Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA-/Negative’ rating to the Rs. 150 crore Non convertible debentures of Nido Home Finance Limited (erstwhile Edelweiss Housing Finance Limited; part of Edelweiss group). CRISIL Ratings has also reaffirmed its ‘CRISIL AA-/Negative/CRISIL A1+’ ratings on the existing debt instruments and bank facilities of the company.
The ratings on non-convertible debentures of Rs 224.1 crore have been withdrawn as unutilised and on request of the issuer; withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The ratings continue to reflect the adequate capitalisation of the Edelweiss group, supported by multiple rounds of capital raising; its diversified business profile, with presence across lending, asset management, asset reconstruction and insurance segments; and demonstrated ability to build competitive presence in multiple lines of businesses, which should also support improvement in earnings going ahead. The group also maintains adequate liquidity on an ongoing basis.
The continuation of the ‘Negative’ outlook reflects the challenges that group is facing in profitability and asset quality on account of its wholesale lending book. Although profitability has seen some improvement and the group is also taking concerted efforts to arrest asset quality stress, improvement in profitability and asset quality will be a key monitorable over the medium term.
The group has raised capital of Rs 4400 crore since 2016 by part or full stake sale in some of its businesses to marquee global investors such as Caisse de depot et placement du Quebec (CDPQ), Kora Management (Kora; a US-based investment firm), Sanaka Growth SPV I Ltd (part of Sanaka Capital), Pacific Alliance Group and Arthur Gallagher. Of this, Rs 2500 crore was raised through 61% stake sale in the wealth management business in fiscals 2020 and 2021, and Rs 400 crore from full stake sale in insurance broking business in fiscal 2022. The group plans to raise further capital through stake sales in its wealth, housing finance company and the life insurance businesses over the medium term.
Networth stood at Rs 8581 crore as on March 31,2023 as against Rs 8,537 crore as on March 31, 2022 (Rs 8621 crore as on March 31, 2021). Gearing stood at 2.45 times as on March 31, 2023, from 2.5 times as on March 31, 2022(3.2 times as on March 31, 2021, and 4.3 times as on March 31, 2020). The debt reduction is on account of planned reduction in the wholesale loan book and shift towards an asset-light business model.
The group has diversified business interests in financial services domain and has demonstrated its ability to build competitive positions. Over the years, the group has significantly scaled up operations of its non-lending businesses, including the asset reconstruction company (ARC), asset management which houses mutual fund business and alternate assets businesses. The insurance businesses are in growth phase. The group has adopted an asset-light approach in the credit business and is looking at co-lending partnerships in the retail lending business; it is aiming for more than 80% of disbursements in the retail book (including housing) to be through the co-lending model. The group has been able to reduce its wholesale book through recoveries and sell-downs to alternative investment funds (AIFs) and ARCs.
Also, the group maintains adequate liquidity. As on May 31, 2023, the group (excluding Nuvama wealth) had overnight liquidable assets of Rs 2769 crore, undrawn bank lines of Rs 152 crore and other liquidable assets (includes short term loans and treasury assets) of Rs 633 crore. This is adequate to cover upcoming debt repayments of upto December 2023. The group has raised Rs 7909 crore in fiscal 2023 as against Rs 8,569 crore in fiscal 2022 and Rs 7,565 crore in fiscal 2021, through bank loans, securitisation, structured non-convertible debentures (NCDs) and retail bonds.
Overall reported gross stage III assets in the lending business stood at Rs 945 crore (12.5%) as on March 31, 2023, as against Rs 930 crore (7.4%) as on March 31, 2022, and Rs 1182 crore (7.7%) as on March 31, 2021. Investments in securities receipts outstanding as on March 31, 2023, stood at Rs 5,296 crore (Rs 5,446 crore as on March 31, 2022). The group has adequate provisions on gross stage III assets, as a result, net stage III assets were lower at Rs 207 crore (3.1%) as on March 31, 2023, against Rs 214 crore (1.7%) and Rs 627 crore (4.1%) as on March 31, 2022, and March 31, 2021, respectively.
The wholesale book has run down to Rs 3,112 crore as on March 31, 2023, from Rs 10,130 crore as on March 31, 2020. This is driven by recoveries and sell down to AIFs and ARCs; however, the group continues to retain some credit risk on part of these exposures. Therefore, the overall stressed assets remain elevated and the group’s ability to recover from these assets in a timely manner will be a key monitorable.
Decline in credit book, lower margins as well as high credit costs have impacted the overall profitability of the group. Furthermore, the insurance businesses are in the growth phase and are expected to break-even in fiscal 2026. The group reported ex-insurance profit of Rs 730 crore in fiscal 2023, as against Rs 523 crore in fiscal 2022 and Rs 552 crore in fiscal 2021. The net profit of the group was Rs 406 crore in fiscal 2023 as against Rs 212 crore in fiscal 2022 and Rs 254 crore fiscal 2021. 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.
Improvement in asset quality and profitability coupled with recoveries from wholesale exposure will be key rating monitorables. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of EFSL and its subsidiaries. This is because these entities, collectively referred to as the Edelweiss group, have significant operational, financial and managerial linkages.
CRISIL Ratings has not consolidated entities in the wealth management business with the Edelweiss group because of the group’s reduced shareholding, change in branding to Nuvama and fewer synergies.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
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.
Weaknesses: 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. |
Liquidity: Adequate The group maintains adequate liquidity. As on May 31, 2023, the group (excluding Nuvama wealth) had overnight liquidable assets of Rs 2769 crore, undrawn bank lines of Rs 152 crore and other liquidable assets (includes short term loans and treasury assets) of Rs 633 crore. This is adequate to cover upcoming debt repayments of upto December 23. |
Outlook: Negative The ‘Negative’ outlook factors in challenges faced by the Edelweiss group due to stressed assets in its credit business, especially in its wholesale lending book, and their impact on profitability. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company EHFL is a housing finance company registered with National Housing Bank (NHB) and was incorporated in May 30, 2008 following the group’s strategy of creating a larger retail footprint. The company offers home loans and loans against property. As on December 30, 2022, the company had assets of Rs 4,048.90 crore.
EHFL reported a profit after tax (PAT) of Rs 16.3 crore on a total income (net off interest exp) of Rs 149 crore in fiscal 2023 as against PAT of Rs 13.8 crore on a total income of Rs186 crore in previous fiscal. |
About the Group The Edelweiss group comprised 30 subsidiaries and associates as on March 31, 2023. The number of companies has come down from 74 as on March 31, 2016, because of multiple factors such as sale, windup and merger among others. The group had 293 offices (including 10 international offices in 6 locations) in around 136 cities as on March 31, 2022. Furthermore, as part of streamlining its operating structure, the group has restructured the businesses into four verticals namely credit, insurance, asset management and asset reconstruction.
The group is present across various financial services businesses, including loans to corporates and individuals, mortgage finance - loans against property and small-ticket housing loans, MSME finance, alternative and domestic asset management, and life and general insurance. In addition, the Balance sheet Management Unit (BMU) focuses on liquidity and asset-liability management.
On a consolidated basis, the group reported PAT of Rs 405 crore on a total income of Rs 6058 crore for fiscal 2023, as against PAT of Rs 212 crore on a total income of Rs 4320 crore for fiscal 2022. |
Key Financial Indicators- EFSL (consolidated)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Public Issue #Yet to be issued/unutilized ^Interchangeable between short term and long term
Annexure - Details of Rating Withdrawn
*Public Issue #Yet to be issued/unutilized |
Annexure – List of entities consolidated (as on March 31, 2023)
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Criteria Details
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