Top Banner
1 Edelweiss Financial Services Ltd Analyst Details Jaymin Trivedi [email protected] 022- 62257275 Banking & Finance | 29 March 2017
20

Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

Apr 13, 2018

Download

Documents

dokhue
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

1

Edelweiss Financial Services Ltd

Analyst Details

Jaymin Trivedi

[email protected]

022- 62257275

Banking & Finance | 29 March 2017

Page 2: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

2

Led by Rashesh Shah, A veteran in Indian financial services industry, EFSL is emerging as a well-

diversified financial services conglomerate. EFSL has successfully transformed from a broking entity to

NBFC (~70% profit is from credit) which is growing at a healthy pace.

Shareholding (%)

Company Data

BSE Code 532922

NSE Code EDELWEISS

Equity Capital (` bn) 83.12

Face Value (`) 1

Market Cap (` bn) 121.6

Avg Daily Volume (Qtly) 1444162

52 week H/L (`) 149/54

Source: NSE, BSE, Capital Line

Source: BSE

Source: ABML Research, Bloomberg Source: ABML Research

Edelweiss Vs Sensex performance

In ` bn Revenues YoY (%) PAT YoY (%) EPS (`) ABV (`) RoA (%) RoE (%) P/E (x) P/B (x)

FY17 45.4 23.5% 5.8 39.4% 6.9 49.3 1.6% 14.6% 21.1 3.0

FY18E 56.6 24.6% 8.1 40.6% 9.7 55.4 1.8% 18.0% 15.0 2.6

FY19E 69.3 22.4% 10.9 33.9% 13.0 64.9 2.0% 20.8% 11.2 2.2

• 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 ~50% 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.

• 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

Key Investment Arguments:

Financial Snapshot:

Promoters36.98

FIIs29.56

GDR/ADR5.4

Others28.06

75

125

175

225

275

325

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Rel

ativ

e Pe

rfor

man

ce

Edelweiss Fin. Return Sensex Return

Edelweiss Financial Services Ltd CMP: Rs146 Target: Rs200

Page 3: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

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.

1996 - 2000 2005 - 2008 2008 - 2013

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 20 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.

Page 4: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

4

Diversified Business Model

In FY08, Edelweiss was mainly a broking company with ~15% contribution from credit business. Post 2009 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.

Wealth

Management

- AUM (` 537

bn)

Wholesale

credit (AUM

of ` 136 bn)

Retail credit

(AUM of `

78.2 bn)

Credit book -

(` 214bn)

excluding

loan to ARC

of ` 35 bn

Broking –

ADV of (` 67

bn),

Asset

Management

- AUM (` 172

bn)

Insurance

Premium

(APE of ` 82

cr for

9MFY17).

Asset

Reconstructi

on - AUM (`

316 bn)

Edelweiss

Profit (` cr) FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Credit Business 127.3 169.5 230.0 337.0 448.1 591.7 765.9

Growth (%) 62.5% 33.2% 35.7% 46.5% 33.0% 32.1% 29.4%

Non-Credit business 99.3 103.0 152.0 182.0 229.8 330.3 408.0

Growth (%) 57.8% 3.8% 47.5% 19.7% 26.3% 43.7% 23.5%

Adj profit Ex-Insurance 226.6 272.6 381.0 519.0 677.9 922.0 1173.9

Growth (%) 60.4% 20.3% 39.8% 36.2% 30.6% 36.0% 27.3%

Insurance -48.1 -51.1 -52.0 -104.0 -100.7 -110.7 -87.8

Adj Profit 178.5 221.5 329.0 414.0 577.2 811.4 1086.1

Growth (%) 39.1% 24.1% 48.5% 25.8% 39.4% 40.6% 33.9%

Source: ABML Research

Page 5: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

5

A) Credit Business

India amongst the most under-penetrated credit market Shadow Banking to GDP ratio also amongst the lowest

Shift from Physical savings to Financial savings shall increase pace

Source: Global Shadow Banking Monitoring Report 2015, ABML Research Source: Global Shadow Banking Monitoring Report 2015, ABML Research

Source: RBI, ABML Research

601

122

271

205

109 108 95 9154

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

UK US China Korea Russia Turkey India Brazil Indonesia

(%)

Banks

147

82

26

48

4 619

33

10.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

UK US China Korea Russia Turkey India BrazilIndonesia

(%)

Shadow Banking

• 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 70% 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.

29939

33648

37250

41167

9,3

35

10,6

40

11,6

94

12,5

03

13376

14637

14608

13794

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY12 FY13 FY14 FY15

(Rs b

n)

Gross Savings Gross Financial saving Saving in physical assets

Page 6: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

6

Diversified credit book

65728953

15036

2001422896

28620

35489

37% 36%

68%

33%

14%

25% 24%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0

5000

10000

15000

20000

25000

30000

35000

40000

FY13 FY14 FY15 FY16 FY17E FY18E FY19E

(Rs c

r)

Credit book Growth (%)

Source: ABML Research, Company Presentation Source: ABML Research, Company Presentation

Diversified credit book which is expected to grow at a healthy pace of 24.5% CAGR over FY17-19E

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

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

Structured collateralised

credit7260

Wholesale mortgage

6346

Retail mortgage

2997

Loan against shares

1725

SME & Others2138

Agri & Rural f inance

963

Diversified Credit book (Rs cr)

Page 7: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

7

Focus shifting to Retail credit book

Particulars (` cr) FY15 FY16 FY17E Proportion

(%) YoY (%) FY18E FY19E

CAGR over

FY17-19E

Wholesale book 11728 12097 14821 64.7% 22.5% 17848 21149 19.5%

Structured collateralised credit 6014 6750 7762.5 33.9% 15.0% 8927 10177 14.5%

Wholesale mortgage 5714 5347 7058 30.8% 32.0% 8921 10972 24.7%

Retail book 2105 6021 8076 35.3% 34.1% 10773 14340 33.3%

Retail mortgage 752 2641 3222 14.1% 22.0% 4028 5034 25.0%

Agri & Rural financing 301 590 944 4.1% 60.0% 1416 2062 47.8%

Loan against shares 451 1940 1785 7.8% -8.0% 2142 2463 17.5%

SME & others 601 850 2125 9.3% 150.0% 3188 4781 50.0%

Total credit book (Ex loan to ARC) 13833 18118 22896 100.0% 26.4% 28620 35489 24.5%

Distress asset book* 1226 1896 3700 - 95.1% 6750 9800 62.7%

Total credit book 15059 20014 26596 100.0% 14.4% 35370 45289 30.5%

P&L of credit business (` cr) FY16 FY17E FY18E FY19E

Int income 2839 3603 4447 5429

Int exp 1639 2011 2441 2962

NII 1200 1592 2006 2467

Operating cost 528 645 787 944

Provision 160 260 322 380

PBT 512 687 897 1143

Tax 174 239 305 377

PAT 338 448 592 766

PAT Growth (%) - 32.6 32.1 29.4

• 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 30.7% to ` 7.7 bn over FY17-

19E.

• We are valuing the credit business using two-

stage 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

Source: ABML Research, Company Presentation

Page 8: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

8

Financial parameters improving

16.20% 16.00% 15.80% 15.50%

10.70% 10.50% 10.20% 9.90%

6.85% 7.07% 7.13% 7.04%

6%

8%

10%

12%

14%

16%

18%

FY16 FY17E FY18E FY19E

Avg. Interest yield Avg cost of Borrowing NIM

1.40%

1.55%1.65%

1.70%

0.47%0.55%

0.60%0.70%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

FY16 FY17E FY18E FY19E

GNPA NNPA

337

448

592

766

26%

47%

33% 32%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

100

200

300

400

500

600

700

800

900

FY16 FY17E FY18E FY19E

(Rs c

r)

PAT PAT growth

2.0%

2.1%

2.2%

2.3%

17.0%18.3%

22.0%23.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1.8%

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

FY16 FY17E FY18E FY19E

RoA RoE

NIM expected to be maintained as cost of borrowing comes down Asset quality to remain stable

Healthy PAT growth expected, mainly supported by business growth Return ratios to improve as operating leverage kicks in

Source: ABML Research, Company Presentation Source: ABML Research, Company Presentation

Source: ABML Research, Company Presentation Source: ABML Research, Company Presentation

Page 9: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

9

B) ARC – A business with long gestation period

Loan book is

transferred to ARC

at a discounted

value which is

mostly at ~50%

discount. For e.g.

` 20bn loan is sold

to ARC at ` 10bn.

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.

ARC receives

commission fee of

~2% on

discounted BV.

Here, ARC shall

receive ` 0.2bn.

Now, the onus is

on ARC to

turnaround the

company. Various

measures including

sale of collateral,

efficiency

improvement, etc.

shall be considered

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 (~20% or

so) is given as

bonus. For e.g., if

receipts are ` 14

bn, ` 0.8 bn will be

given as bonus to

ARC while ` 13.2

bn will be shared in

ratio of 15:85.

1

2

3

4

5

Start

Finish It shall take about 5-7 years for an

ARC to recover money.

Management guiding for an IRR

at 22% p.a.

Page 10: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

10

Edelweiss now a largest Indian ARC

Edelweiss ARC currently contributes ~10% 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 20% by FY20.

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 ` 50 bn to provide next leg of growth

CDPQ has targeted investment of ` 50 bn over four years in the Edelweiss ARC business. It will be acquiring a 20% equity stake in Edelweiss ARC.

The partnership aims to channel between ` 120-140 bn (including CDPQ’s ` 50 bn).

Robust AUM growth propels Edel to be largest Indian ARC by AUM

Source: ABML Research, Company Presentation

Low acquisition cost in context of BV provides comfort

Source: Financial Stability Report 2015 ABML Research

90110

70100

500 500

20 305

30

200 210

0

100

200

300

400

500

600

FY10 FY11 FY12 FY13 FY14 FY15

(Rs b

n)

Book value of asset acquired Acquisition cost

32000

43200

56160

70200

8424060%

35%

30%25%

20%

0%

10%

20%

30%

40%

50%

60%

70%

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

FY15 FY16 FY17E FY18E FY19E

Rs. bn

ARC AUM Growth

Page 11: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

11

C) Wealth management

• 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 FY14-16.

• 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 80-90 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 90% 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. `

20/share. On P/E basis, we are valuing it at 20xFY19E EPS. It shall contribute ~10.6% 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.

177.5

295

550

660

79299%

66%

86%

20%20%

0%

20%

40%

60%

80%

100%

120%

0

100

200

300

400

500

600

700

800

900

FY15 FY16 FY17E FY18E FY19E

Rs. bn

AUM

AUM Growth

Particulars (` cr) FY16 FY17E FY18E FY19E

AUM 29500 55000 66000 79200

Growth 66.2% 86.4% 20.0% 20.0%

Commission & Fee

income 201 359 514 617

Growth 68.3% 52.1% 20.0%

Operating exp 197 325 422 485

Operating Profit 4 34 92 132

Source: ABML Research, Company Presentation Source: ABML Research, Company Presentation

Wealth Management AUM has grown at a robust pace

Page 12: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

12

D) Asset management

• 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 30 employees from JPM

• EFSL has recently made first closure of two funds. i) Edelweiss

Real Estate Fund with AUM of $ 380 mn and ii) Edelweiss India

Special Assets Fund II with AUM of $ 260 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 ` 10

bn i.e. ` 12/share.

5.97

8.3

10.8

12.3

19% 19%

30%

14%

0%

5%

10%

15%

20%

25%

30%

35%

0

2

4

6

8

10

12

14

FY12 FY13 FY14 FY15 FY16

Rs. Tn

Mutual Fund Industry AUM

Mutual Fund AUM Growth

2 8 16

65

27 1934

107

29 27

50

172

0

20

40

60

80

100

120

140

160

180

200

FY14 FY15 FY16 9MFY17

Rs. bn

Mutual Fund AUM Alternative Assets AUM

Acquisition leads to bump-up in AUM during FY17E Indian MF industry AUM growing at a healthy pace

Fund closures leading growth in AUM

Source: ABML Research, Company Presentation Source: ABML Research, Company Presentation

Source: ABML Research, Company Presentation

29 2750

180

216

259.2

-7%

85%

260%

20% 20%

-50%

0%

50%

100%

150%

200%

250%

300%

0

50

100

150

200

250

300

FY14 FY15 FY16 FY17E FY18E FY19E

Rs. bn

AUM

ARC AUM Growth

Page 13: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

13

E) Broking & Balance sheet Management Unit

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.

Average Daily Volume consistently rising Generates healthy revenue from IB & Advisory business

Balance sheet management unit provides liquidity cushion

Source: ABML Research, Company Presentation Source: ABML Research, Company Presentation

Source: ABML Research, Company Presentation

3100

50005200

6700

0

1000

2000

3000

4000

5000

6000

7000

8000

FY14 FY15 FY16 9MFY17

Rs. cr

Average Daily Volume

61

114

100

72

0

20

40

60

80

100

120

FY14 FY15 FY16 9MFY17

Rs. cr

Investment Banking & Advisory

3317

2453

1213

346

0

500

1000

1500

2000

2500

3000

3500

Govt securities Liquidity cushion Fixed & Taxassets

Others

Rs. cr

Balance Sheet Management Unit

Page 14: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

14

F) Life Insurance business

EFSL launched Edelweiss Tokio Life Insurance company in 2011 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 2021 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.

Particulars FY15 FY16 FY17E FY18E FY19E

Gross Premium Income 193 310 480.5 720.75 1009.05

Investment & Other income 97 87 150 180 216

Total Income 290 397 630.5 900.75 1225.05

Total Expenses 361 552 828 1117.8 1397.25

PAT -71 -155 -197.5 -217.05 -172.2

Edelweiss share in PAT -53 -104 -100.7 -110.7 -87.8

Networth 569 939 780 669 581

32%

7%

0.20%0%

5%

10%

15%

20%

25%

30%

35%

Edelweiss Tokio LifeInsurance

Peer set Industry

106187

300

465

697.5

976.576%

60%55%

50%40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

200

400

600

800

1000

1200

FY14 FY15 FY16 FY17E FY18E FY19E

Rs.

cr

Insurance Premium

Insurance Premium Growth

56%

61%

71% 70%

50%

55%

60%

65%

70%

75%

FY14 FY15 FY16 9MFY17

Persistency (Individual & Group Combined)

Average Daily Volume consistently rising Generates healthy revenue from IB & Advisory business

Generates healthy revenue from IB & Advisory business

Source: ABML Research, Company Presentation

Page 15: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

15

Valuation

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 ` 200. 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.

0

50

100

150

200

250

300

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

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

Close -Unit Curr 5.0 X 9.0 X 13.0 X 17.0 X 21.0 X

0

50

100

150

200

250

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

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

Close -Unit Curr 1.0 X 1.5 X 2.0 X 2.5 X 3.0 X

Particulars Valuation basis Multiple on FY19 fig Business Value (` cr) Business value /share

Credit P/ABV 2.2x 7272 87.4

ARC DCF - 4341 52.2

Broking PE 12x 1024 12.3

Wealth management PE 20x 1764 21.2

AMC % of AUM 4.0% 1037 12.5

Insurance Networth 1.2x 698 8.4

BMU & others PE 8x 496 6.0

Total EFSL value 16631 200

CMP 146

Upside 37.0%

Historical 1 year forward PE band Historical 1 year forward P/ABV band

Source: ABML Research, Bloomberg Source: ABML Research, Bloomberg

Page 16: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

16

Consolidated Financials – EFSL

Balance Sheet

Financial Year (`cr) FY16 FY17 FY18E FY19E

Sources of Funds

Equity Capital 81 83.2 84 84

Reserves 3593 4055 4704 5573

Networth 3675 4228 4788 5657

Other Liabilities 697 836 1004 1204

Borrowings 27773 34439 42704 52953

Total Liabilities 32145 39503 48496 59814

Application of Funds

Loan book 20014 22896 28620 35489

FDs and Cash & Bank Balance 3116 3583 4372 5334

Govt Bonds 4866 5596 6827 8329

Other assets 4149 7428 8677 10663

Total Assets 32145 39503 48496 59814

Source: ABML Research

Page 17: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

17

Consolidated Financials – EFSL

Income Statement

Financial Year (` cr) FY16 FY17E FY18E FY19E

Interest income on credit business 2839 3603 4447 5429

Interest exp on credit business 1639 2011 2441 2962

NII 1200 1592 2006 2467

Non-interest income 2477 2950 3654 4460

Net total income 3677 4542 5659 6927

Emp Exp 882 1076 1313 1549

Other operating exp 2176 2648 3185 3813

Total exp 3058 3724 4498 5362

PBT 619 818 1162 1564

Tax 236 278 395 532

PAT 383 540 767 1032

Shares of Minority interest -31 -37 -45 -54

PAT after minority interest 414 577 811 1086

Growth 26% 39% 40.6% 33.9%

Source: ABML Research

Page 18: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

18

Consolidated Financials – EFSL

Ratios

Financial Year FY16 FY17 FY18E FY19E

Growth ratios

Credit growth 33.1% 14.4% 25.0% 24.0%

NII growth 49.3% 32.7% 26.0% 23.0%

PAT growth of credit business 46.9% 32.6% 32.1% 29.4%

Consolidated PAT growth 25.9% 39.4% 40.6% 33.9%

Other Key ratios

Cost to income ratio 83.2% 82.0% 79.5% 77.4%

RoA 1.4% 1.6% 1.8% 2.0%

RoE 12.9% 14.6% 18.0% 20.8%

Dividend payout ratios 25.1% 22% 20% 18%

Dividend per share 1.25 1.5 1.9 2.3

GNPA ratio 1.4% 1.6% 1.7% 1.7%

NNPA ratio 0.5% 0.6% 0.6% 0.7%

Valuation ratios (x)

EPS 5.0 6.9 9.7 13.1

P/E 29.4 21.1 15.0 11.2

BV 44.2 50.8 57.5 68.0

ABV 43.0 49.3 55.5 65.0

P/ABV 3.4 3.0 2.6 2.2

Source: ABML Research

Page 19: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

19

Research Team

Vivek Mahajan Hemant Thukral

Head of Research Head – Derivatives Desk

022-6225 7220 022-6225 7230

[email protected] [email protected]

Fundamental Team

Avinash Nahata Head Equity Analyst 022-6225 7208 [email protected]

Jaymin Trivedi Banking & Finance 022-6225 7275 [email protected]

Naveen Baid IT 022-6225 7274 [email protected]

Suresh Gardas Pharma & Chemicals 022-6225 7271 [email protected]

Mahavir Jain Equity Analyst 022-62257270 [email protected]

Quantitative Team

Sudeep Shah Sr.Technical Analyst 022-6225 7265 [email protected]

Ammolh Paatil Sr. Derivative Analyst 022-6225 7264 [email protected]

Rahil Vora Technical Analyst 022-6225 7266 [email protected]

Smita Dhale Sr.Executive –Derivative Desk 022-6225 7269 [email protected]

Advisory Team

Salim Hajiani Advisory Desk 022-6225 7277 [email protected]

Pradeep Parkar Equity Advisor 022-6225 7272 [email protected]

Mohan Jaiswal Sr. Exec.-Research Support 022-6225 7273 [email protected]

ABML research is also accessible in Bloomberg at ABMR

Page 20: Edelweiss Financial Services Ltd - NSE, BSE, Sensex, … · Edelweiss Financial Services Ltd ... BSE Code 532922 NSE Code EDELWEISS ... Edelweiss Vs Sensex performancereasonable

20

Disclaimer:

This document is not for public distribution and is meant solely for the personal information of the authorised recipient. No part of the

information must be altered, transmitted, copied, distributed or reproduced in any form to any other person. Persons into whose possession

this document may come are required to observe these restrictions. This document is for general information purposes only and does not

constitute an investment advice or an offer to sell or solicitation of an offer to buy / sell any security and is not intended for distribution in

countries where distribution of such material is subject to any licensing, registration or other legal requirements.

The information, opinion, views contained in this document are as per prevailing conditions and are of the date appearing on this material

only and are subject to change. No reliance may be placed for any purpose whatsoever on the information contained in this document or on

its completeness. Neither Aditya Birla Money Limited (ABML), its group companies, its directors, associates, employees nor any person

connected with it accepts any liability or loss arising from the use of this document. The views and opinions expressed herein by the author

in the document are his own and do not reflect the views of Aditya Birla Money Limited or any of its associate or group companies. The

information set out herein may be subject to updation, completion, revision, verification and amendment and such information may change

materially. Past performance is no guarantee and does not indicate or guide to future performance.

Nothing in this document is intended to constitute legal, tax or investment advice, or an opinion regarding the appropriateness of any

investment, or a solicitation of any type. The contents in this document are intended for general information purposes only. This document or

information mentioned therefore should not form the basis of and should not be relied upon in connection with making any investment. The

investment may not be suited to all the categories of investors. The recipients should therefore obtain their own professional, legal, tax and

financial advice and assessment of their risk profile and financial condition before considering any decision.

Aditya Birla Money Limited, its associate and group companies, its directors, associates, employees from time to time may have various

interests/ positions in any of the securities of the Company(ies) mentioned therein or be engaged in any other transactions involving such

securities or otherwise in other securities of the companies / organization mentioned in the document or may have other interest with respect

to any recommendation and / related information and opinions. The company follows Employee Trading Policy which regulates the trading

activities of the research analysts. The compensation of the research analysts is governed as per the Board approved “Research Analyst”

Policy.

Aditya Birla Money Limited is acting as a Research Analyst and is registered under SEBI (Research Analyst) Regulations, 2014. SEBI

Registration No. INH000002145