| Edelweiss Financial Services Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Edelweiss Financial Services Ltd (EFSL). |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Edelweiss Financial Services Ltd (EFSL) and its subsidiaries. That's because all these entities, collectively referred to as the Edelweiss group, have significant operational, financial, and managerial integration and also operate under the common Edelweiss brand. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Diversified business profile The group has been diversifying within each of its key businesses, as well as entering new businesses, over the past few years. It is now present in the retail and wholesale lending segments, securities broking, wealth management, asset management, insurance, stressed-asset management, and alternate assets. Many of these have now attained sizeable scale, and likely to lend greater stability to earnings. Within the capital market, retail broking volume now constitutes around half of the overall broking volume. In terms of new business lines, the life insurance business has grown significantly and may break even over the next 3-4 years. In the lending business (book size of Rs 33,968 crore as on June 30, 2019, excluding capital deployed in distressed assets credit), the group will continue to focus on increasing the granularity of the loan book. As a part of this strategy, it will focus on growing the retail book (comprising mortgage, small and medium enterprise [SME], agriculture loans and retail loans against shares) from around 50% as on June 30, 2019 (45% as on March 31, 2018) to about 70% by March 2021. Within wholesale lending, focus will be on a new segment of mid-market corporate lending, with lower ticket size of Rs 50-100 crore as against large ticket size in the existing structured collateralised credit. Growth in the wholesale credit book will be through funds structure. However, given the current evolving liquidity situation for non-banks since September 2018, and the slowdown seen in the sector, the group has reduced its disbursements in the wholesale segment. * Demonstrated ability to build significant competitive positions across businesses While the group remains a large player in the traditional broking business, it also has one of the largest wholesale lending book among non-banks; this portfolio stood at Rs 16,987 crore as on June 30, 2019 (Rs 18,055 crore as on March 31, 2019; excluding capital deployed in distressed assets credit). In the distressed assets segment, EARC remains the largest asset reconstruction company in India with total securities receipts managed at around Rs 47,400 crore as on June 30, 2019 (Rs 46,600 crore as on March 31, 2019). In the commodities business, the group has exited its agricultural commodities and precious metals trading businesses and is focusing on the agricultural credit and value chain services business. * Established position in capital market businesses Earnings and accretion to capital should provide a regular stream of fee-based income over the medium term, given the established market position in capital market-related businesses. Profit from the fee-based capital markets and asset management has increased in the past few years, and may record healthy growth over the medium term. The group has an established franchise in institutional broking and investment banking, and an expanding presence in retail broking, wealth management, and asset management segments. It is also one of the largest Indian institutional brokerage houses, with over 700 foreign and domestic institutional clients. The retail broking franchise is also expanding, with more than 5.55 lakh unique clients as on March 31, 2019. The group operates across the corporate finance and advisory domains-equity markets, private equity, mergers and acquisitions, advisory structured financial syndication, and debt issues. The wealth business and alternate assets business have also witnessed significant growth. Assets under advice in the global wealth management business were Rs 106,000 crore, and the assets under management in the asset management business stood at Rs 36,300 crore, as on June 30, 2019. Weaknesses: * Asset quality exposed to risks related to concentration in wholesale lending Asset quality will remain vulnerable to concentration risks inherent in the wholesale loan book, despite the strong focus on collateral. As on June 30, 2019, wholesale lending constituted almost 50% of the total loan portfolio (excluding distressed assets credit), with the 10 largest loans constituting 18% of the wholesale portfolio. A sizeable proportion of this book is currently under moratorium with bullet or staggered repayments. The group has also sold a few stressed exposures to the ARC to leverage on the latter's better resolution capability and strong legal team. Also, around 67% of the wholesale portfolio comprises real estate loans; this segment is vulnerable to cyclical downturns. Further, given the current evolving liquidity situation for non-banks since September 2018, asset quality on the group's exposures to loans against property (LAP) and loans to micro, SME (around 20% of the loan book as on June 30, 2019; excluding capital deployed in distressed assets credit), would also be a key monitorable. This stems from sensitivity of borrowers of such loans to an environment of prolonged liquidity tightness. Any sharp deterioration in asset quality, specifically in the wholesale lending book, will also impact profitability and capital, and remains a key rating monitorable. The group is also planning to reduce its wholesale through sell-down over the next few months. Its ability to refinance/exit and recover from some of the exposures as well as scale down the book will remain key a monitorable, considering the current challenging environment. * Lower profitability than peers Profitability has been lower than those of other large financial sector groups; return on assets (annualised) and return on equity (annualised) stood at 0.8% and 5.8%, respectively, for the first quarter of fiscal 2020 ( 1.6% and 12.6% for fiscal 2019). Profitability in the first quarter of fiscal 2019 was also impacted by higher provisioning costs, which more than doubled to Rs 248 crore (Rs 110 crore during the quarter ended June 30, 2018). The group's profitability, while on an improving trend over the past few fiscals, remains relatively lower as over 25%, of the capital (equity plus borrowings) is employed in businesses or investments that are either low yielding or loss making at this point. The group has a large investment portfolio under its balance sheet management unit (BMU), used for managing liquidity. This largely comprises government securities, fixed deposits, liquid mutual fund units and corporate bonds, which have a low return on capital employed. Furthermore, the life and general insurance businesses continue to be loss-making. The general insurance business started in February 2018, after requisite approvals were received from the Insurance Regulatory and Development Authority of India. This business is also expected to affect consolidated profitability in the initial years of operations, given its long gestation period. Expected improvement in profitability of the insurance business and reduction in the share of funds allocated to BMU will benefit profitability only in the long term. In the near term, profitability could be constrained by increase in credit costs, and higher borrowing costs coupled with limited ability to pass these on to borrowers. * Relatively high gearing, though lower than earlier levels Gearing is relatively high, though declining, in the context of the share of the wholesale portfolio in the Edelweiss group, which is around 50%. Other large, predominantly wholesale lenders operate at significantly lower levels. As on June 30, 2019, gearing was 5.1 times, while the net gearing (excluding the liquid assets of BMU) stood at 3.7 times. However, after factoring in the Rs 1,040 crore received from CDPQ in the June quarter and treating it as equity, the group's gearing stood at 4.5 times. With additional capital raising of Rs 525 crore from Kora coupled with plans of raising further capital in EGIA, the group's leverage ratio is expected to reduce further. Gearing, thereafter, is expected to gradually increase to 5-5.5 times over the medium term. Liquidity: Adequate Liquidity is adequate. As a policy, the group maintains a cushion of 9-10% of the balance sheet. Even in current market conditions, there was a liquidity cushion (including cash, liquid investments and treasury assets) of around Rs 2,900 crore and unutilised bank lines of around Rs 1,300 crore as on September 26, 2019. Collections of around Rs 2,400 crore, expected till December 31, 2019, also supports liquidity. The group also has other liquid assets (investments, securities-based lending book) which can be accessed if necessary- this stood at around Rs 4,600 crore as on same date. As on September 30, 2019, the overall liquidity was adequate to meet debt repayment of around Rs 4,500 crore due over the next three months ended December 31, 2019. The group has also reduced its dependence on commercial paper borrowing, which has dropped to less than 1% of overall borrowings as compared to 18% as on September 30, 2018. The assets and liabilities continue to be well-matched. Rating sensitivity factors Downside factors: * Deterioration in asset quality with GNPA increasing to above 4%, over an extended period, thereby also impacting profitability * Continued funding access challenges for non-banks sector with limited fund-raising by the Edelweiss group * Lack of progress on planned scale down of wholesale portfolio About the company and group The group comprises 46 subsidiaries as on March 31, 2019. It has plans to bring down the number of entities to around 35 in fiscal 2020, (subject to requisite approvals).The group had 476 offices (including 8 international offices in 6 locations) in around 200 cities as on March 31, 2019. Its main business lines are credit, franchise businesses, and insurance. These businesses entail loans to corporates and individuals, mortgage finance, including LAPs and small-ticket housing loans, SME finance, agricultural credit including commodity sourcing and distribution, institutional and retail equity broking, corporate finance and advisory, wealth management, third-party financial products distribution, alternative and domestic asset management, and life and general insurance. In addition, the BMU focuses on liquidity and asset-liability management. For fiscal 2019, profit after tax (PAT) of the group was Rs 995 crore on total income of Rs 10,881 crore against Rs 863 crore and Rs 8,920 crore, respectively, in fiscal 2018. For the first quarter of fiscal 2020, PAT (after minority interest) of the group was Rs 132 crore on total income of Rs 2,546 crore, against Rs 264 crore and Rs 2,476 crore, respectively, in fiscal 2019. Networth of the group increased to Rs 9,844 crore (after factoring CDPQ investment of Rs 1,040 crore in May 2019) as on June 30, 2019, from Rs 8,226 crore as on June 30, 2018 |
| Key Financial Indicators : EFSL (Consolidated) | ||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated (As on March 31, 2019 as per IndAS) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Links to related criteria |
| Rating Criteria for Banks and Financial Institutions |
| CRISILs Criteria for Consolidation |
| CRISILs Criteria for rating short term debt |
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