CRISIL has assigned its ‘P1+’ rating to the Rs.5-billion short-term debt programme of ECL Finance Ltd (ECLF, which is part of the Edelweiss group), and has reaffirmed its ‘AA-/Stable/P1+’ ratings on the other instruments. The ratings reflect the Edelweiss group’s strong capitalisation, comfortable liquidity, and diversified business and earnings profiles. These rating strengths are partially offset by the group’s susceptibilty to volatility inherent in capital-market-related businesses, and exposure to risks associated with new ventures.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of all the entities in the Edelweiss group because of the significant level of operational and financial integration among the entities.

The Edelweiss group has strong capitalisation, reflected in its large net worth and prudent gearing policy. The group had a net worth of about Rs.22.66 billion (excluding minority interest) as on December 31, 2009, enabling it to withstand the vagaries of the capital markets. The debt component on the balance sheets of capital-market-related entities tends to follow market volumes, as the debt is mainly utilised for funding client margins. Following the recent revival in the capital market, the group’s gearing increased to 1.2 times as on December 31, 2009, from 0.36 times as on March 31, 2009. The rating is underpinned by the group’s stated policy of maintaining a gearing not more than 2 times on a steady-state basis. While the group has planned to venture into non-capital-market-related businesses in the financial services sector, such as life insurance and asset reconstruction, it is expected to have a measured growth in these segments, and therefore its capital requirement for these businesses is expected to remain small over the medium term. Nevertheless, the extent of diversification into unrelated businesses, and its impact on the capital position, or a change in the gearing policy, will be key monitorables for the group. The Edelweiss group has comfortable liquidity; as on December 31, 2009, the group had more than Rs.17 billion in fixed deposits and liquid mutual funds.

The Edelweiss group has a diversified business profile, supported by its presence across capital-market-related businesses, such as institutional equity broking, securities-based lending, investment banking, and asset management. The group has also built up expertise in the arbitrage business over a long period, and across market cycles. In addition, it recently announced the acquisition of Anagram Capital Ltd (Anagram Capital); the acquisition is aimed at increasing the group’s reach in the retail equity broking business. The presence across capital market businesses helps the group maintain a diversified revenue profile; currently, the group derives about one-third of its total revenues from fund-based business, arbitrage business, and broking and fee-based business each. With the revival of capital markets in 2009-10 (refers to financial year, April 1 to March 31), the group reported a 22 per cent increase in profit after tax (PAT; after minority interest) for the nine months ended December 31, 2009, over the corresponding period of the preceding year. The group posted a PAT of Rs.1.77 billion for the nine months ended December 31, 2009, against a PAT of Rs.1.46 billion for the corresponding period of the previous year.

However, the Edelweiss group derives its revenue primarily from capital market services; thus, its earnings profile is vulnerable to the cyclicality inherent in this line of business. Also, the group’s new ventures include expansion in the retail broking business through the acquisition of Anagram Capital, and entry into the life insurance and asset reconstruction businesses, which are more competitive and risk-prone than the institutional broking segment. The extent of scaling up of operations in the retail segment will depend on the integration of the Anagram brand in the next two to three quarters, and the sustenance of the revival in equity capital markets.

Outlook: Stable
CRISIL believes that Edelweiss group will maintain its capitalisation, adequate earnings profile, and comfortable liquidity. Furthermore, the acquisition of Anagram Capital is expected to strengthen the Edelweiss group’s market position in the equity broking space. The outlook may be revised to ‘Positive’ in case of significant improvement in the group’s market position and earnings profile. Conversely, the outlook may be revised to ‘Negative’ if the group’s capitalisation or earnings profile deteriorates.

About the Company
ECLF, a subsidiary of Edelweiss Capital Ltd (Edelweiss Capital), was set up in July 2005 to manage the Edelweiss group’s fund-based businesses. It is a non-deposit-taking non-banking financial company registered with the Reserve Bank of India. In May 2007, Lehman Brothers Netherlands BV acquired 26 per cent of ECLF. In January 2008, Edelweiss Capital diluted its stake in ECLF to 62.5 per cent. Following the capital infusion by Edelweiss Capital in 2008-09, its ownership of ECLF increased to 79.29 per cent. Currently, ECLF is engaged in promoter funding, loan against shares, Employee stock options (ESOP) funding, and Initial Public offering (IPO) financing businesses.

For the nine months ended December 31, 2009, ECLF posted a PAT of Rs.562.3 million, against a PAT of Rs.522.0 million for the corresponding period of the previous year.

The Edelweiss group consisted of 31 companies as on March 31, 2009, all engaged in capital-market-related businesses. Most of these entities are 100 per cent subsidiaries of Edelweiss Capital, the holding company. The group has a presence in institutional equity broking, corporate debt syndication, arbitrage trading, proprietary trading, investment banking, alternative asset management, loan against shares, promoter financing, IPO financing, commodity trading, wealth management, third-party financial products distribution, and treasury operations. It has also ventured into asset management and life insurance, and plans to expand its presence in retail broking.

For 2008-09, the Edelweiss group reported a PAT of Rs.1.86 billion, against a PAT of Rs.2.73 billion for the preceding year.