(A) Introduction
Edelweiss Group is an investment and financial services group based in Mumbai. The parent company of the group is Edelweiss Financial Services Ltd. Rashesh Shah is the Co-founder, Chairman and Chief Executive Officer (CEO) of the Edelweiss Group. He is MBA from Indian Institute of Management (IIM), Ahmedabad (1989). He went to work briefly for Prime Securities Ltd. in Mumbai and moved on to ICICI Bank.
Edelweiss was founded in November 1995 by Rashesh Shah along with his former colleague Venkatchalam Ramaswamy who is now Executive director – Edelweiss Financial Services Ltd.
The founders put their own savings and loan amount by mortgaging own house to start the company as a merchant bank doing IPOs, right issues etc. But during the year, SEBI changed the rules to a minimum capital requirement of Rs 5 crore. Due to non fulfilment of the required capital condition, the business plan was changed and they started working on private equity syndication and mergers and acquisitions (M&A). The company started the business of helping start-up companies raise funds via the non-IPO route, tapping Venture Capital (VC) and Private Equity Funds (PE), which was a rarity in India at that time. Only in the year 2000, did the company cross the Rs 5 crore capital mark, and finally became a Category-1 merchant bank. Now the Edelweiss group is a financial services conglomerate offering Credit (Retail, Corporate), Investment & Advisory (Wealth Management, Asset Management and Capital Markets) and Insurance.
(B) Major Historic Events
1996:
The Company received certificate for commencement of business on January 16, 1996. During 1996 to 2000 the company conducted the business of helping start-up companies raise funds via the non-IPO route, tapping, Venture Capital (VC) and Private Equity Funds (PE).
2000:
Till the year 2000 the company staged itself to become an investment bank. The Company commenced investment banking activities and registered with SEBI as a “Category I Merchant Banker” (as defined under the Securities and Exchange Board of India (Merchant Bankers) Rules, 1992. The company acquired Crossborder Investments Pvt Ltd to enter non banking financial activities. Also the Company raised funds through private equity from Connect Capital Holdings during the year. Connect Capital Holdings invested ~$2 million for 10% stake.
The company started considering a foray into the Broking business.
2001:
The company obtained Futures and Options License.
2002:
The company entered the business of securities broking in the year 2002 by acquisition of Rooshnil Securities Private limited which later changed to Edelweiss Securities Private Limited and is presently known as Edelweiss Securities Limited. The subsidiary Crossborder Investments Pvt Ltd was registered as NBFC.
2004:
The foray of the company into the businesses of insurance advisory as well as commodities broking and trading.
2005:
ECL Finance Limited was incorporated in the year 2005.
Greater Pacific Capital (GPC) picked up a 20% stake amounting to Rs. 80 crore in Edelweiss. Apart from fresh capital investment in the company, GPC had also bought the existing strategic investor, Connect Capitals’ stake.
2006:
Till 2006 the company had witnessed two significant rounds of capital raises – private equity from Connect Capital Holdings in the year 2000 and Greater Pacific Capital (GPC) concluded strategic investment in the Company in October 2005.
The Company attracted capital from Galleon Diversified Fund, Heliconia Pte Ltd (which is currently a wholly owned subsidiary of GIC (Ventures) Pte Ltd held through a wholly owned subsidiary Lathe Investment Pte Ltd), BIH SA and Shuaa Capital in 2006.
Edelweiss Real Estate Advisors Private Limited, which was previously company’s subsidiary and another subsidiary Edelweiss Trustee Services Private Limited, were incorporated in the year 2006, for launching the company’s first real estate fund which was registered with the SEBI as a “Venture Capital Fund” (as defined under the SEBI (Venture Capital Funds) Regulations, 1996)
During the year 2006 ECL Finance Limited received NBFC registration.
2007:
The Initial Public Offering of the company was successfully issued in the year 2007 amounting to ~Rs. 691.86 crore. During the year ECL Finance Ltd. obtained the Clearing Member License.
2008:
Edelweiss received regulatory approval from the Securities & Exchange Board of India (SEBI) to start its mutual fund business. Registration was granted to Edelweiss Mutual Fund and approval granted for Edelweiss Asset Management Ltd. to act as investment manager to Edelweiss Mutual Fund.
2009:
On 16 October 2009, Edelweiss Asset Reconstruction Company Limited, an associate of Edelweiss Capital (not Edelweiss Financial Services Ltd) received the certificate of registration from the Reserve Bank of India to commence/carry on the business of securitisation or asset reconstruction.
On 23 November 2009, Edelweiss executed joint venture agreement with Tokio Marine Holdings Inc., to carry on the life insurance business in India through a subsidiary of the company.
2010:
Edelweiss Capital entered into an agreement to acquire Anagram Capital for Rs. 164 crore in an all cash transaction through its two subsidiaries Edelweiss Securities Ltd. and Edelweiss Investments Finance Ltd to expand the retail broking business. With a nation-wide network of more than 137 branches and over 1300 sub brokers, Anagram was one of the widest geographical reach among retail broking firms. The company had more than 180,000 clients and estimated total revenues of Rs. 100 crores for nine months ended December 31, 2009. The company’s average daily equity trading volume was approximately Rs.800 crores.
2011:
In May 2011, Edelweiss Tokio Life Insurance Company Limited, a joint venture between the Edelweiss Capital, received registration by Insurance Regulatory & Development Authority (IRDA) to carry on the business as a life insurer.
The Ministry of Corporate Affairs accorded approval for change in the name of the company from Edelweiss Capital Limited to Edelweiss Financial Services Limited with effect from 1 August 2011.
2012:
EAAA LLC, Mauritius, a subsidiary of Edelweiss Financial Services Ltd (hereinafter “Edelweiss”) and Japan’s SBI Holdings, Inc. (hereinafter “SBIH”) signed a definitive agreement to jointly sponsor an Alternative asset management fund called “EW SBIH Crossover Fund” in Mauritius, focused on investments in small/mid-cap listed companies in India. Share in the sponsorship determined was – SBIH -75% and Edelweiss 25%.
2013:
In accordance with the provisions of Foreign Exchange Management Act, 1999 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, the Board of Directors of the company, increased the limits of Foreign Institutional Investors (FIIs) holding in the equity share capital of the Company from 24% to 28%.
2014:
In april 2014, the BOD approved buy back of shares made from the open market through Stock Exchanges, at a price not exceeding Rs. 45 per equity share and for an aggregate amount not exceeding Rs. 135 crores.
In May 2014, announced the acquisition of “Forefront Capital Management Pvt Ltd” a high net worth asset management company in Mumbai to strengthen its presence in Assets Management space.
2015:
On 26 November 2015 Edelweiss Group announced that it has entered into a partnership agreement with Sun Global Investments, a leading boutique Investment Manager headquartered in London, to offer full service solutions in INR Fixed Income markets – both Primary and Secondary as well as USD denominated Indian debt across UK, Europe & Asia. This alliance was to bring together Edelweiss Group’s onshore capabilities with that of Sun Global’s International presence and Investor coverage coupled with a flexible dynamic Fund construct.
2016:
January 28, 2016
Edelweiss Tokio Life Insurance received IRDA approval to increase foreign stake to 49%. Tokio Marine announced to infuse over INR 525 crore to fund expansion plans issued by Edelweiss Tokio Life Insurance Company Ltd.
On 22 March 2016
Edelweiss Asset Management Limited (EAML) a wholly owned subsidiary of Edelweiss Financial Services Limited (EFSL) executed an agreement to acquire the onshore fund schemes managed by JP Morgan Asset Management India Private Limited (JPMAM) including its India based onshore mutual fund business and the international fund of funds. The assets under management (AUM) of JPMAM stood at approximately Rs 7,081 crore while the combined AUMs of both entities amounted to approximately Rs 8757 crore (as on 31 December 2015).
In September 2016
Edelweiss group entity agreed to acquire Ambit Alpha Fund, a category III Alternate Investment Fund with an AUM of over INR 1,100 crore, and to be its new investment manager. The acquisition aimed to further strengthen Edelweiss Group’s Rs. 35,000 crore Global Assets Management (GAM) business.
In October 2016
CDPQ and Edelweiss entered into long-term partnership agreement – The agreement includes target investments by CDPQ of Rs 5000 crore over four years that will provide Edelweiss Group with capital to invest in stressed assets and private debt opportunities in India. This platform will invest in assets with the aim of restructuring debt and turning around companies, as well as becoming the provider of financing to Indian entrepreneurs and companies. Edelweiss Asset Reconstruction Company (EARC) will invest through different Edelweiss funds and will result in the purchase of non-performing loans from Indian banks and investments in private debt of growing Indian companies. CDPQ will also be acquiring a 20% equity stake in Edelweiss Asset Reconstruction Company (EARC).
2017:
On November 23, 2017 Edelweiss Financial Services Limited (EFSL) raised Rs 1,527.75 crore through the Qualified Institutions Placement
(QIP) route.
In Nov 2017, Edelweiss Tokio Life Insurance received equity capital infusion of Rs 670 crore from Edelweiss Financial Services Ltd. and Tokio Marine Holdings Inc. to support the company’s expansion plans, and in particular, the development of its Bancassurance channel.
On 27 December 2017, the Insurance Regulatory & Development Authority of India (IRDAI) granted its approval and registered ‘Edelweiss General Insurance Company Limited’, a wholly owned subsidiary of the company, to commence its business in General and Health Insurance in India.
2018:
Edelweiss Alternative Asset Advisors Limited (EAAA), a subsidiary of
Edelweiss Financial Services Limited resolved that it shall aquire two Funds of Milestone Capital Advisors Limited – Milestone Opportunities Fund 10 and Milestone Commercial Advantage Fund. Both funds are SEBI Registered Category II Alternate Investment Funds with AUM (combined) of over INR 150 crores.
2019:
In Feb 2019, Edelweiss Group, and Bank of Singapore, signed a Memorandum of Understanding to form a strategic partnership to provide clients of both entities the opportunity to access their respective product platforms – Bank of Singapore’s wide range of global investment solutions offered through its open‐architecture platform and Edelweiss’s wealth solutions and investment opportunities in India.
In May 2019 Edelweiss Group announced that US-based Arthur J. Gallagher & Co. (AJG) – one of the world’s largest insurance brokerage and risk management services firms – will acquire a minority stake in Edelweiss Insurance Brokers Limited (EIBL), a wholly owned subsidiary of Edelweiss Financial Services Limited.
In June 2019, ‘ECL Finance Limited, a subsidiary of Edelweiss Financial Services Limited and Bank of Baroda, signed an agreement to form a strategic partnership to explore Co-lending / Co-Origination opportunities. With this partnership, ECL Finance Limited and Bank of Baroda will jointly offer loans and expertise for the growing needs of MSME and self-employed as well as priority sector groups.
(C) Shareholding Pattern
The promoter and promoter group holds 32.93% as on 30 June 2019 with Rashesh Shah holding 15.57%, Venkatchalam A Ramaswamy 6.22% and 6.55% with the family members of the co-founders.
Under Institutional holding, mutual funds hold 3.16% and foreign portfolio investors hold 30.24%. Directors’s/Directors relatives’ shareholding is 1.31%.
(D) Shareholders holding more than 1% – other than promoters
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(E) Composition of the Group
Edelweiss Financial Services Ltd. carries on diversified businesses through 55 subsidiaries and has no associates/joint venture as on 31 March 2019. (click to enlarge the image):
(F) About the Executive Management of Edelweiss
Mr. Rashesh Shah: Co-founder, Chairman and CEO
Mr. Rashesh Shah completed a bachelor’s degree of Science in Statistics from KC College, Mumbai and spent a year studying exports at Indian Institute of Foreign Trade (IIFT). After that, he completed his MBA from Indian Institute of Management (IIM), Ahmedabad in 1989. He worked with ICICI and Prime Securities before forming Edelweiss.
Mr. Venkatchalam Ramaswamy: Co-founder, Executive Director
He is an MBA from the University of Pittsburgh, USA and also holds a Bachelor’s Degree in Electronics Engineering. Widely recognized as one of India’s finest deal-makers, he co-heads the Global Wealth and Asset Management business, while continuing to play a mentorship role with Edelweiss Investment Banking. He is into crafting a client-need focus solutions approach for the Distressed Asset Resolution as well as the ARC business.
Mr. Himanshu Kaji: Executive Director and group COO
Group COO; Since Sept 2009 and Executive Director; Since 2011.
He is a Member of Institute of Chartered Accountants of India. Starting off with ICICI as an investment banker, he joined his family broking business and later launched his own company offering corporate advisory. One of his key assignments was the modernisation and corporatization of the Bombay Stock Exchange. He also served as honorary treasurer and spokesperson of the BSE during 1999-2001.
Mr. Rujan Panjwani: Executive Director
Mr. Panjwani has been with Edelweiss Group since 2000 and has played an important role in setting up several businesses for the firm, including asset management and credit. He holds a Bachelor’s degree in Electrical Engineering from Manipal Institute of Technology.
Mr. S Ranganathan: CFO
Mr. S Ranganathan is a Member of Institute of Chartered Accountants of India . He was working as a senior Vice President with CitiBank during 2003-07 period before joining Edelweiss, he was with Bank of America Merryl Lynch as its CFO. Then, hired by Edelweiss in 2011. Before him, Himanshu Kaji, the Chief Operating Officer of Edelweiss held the additional charge of CFO of the company. His appointment was considered a great strategic move to include in the executive team someone other than the founders.
The total remuneration of the managing and executive directors for the year FY19 was Rs. 47.01 crore which formed 0.44% of the total revenue and 4.50% of the net profit for the year.
(G) Business Segments
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(H) Business Structure
Business operations of Edelweiss are under three business groups/units – Credit business, Advisory business and Insurance.
1. Edelweiss Credit Business
Credit Business is the largest contributing business leg with PAT of Rs. 1,169 crore the highest amongst all segments for the year ended 31 March 2019. The company conducts credit business through two major subsidiaries – ECL Finance Ltd. And Edelweiss Retail Finance Ltd. The credit business comprises of:
- Retail credit:
- Corporate credit
- Distressed credit
Retail Credit Business
The retail credit business offers mortgages including home finance, retail construction finance and loan against property, SME finance, agri and rural finance, ESOP and margin funding. The retail credit book as on 31 March 2019 stands out to be Rs. 18,075 cr. (41.54% of the total credit book). Edelweiss Retail Finance Ltd. carries on the business of retail credit. Loans for retail construction and loan against property are being offered up to the amount of Rs. 35 lacs to salaried and self employed individuals. SME finance is offered to business owners as well as Small and Micro Enterprises from Rs. 3.5 lacs upto Rs. 25 crore. ESOP and margin funding offers loans against shares and other securities. Agri and rural finance is being offered by Edelweiss Rural & Corporate Services Ltd. and facilities are available to farmers, aggregators, traders, processors, importers and exporters.
Corporate credit business
Corporate credit business offers full range of credit products – (i) cash flow based loans, structured collateralised finance to corporates and (ii)Real estate finance to developers. The corporate credit book as on 31 March 2019 was Rs. 18,055 cr. (41.50% of the total loan book)
Distressed credit business
Distressed credit business comprises Edelweiss Asset Reconstruction Company (EARC), distressed funds and turnaround advisory services. The loan book of the distressed credit business was Rs. 7,380 cr. (16.96% of the total loan book) as on 31 March 2019. Edelweiss has a long-term partnership with Caisse de dépôt et placement du Québec (CDPQ), a USD 250 billion Canadian Pension Fund, for this business. Edelweiss Asset Reconstruction Company is focussed on resolving large assets by financing last-mile (when other funding option are exhausted) capital requirements and providing turnaround support. The EARC acquisitions include the EBIDTA positive operating assets which are financially broken – can be revived and have pipeline for future growth.
2. Edelweiss Advisory Business
The net revenue from advisory business was Rs 1310 cr. for FY 19 (11.21% of the total net revenue) and PAT of Rs. 292 cr. The advisory business comprises of:
- Wealth management
- Asset management
- Capital markets
Wealth management
Under wealth management, financial solutions are provided to family offices, new age entrepreneurs, corporate treasuries, professionals and c-suite executives with the offerings of wealth structuring, inheritance planning, investment management across all asset classes, insurance advisory and risk management. Edelweiss also has a trading app “Edelweiss Mobile Trader”
Assets management
Under assets management, offerings include “Alternative Strategies” and “Mutual Funds”.
Capital markets business
Capital markets business offers – investment banking, institutional equities, prime broking and fixed income advisory services. Edelweiss closed 21 transaction in FY19 and was ranked 1st in terms of count of QIP and IPO deals closed in FY19. Edelweiss was the lead arranger for ~98% of the amount mobilized though bonds issuance.
3. Edelweiss Insurance Business
Edelweiss added insurance business in 2011 for expanding the retail market reach. Life insurance is offered by Edelweiss Tokio Life Insurance Company Ltd. Edelweiss offers 33 individual and group products via agency, banca, broker and direct channels. Edelweiss added general insurance business in Feb 2018 through its subsidiary Edelweiss General Insurance Company Ltd. which contributes 0.48% to the total revenue.
(I) Credit Business Metrics
1. Credit Book
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2. Credit business performance highlights March 2019
- Net Interest Income – Rs. 3,576 cr.
- PAT – Rs. 1,169 cr.
- NIM (%) – 8.1
- Cost to income (%) – 37
- ROA (%) – 2.6
- ROE (%) – 18.7
Out of the total net interest income, corporate credit contributes the highest 49.64% followed by retail credit 26.17% and distressed credit 24.19%. NIM of the distressed credit is highest 12.9% followed by corporate credit 9.2% and retail credit 5.1%. Distressed credit provides the highest ROE 28.4% with corporate credit generating ROE of 17.9% and retail credit 12.2%.
The retail business has the highest cost to income ratio i.e. 50% and this is because of higher expenditure on opening retail branches and recruitment of salespeople.
Overall gross NPA is 1.87% and Net NPA of 0.83% for the quarter ended 31 March 2019.
Under retail credit, key focus areas are SME loans which include secured credit yielding ~14% and unsecured credit yielding ~21% and retail mortgage credit which includes home loans yielding ~11% and LAP yielding ~12%.
The corporate credit includes two lending categories – (i) Structured collateralised credit yielding 15-17% and (ii) wholesale mortgage – financing of developers for primary residential projects yielding 17-19%.
3. Distressed Credit Business Exposure
The asset reconstruction business works on limited partner (LP) and general partner (GP) model where if for example, Rs. 100 mn asset is acquired, Edelweiss ARC puts in own money of Rs. 15 mn and issue security receipts for Rs. 85 mn to bank. The earnings from distressed credit business is in the parts of fee receipt, economic interest and carry interest for managing the asset which is received at the time of exit of transaction. ARC recoveries have a cycle of 3-5 years where assets invested 3 years ago are realised today and recoveries for the year ended 2019 totaled Rs. 7000 cr. The distressed credit business has exposure (in terms of security receipts issued at March 2019 end) in several industries – steel being the highest 23%, power 12%, Infrastructure 11%, paper, real estate, textiles, chemicals, ship building, EPC, exports etc.
4. Distribution Network of Credit Business
Edelweiss has 163 retail credit branches over 135 cities. SME credit operates in 108 locations and 96 locations for retail mortgage which are the two focus areas for Edelweiss.
Edelweiss held 76 accounts under Structured collateralised business as on 31 March 2019 and 162 projects under wholesale mortgage business.
(J) Advisory Business Metrics
1. Assets under Advisory
Out of the advisory business segment, wealth management is the highest PAT contributing business with PAT of Rs. 162 cr. followed by capital markets Rs. 67 cr. and asset management Rs. 63 cr. for FY19.
Under wealth management, assets under advice (AUA) were Rs. 1,06,000 cr. as on 31 March 2019,18% higher than the AUA as on 31 March 2018. Net revenue from wealth management was Rs. 725 cr. and PAT of Rs. 162 cr. for FY19. 70% of the AUA is from distribution business and 30% is the assets advisory business.
Under assets management Assets under management (AUM) under alternative asset management amount to Rs. 25,600 cr., 44.63% higher than that at 31 March 2018 which was Rs. 17,700 cr.
Mutual Funds AUM amounts to Rs. 11,400 cr. As on 31 march 2019 which is 0.87% lower than the amount at 31 March 2018 which was Rs. 11,500 cr. Edelweiss offers 32 schemes across equity, debt and liquid categories.
2. Distribution Network of Advisory Business
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Under assets management – mutual funds business, the company catered to ~1,78,600 clients in FY19.
3. Alternative Asset AUM Categorization FY19
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4. Income Structure of Alternative Assets Management
The management fee booked on credit fund is around 1.5-2% p.a. calculated on the deployed funds amount out of which 3/4th goes into expenses. The carry income is received at the time of exit of fund which is 4-5% and it is received cumulatively at the exit that is carried in 3 to 4 years. The deployed funds as on 31 March 2019 were ~50% of the total AUM.
(K) Insurance Business Metrics
- Net premium income – Rs. 855 cr. for FY19 vs Rs. 601 cr. for FY18.
- Investment & other income – Rs. 202 cr. for FY19 vs Rs. 148 cr. for FY18.
- Distribution network for Life insurance business – Life insurance is catered through 121 branches; ~43,600 personal financial advisors across 93 locations across India.
- Life insurance channel mix: Click to enlarge the image
- Life insurance product mix – on the basis of new business premium FY19
(L) Borrowings Profile
Total debt as on 31 March 2019 stood at Rs. 45,217 cr. and out of which 61% constitute long term debt. Click to enlarge the image
(M) Edelweiss Business Outlook till FY22
- The management aims to reduce the cost to income ratio in retail credit which is 50% currently to 30% by FY22 by bringing more efficiency (adding quantity of business). To improve further, the management wants to include securitisation for increasing margins which was not done till FY 19 in a big way. Also Edelweiss has already invested on opening sales capacity and branches in last 2 years for retail credit business.
- The management targets to double the credit book in the next 3-4 years but keep wholesale credit business constant and basically triple the retail part of the portfolio so to achieve 70% retail and 30% wholesale which is currently 50:50.
- The corporate book shall not be in focus and only repayments shall occur in further quarters. The demand on retail credit is expected on LAP business and home loans business growth which is the mortgage business and is currently Rs. 9,000 cr. The ESOP and margin funding book which is currently Rs. 4,000 cr. has the opportunity to grow to rs. 10,000 cr. with Edelweiss’s HNI customers portfolio. The management also expects inorganic growth by acquiring portfolios from other NBFCs and housing finance companies for about Rs.2,000-3,000 crore a year.
- Strategy for structured collateralised finance – The management remains very optimistic on the structured credit opportunity and are on the road to raise $1 billion structured credit fund from international investors.
- For the ARC book, the management sees opportunity of raising the book by net amount of ~Rs 1,000 cr. a year for the next three years considering the NPAs are still there in the banks and now have been identified, quantified and provided against by the banks, they will give to ARC for recoveries.
- By end FY20 the management aims to simplify Edelweiss business structures and realign businesses as transition into 3 self contained Strategic Business Groups (BGs) viz. Credit, Advisory and Insurance. Each BG shall have strategic investors to provide the growth capital needed for next 3-4 years. In addition, each of the groups will have an Independent Board with enhanced Governance.
CDPQ investment in ECL Finance
Edelweiss entered into an agreement with CDPQ Private Equity Asia Pte. Ltd. (CDPQ), a wholly-owned subsidiary of Caisse de dépôt et placement du Québec, to invest ~INR 1,800 Cr (USD 250 mn) in Edelweiss NBFC arm, ECL Finance for credit business in 3 tranches: USD 150 million on closing; USD 50 million each at the end of year 1 and 2. Based on projected performance of ECL Finance and its subsidiaries, CDPQ is likely to own an equity stake on conversion. As part of this transaction Edelweiss Housing Finance will become a subsidiary of ECL Finance and Edelweiss Retail Finance will merge with ECL Finance.
In May 2019, the first tranche of Rs.1,000 crore has already been received and the balance Rs.400 crore plus Rs.400 crore will come at the end of year one and year two going forward as enough capitalization for growth over next three to four years of the credit business.
Recent news update
Lately in July 2019, US-based Kora Management was in advanced talks to buy 20 per cent in Edelweiss’s Wealth Management for Rs 2,000 crore, valuing the wealth management business at Rs 10,000 crore, information was not yet officially announced. Edelweiss was to raise Rs 2,000 crore by selling this stake to help in meeting debt obligations.
On 14 August 2019, the management announced that US-based Kora Management will be investing up to US$ 125 million (~INR 875 crores) in the Group. Kora Management is an existing long-term investor in Edelweiss and has committed to invest US$ 75 million (~INR 525 crores) in the advisory business, Edelweiss Global Investment Advisors (EGIA) subject to structuring-related milestones. EGIA includes the businesses of Asset Reconstruction, Wealth & Asset Management and Institutional Client Group, together contributing to nearly 50% of the Group’s profits. In addition to this investment, Kora plans to make a further investment of US$ 50 million (~INR 350 crores) in Edelweiss, the timing and structuring of which is being finalized.
Kora Management’s proposed investment in Edelweiss Group’s advisory business marks the third and final external funding process for the group.
Edelweiss is also in talks with other investors to join external investment round in EGIA, which will be limited to $200 million (Rs. 1,400 crore)
(N) Opportunities and Concerns
Opportunities
1. Scalable Retail Finance
India has one of the lowest credit penetration among larger economies and retail credit presents a large growth opportunity driven by long term trends in democratization of credit, rising household incomes and increased consumption. Retail mortgage continues its momentum except for the second half of FY19 but it is coming back to prior trends. Other than the retail mortgage, SME finance is a scalable area. SMEs continue to remain under-banked and NBFCs are increasingly making headway in this sector.
2. Diversified business model
The projected growth for Indian economy is ~7% in FY20 would continue to throw vast opportunities for diversified business models. Edelweiss’s aim has always been to build a bank like fully diversified financial services firm in a non banking finance company structure. Adding new businesses, even inorganically has been constant in Edelweiss for years.
3. Sophisticated growth of wealth management industry
Financialization of assets and increasing sophistication are emerging trends in Indian wealth management industry. Due to increased awareness coupled with various economic reforms, structurally low interest rates and increased investment choices, investors are increasingly exploring their options besides hard assets and traditional savings. Ultra HNIs and affluent clients are progressively looking at sophisticated investment strategies investment and turning towards more personalised and focused investment advisory services in their quest for higher yields.
4. Shift in investing behavior
Mutual Funds’ AUM recorded slightly lower growth of ~11% in FY 19 from FY18. Inflows into equity schemes continued in FY19 with the proportion of equity and equity linked savings schemes going up to 36% at the end of FY19 compared to 35% a year ago in the total AUM of MFs. Also, Alternative asset funds in the structured credit, distressed assets and real estate space also saw higher inflows of ~US$ 7.5 Bn during FY19 as compared to ~US$ 4.5 Bn in FY18. Thus the asset management inflows being robust during FY19 reflect growing future ahead.
5. Low penetration in insurance industry
India suffers low level of penetration at ~2.72% vs global insurance penetration at ~3.47% in life insurance which indicates expandable space in life insurance business. Private sector life insurers are growing at good pace and even in FY19 private insurers increased their individual APE market share from ~56% in FY18 to ~58%.
Similarly penetration in non-life insurance is 0.93% of GDP which is significantly low than global average of 2.8%. There are many interesting changes happening in the industry which are growth oriented: new products, new players, innovative services, progressive regulations etc.
Concerns
1. Asset quality exposed to risks related to concentration in wholesale lending
Edelweiss’s asset quality shall probably remain vulnerable to the concentration risks inherent in its wholesale loan book, despite the strong focus on collateral. The group’s wholesale lending constituted almost 27% of its total loan portfolio (excluding distressed assets credit) and the wholesale portfolio comprises real estate loans and this segment is vulnerable to cyclical downturns. This factor is a matter of concern for ratings company as well.
2. Inherent risks in the commodities business space
In the agri-commodities segment (set up in 2010), the group is engaged in sourcing of agri commodities as well as value chain activities. The value chain business consists of warehousing and trade financing. The commodities business, by its very nature is volatile and susceptible to various risks. The commodities business is exposed to counterparty risk, price risk, fraud risk and other risks like natural disasters and theft. However, Edelweiss has put in place strong risk management practices to manage risks across these business like client profiling including multiple background checks, financial position analysis and other due diligence.
3. Liquidity crunch in Indian economy
NBFCs are under stress due to tight liquidity conditions prevailing over the past nine months. Companies such as Edelweiss are affected by a prolonged slowdown in the real estate industry coupled with the liquidity crunch in the overall market that followed the unexpected default by Infrastructure Leasing & Financial Services (IL&FS) in September last year. NBFC credit dropped 31 per cent to Rs 1.96 lakh crore at the end of March 2019 from Rs 2.83 lakh crore in the year earlier. Such real slowdown impacts business substantially.
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References: Annual Reports, News Publications, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews.
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