been factored while assigning the rating. Further, PPMLDs are considered as Complex instruments, and a reference may please be made to BWR website for more details. Key Risk Drivers: 1. Ownership of Edelweiss Group, and support: Edelweiss Group is a diversified financial services player engaged in credit, capital markets and other advisory businesses. The diversification in revenue streams has reduced the Group s exposure to cyclical movements in domestic capital markets. On a consolidated basis, EFSL s net operating income increased from Rs crore in FY2017 to Rs crore in FY2018, registering a 34% growth supported by a healthy growth in investment banking, other fee income and trading income. With the scaling up of the credit business, interest income continues to be the key revenue driver contributing 59% of the operating income in FY2018. The Group s investment banking and fee income, insurance and trading and 2 16 Nov 2018

3 broking businesses contributed 25%, 7% and 7% of the operating income respectively in FY ALM Profile : The group has adequate short/medium/long term ALM profile and ability to raise funds. EFSL maintains a liquidity cushion of ~10% at all points of time, which is sufficient to meet its contractual liabilities over the next 6 months. Short term funding is seeing tightness, but is expected to improve in coming months. BWR believes that the group s diversified business model will help to navigate through short term challenges and will help in growth of PAT going forward. 3. Experienced and qualified management: ECEL is a fully owned subsidiary of Edelweiss Financial Services Ltd. The entire group is being managed by experienced and qualified professionals, in the areas of credit appraisal, risk management, internal audit, etc. 4. Risk Management Systems: The Company enters arbitrage position by taking a cash position in the equity market and fully hedging it through forwards/futures. These positions are sometimes taken in different companies of Edelweiss Group as per the accounting and taxation planning of the Group. The company has adequate risk management systems in place. 5. High Competition: NBFC sector is seeing increased competition, which results in margins getting reduced and profitability getting affected. 6. Nature of the Instrument: This will be a Secured instrument, with Principal Protection at maturity. The rating of the instrument will be for various issues over a period of time and can have a Tenor upto 10 yrs. The yield of the instrument can be linked to any of the current or future indices of nse/bse. As per the management of the company, ~60-95% of the amount received under various issues over time will be invested in the issuing entity I.e Ecap Equities ltd and balance will be invested in the underlying index derivatives. Rating Outlook: BWR believes ECEL s business risk profile will be maintained over the medium term. The Stable outlook indicates a low likelihood of rating change over the 3 16 Nov 2018

4 medium term. Any major volatility in profitability or deterioration in asset quality with impact on capitalization may lead to revision in the rating or the outlook. Any change at Group Level financials could also result in a review of this rating. Background: Ecap, a subsidiary of Edelweiss Financial Services Limited (rated BWR AA+ (stable)), is engaged in arbitrage trading. Ecap, along with Edelweiss Securities, houses the proprietary trading book of the group, with no lending activity being carried out from these entities. The Company earns revenue in the form of interest income from its debt investments/ loans and treasury operations The Company enters arbitrage position by taking a cash position in the equity market and fully hedging it through forwards/futures. These positions are sometimes taken in different companies of Edelweiss Group as per the accounting and taxation planning of the Group. The forwards/futures are of 2-3 months tenor Key Financial Figures: Key Figures (`Cr) and % (ECEL) FY17 FY18 H1FY19 Revenue from Operations PAT TNW Total Borrowings Total Debt/TNW Current Ratio Nov 2018

5 Rating History for the last three years Sl. No. Instrument/F acility Type (Long Term/Short Term) Current Rating (Year 2018) Amount (Rs Crs) 1. PP-MLD Long Term 500 Rating AA+ June 23, 2017 Rating History Date in 2016 Date in PP-MLD Long Term 500 AA+ 1. PP-MLD Long Term 350 AA PP-MLD Long Term 300 AA+ BWR PP-MLD AA NCD Long Term 100 BWR AA+ BWR AA+ 4. NCD Long Term 300 BWR AA+ BWR AA+ Total 2050 ISIN Details: PPMLD Rs. 300 Cr Credit Rating Credit Limit (In Crs) AUM Allotment Date Redemption date AA Mar Apr-18 INE572O07083 AA Aug Sep-19 INE572O07AR2 ISIN 5 16 Nov 2018

6 AA Sep Sep-19 INE572O07AR2 AA Feb-18 1-Feb-22 INE572O07BU4 AA Feb Mar-19 INE572O07CD8 AA Feb Mar-19 INE572O07CE6 AA Nov-17 8-Nov-21 INE572O07BF5 AA Nov-17 5-Nov-21 INE572O07BE8 AA Jan-18 3-Jan-22 INE572O07BM1 AA Jan-18 8-Feb-19 INE572O07BO7 AA Jan Feb-19 INE572O07BP4 AA Dec-17 6-Dec-21 INE572O07BK5 AA Jan-18 7-Feb-19 INE572O07BN9 AA Aug-17 INE572O07AW 23-Dec PP-MLD Rs.350 Cr: 6 16 Nov 2018

7 PP-MLD RS.500 Cr Hyperlink/Reference to applicable Criteria General Criteria Banks and Financial Institutions Principal Protected Market Linked Debentures For any other criteria obtain hyperlinks from website Analytical Contacts MSR Manjunatha Head Ratings Administration Media Phone: Relationship Contact For print and digital media 7 16 Nov 2018

8 The Rating Rationale is sent to you for the sole purpose of dissemination through your print, digital or electronic media. While it may be used by you acknowledging credit to BWR, please do not change the wordings in the rationale to avoid conveying a meaning different from what was intended by BWR. BWR alone has the sole right of sharing (both direct and indirect) its rationales for consideration or otherwise through any print or electronic or digital media. Note on complexity levels of the rated instrument: BWR complexity levels are meant for educating investors. The BWR complexity levels are available at Investors queries can be sent to info@brickworkratings.com. About Brickwork Ratings Brickwork Ratings (BWR), a SEBI registered Credit Rating Agency, accredited by RBI and empaneled by NSIC, offers Bank Loan, NCD, Commercial Paper, MSME ratings and grading services. NABARD has empaneled Brickwork for MFI and NGO grading. BWR is accredited by IREDA & the Ministry of New and Renewable Energy (MNRE), Government of India. Brickwork Ratings has Canara Bank, a leading public sector bank, as its promoter and strategic partner. BWR has its corporate office in Bengaluru and a country-wide presence with its offices in Ahmedabad, Chandigarh, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi along with representatives in 150+ locations. BWR has rated debt instruments/bonds/bank loans, securitized paper of over 13,22,500 Cr. In addition, BWR has rated over 7000 MSMEs. Also, Fixed Deposits and Commercial Papers etc. worth over 62,000 Cr have been rated. BWR has rated over 30 PSUs/Public Sector banks, as well as many major private players. BWR has a major presence in ULB rating of nearly 102 cities DISCLAIMER Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented as is without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons Nov 2018