Key Rating Drivers & Detailed Description
Strengths:
Adequate capitalisation, supported by multiple capital raises
The Edelweiss group has demonstrated its ability to raise capital from global investors across businesses, despite the tough macroeconomic environment. The group has raised Rs 4,400 crore since 2016 across lending, wealth management and asset management businesses. This has helped maintain the capital position, despite elevated credit cost and absorb the asset-side risks. The group’s networth stood at Rs 8581 crore as on March 31, 2023 (Rs 8,537 crore as on March 31, 2022).
Furthermore, gearing reduced to 2.45 times as on March 31, 2023, from 2.6 times as on March 31, 2022 (3.2 times and 4.3 times as on March 31, 2021, and March 2020). This is driven by the adoption of asset-light model, wherein the credit business operates through the co-lending model, and increased focus on fee-based businesses such as mutual funds and alternate assets.
The group’s capitalisation position will remain supported by the asset-light model and increased focus on fee-based businesses. Also, it has the flexibility to raise capital through dilution of stake in group entities.
Diversified financial services player, with demonstrated ability to build significant competitive position
The Edelweiss group is a diversified financial services player, with presence in four verticals i.e. credit (wholesale and retail), insurance (life and general), asset management, and asset reconstruction. The group has attained competitive positions in the alternate asset business and asset reconstruction and is focusing on building market position in other businesses too, which should lend greater stability to earnings over a period of time.
The asset management business comprises mutual fund and alternate asset businesses. The group is a leading player in the alternate asset segment and its mutual fund assets under management (AUM) has been growing steadily. The asset management AUM has grown over 4.5 times to Rs 1,51,500 crore as on March 31, 2023, as against Rs 37,100 crore as on March 31, 2019. Mutual fund AUM stood at Rs 1,05,000 crore and alternate asset AUM at Rs 46,500 crore as on March 31, 2023.
In the distressed assets segment, Edelweiss Asset Reconstruction Company Limited (Edelweiss ARC) is the largest ARC in India, with total securities receipts managed at Rs 37,100 crore as on March 31, 2023 (vis-à-vis Rs 40,200 crore as on March 31, 2022). From being largely corporate focused, the group has, in the recent past, started focusing on retail and micro, small and medium enterprises (MSME) segments. The share of retail is expected to grow, over the medium term.
In the lending business, while the wholesale book is under run down, the group is focusing on growth in retail through the asset-light model. The group has entered into agreements with various co-lending partners, which are large domestic and foreign banks, for both the priority and non-priority sector portfolios. Going forward, the group targets over 80% of its disbursements through the co-lending route. The key product offerings in retail credit book would be mortgage and MSME loans. Furthermore, the life and general insurance businesses are gaining scale and are expected to break even over the medium term.
Weakness:
Asset quality remains vulnerable
The overall gross stage III assets in the lending business stood at Rs 945 crore (12.5%) as on March 31, 2023, as on March 31, 2023, as against Rs 930 crore (7.4%) as on March 31, 2022, and Rs 1,182 crore (7.7%) as on March 31, 2021. The gross stage III assets in the wholesale credit book were Rs 679 crore as on March 31, 2023, while these were Rs 748 crore on March 31, 2022, and Rs 866 crore on March 31, 2021. The group’s investments in securities receipts outstanding as on March 31, 2023, was Rs 5296 crore (Rs 5,446 crore as March 31, 2022). The retail book gross stage III assets were Rs 266 crore as on March 31, 2023, as against Rs 182 crore as of March 31, 2022 (Rs 134 crore a year earlier).
The group is carrying adequate provisions on gross stage III assets, as a result, the net stage III assets are lower at Rs 207 crore (3.1%) as on March 31, 2023, against Rs 201 crore (1.1%) as on March 31, 2022, and Rs 627 crore (4.1%) as on March 31, 2021, respectively.
The wholesale credit book remains vulnerable owing to exposure to the real estate segment and stressed mid-tier borrowers in structured credit. This book has substantially run down to Rs 3,112 crore as on March 31, 2023, from Rs 10,130 crore as on March 31, 2020; supported by recoveries and sell down to Alternate Investment Funds (AIFs) and ARCs; however, the group continues to retain some credit risk on part of these exposures. Therefore, ability to recover from these assets in a timely manner will be a key monitorable. Furthermore, the loan book remains concentrated with 10 largest loans constituting ~50% of the wholesale portfolio as on March 31, 2023. Nevertheless, the group has reasonable collateral cover for its wholesale loans.
Any sharp weakening of asset quality, specifically in the wholesale lending book, will impact profitability as well as capitalisation and remains a key rating monitorable.
Low profitability
Edelweiss Group’s profitability has been lower compared to other large, financial sector groups. However, most of the businesses have been reporting profit from the last quarter of fiscal 2021.
The group reported ex-insurance profit of Rs 730 crore in fiscal 2023 against Rs 523 crore in fiscal 2022 and Rs 552 crore in fiscal 2021.
Also, the group’s profitability remains subdued owing to the lower net interest margin (NIM) and substantial credit cost in lending business. The net profit of the group was Rs 406 crore in fiscal 2023 as against Rs 254 crore and loss of Rs 2,045 crore in fiscal 2021 and fiscal 2020, respectively. These include fair value gain on Nuvama Investment of Rs 1241 crore in fiscal 2023 and capital gains of Rs 306 crore and Rs 1406 crore in FY22 and FY21 respectively. Further, the insurance businesses are expected to breakeven in fiscal 2026.
With the asset-light model, the borrowing requirement and resultant cost are likely to reduce. Also, credit cost normalised to 0.2% in fiscal 2022 from 8.2% and 10.7% in fiscals 2021 and 2020, respectively.
Asset management, asset reconstruction and credit are key to driving the group’s overall profitability going forward. The group aims at increasing the fee-paying AUM in asset management business, which would enhance the overall revenues and thereby profitability. Asset reconstruction business is expected to continue to provide a regular income stream. However, in the credit business, ability to scale-up retail lending and recover from wholesale book as well as breakeven in the insurance businesses, will be a monitorable.