Companies operating in the financial services space have evolved over the last decade or so — from being pure-play stock broking or investment banking entities to fully diversified financial services companies pursuing lending activities and also setting up mutual funds, life insurance business and asset reconstruction companies.
The change in business model has helped some of these companies bring in more predictability in earnings, insulating them from stock market vagaries which impact broking revenues (linked to trading volumes).
Edelweiss Financial Services, which was initially set up to provide advisory and investment banking services, has diversified its business across lending, financial markets, asset management, commodity and agri services and life insurance.
The initial phase of diversification was predominantly into the corporate space. It was only between 2008 and 2012 that the company started strengthening its presence in the retail space. Over the last three years, the company’s diversification has paid off. Revenues have grown 33 per cent and earnings 37 per cent annually since 2011-12.
Strong growth in the retail finance business, traction in life insurance and improvement in broking and asset management businesses should help the company’s performance. At the current price, the stock trades at an attractive 1.4 times its one-year forward book value, when compared with peers — IIFL Holdings (1.9 times), Motilal Oswal Financial Services (3.2 times) and Religare Enterprises (1.4 times). Investors with a two to three year horizon can buy the stock.
Uptick in lending businessAs part of its lending (credit) business, Edelweiss provides housing loan, loan against property, real estate finance, collaterised loans to corporates, SME (small and medium enterprises) and agri financing. Mortgages (40 per cent of total loans) and loans extended to corporates (39 per cent) form a chunk of the total loan book. As of June 2015, the company’s loan book grew a robust 72 per cent, with traction across segments.
Retail finance, which accounted for 19 per cent of the total loan book, grew 39 per cent during the latest June quarter. The management expects this segment to grow at a healthy pace.
Asset quality remains under control with gross non-performing assets at 1.32 per cent of loans as of June 2015. Provision cover is at a comfortable 97 per cent. The structured loans to corporate clients are also adequately secured with an average collateral cover of over two times. The lending business has a healthy net interest margin of 6.7 per cent.
The company is also in the distressed assets business, under which it buys bad loans from banks and helps in the recovery process. Edelweiss Asset Reconstruction Company (ARC), now the largest ARC, has an asset base of ₹20,700 crore.
ARCs require large capital as they may have to absorb losses on the debt they take over from banks. Backing from the Edelweiss group should ensure sufficient flow of capital into the business. Selling of bad loans by public sector banks to ARCs is likely to gather momentum.
On a sound footingThe revival in the capital markets over the last year has led to healthy growth in Edelweiss’ agency business that includes investment banking, broking, wealth management and asset management. Edelweiss is one of the largest domestic institutional broking houses.
The group’s assets in the wealth business increased to ₹10,200 crore as on June 2015, from ₹ 7,000 crore last year. The company’s asset management business has funds spanning equity and debt.
Edelweiss launched its life insurance business — Edelweiss Tokio Life Insurance — in 2011. Gross premium for the business went up to ₹32.4 crore in the June quarter from ₹22.7 crore last year. However, the insurance business is yet to break even. It incurred a loss of ₹27 crore in the latest June quarter.
The management expects the business to turn profitable in 2020. However, the life insurance business constitutes only about 7 per cent of the consolidated revenues (in 2014-15).
The lending business, which is on a strong footing, contributes about half the overall revenues.
Overall, the company’s healthy capitalisation, strong balance sheet and diversified portfolio should help it scale up its businesses over the next two to three years.