Market leadership and capital-light model should enable growth for Edelweiss Financial Services Limited
In FY20, diversified business model supported Edelweiss Financial Services Limited as 3 out of 4 businesses saw minimal impact. This was despite ~8 quarters of market dislocation. Edelweiss Financial Services Limited has made a decision to divest stake in Edelweiss Gallagher Insurance Brokers Ltd. Market leadership and focus on gaining market share are expected to act as principal growth enablers.
About Edelweiss Financial Services Limited
As India's leading diversified financial services conglomerate, Edelweiss Financial Services Limited provides range of financial products and services. These services cater to substantial and differentiated client base such as corporations, institutions and individuals. It offers strong platform to diversified client base in domestic and global geographies. The company’s key lines of business are Credit, Investment & Advisory and Insurance. The company’s 1.2 million strong client base gets service through network of 476+ offices, with ~11,000 employees. It has a strong network of sub-brokers and authorized persons and the company is present in all major cities in India.
Growth Enablers of Edelweiss Financial Services Limited
- Steady Performance in FY22: Businesses of the company saw steady performance in FY22 as its ex-Insurance PAT came in at ~INR405 Cr. Its Asset Management cluster doubled AUM over past 2 years. Mutual Fund AUM saw ~55% growth YoY, with 2.2x rise in its customer base. Alternatives too saw strong deployment and an onset of operating leverage led to better margins and PAT growth of 2.4x year-over-year. Life Insurance and General Insurance franchisees of the company are amongst fastest growing players in this industry. Recoveries in Asset Reconstruction business was healthy, with share of retail portfolio in capital employed rising up by 4x year-over-year.
- Wealth & Asset Management- Strong Franchise Should Lend Support: Wealth & asset management business was seen outpacing market growth and this business improved industry rankings over last five years. Market dominance was stemmed from strong capabilities and scale. With an expansion in market share, these businesses improved its customer base. In FY20, leading global institutions like Kora Management, Sanaka Capital and Arthur J. Gallagher & Co made alliances. As per FY21 business structure, wealth and asset management businesses were segregated. Alternative assets, mutual funds and asset reconstruction come under umbrella of Edelweiss asset management. Wealth management business is being housed under Edelweiss wealth management.
- Capital-light Model- A Focus of Credit Business: Given market environment, the company’s credit business transitions to capital-light model, with help of co-origination partnerships with India’s renowned public sector banks. In FY20, the company’s total credit book size was INR210.32 billion, with retail book forming 52% of total book. This business saw co-origination with SBI, Central Bank of India, Bank of Baroda and PNB for priority sector lending. With focus of business on scaling down corporate credit book by focusing on sell-downs, this business continues to focus on affordable housing, SME and business loan segments. This business has high capital adequacy. In FY21, total credit book was INR140.59 billion.
- Focus on Gaining Market Leadership and Presence: Businesses such as wealth management and asset management are businesses in which market leadership was built over time. Plans are there to capture market share and enhance its lead. Global partners such as PAG should play significant role in this journey and their experience and ability should be able to open new doors of opportunity. Businesses like retail credit, life insurance and general insurance should be able to adapt new technologies. With technology acting as backbone, the company expects to scale up these businesses and cater to larger section of population.
- Diversified Business Should Continue to Support Edelweiss Financial Services Limited: The company has diverse business profile in financial services, with presence across retail credit, wholesale lending etc. Wholesale segment focuses on loans to realtors and structured credit. The company focuses on reducing its exposure to this segment. It continues to make attempts to increase exposure to MSME and retail mortgage segments. With diversified businesses come diversified streams of revenue. In past 2 years, its customer reach nearly doubled.
- Capitalising on Future Opportunities: Long-term growth story of India and trend of compounding should continue to stem growth for Edelweiss Financial Services Limited. Now, the company should be able to see some improvement. Financialisation of household savings in India, low credit penetration and consumption demand continue to present newer opportunities. These opportunities should come in areas of credit, asset management, wealth management and insurance. These are major businesses of Edelweiss Financial Services Limited. Credit democratisation and increased availability of credit for SME sector should benefit the company as it has strong position in retail credit segment. In next few years, focus should be on productivity and efficiency, strengthening and consolidation. The company plans to prepare itself for FY23 and for its future aspirations as it gets back into growth mode. To achieve next leg of growth, the company has raised equity in its NBFC named ECL Finance Ltd. Now, it has significant opportunities for growth once improvement in business environment becomes certain. Strategic investors have flowed in advisory businesses where its franchise remains strong. Plans are there to improve operating efficiency by reducing costs and using technology.
- Focus on Life and Non-Life Insurance Businesses: Edelweiss Financial Services Limited plans to make investments and scale up fast-growing life and non-life insurance businesses. To achieve this, the company has made a decision to divest its stake in Edelweiss Gallagher Insurance Brokers Ltd. This decision also supports the company to reallocate capital. Gallagher plans to acquire all remaining shares and take its stake to 100%. Previously, Gallagher was holding 30% in this business. Edelweiss Gallagher Insurance Brokers Ltd is in business of offering general insurance solutions to clients in India.
Conclusion
In FY20, Edelweiss Tokio Life Insurance expanded its distribution footprint across agency and alternate digital channels. Over FY16-FY20, life insurance business compounded its individual annualised premium at ~24% to INR3.23 billion while it has compounded AuM at 52% to INR27.07 billion. Edelweiss Financial Services Limited has made progress in doing wholesale book reduction. This reduction stemmed from organic repayments and asset sell-down transactions like real estate completion financing platform with Meritz. Focus is on more reduction in wholesale book. ECL Finance Wholesale Loan Book saw a reduction of 43% from peak levels.
India is counted as a country having lowest credit penetration among larger economies and retail credit presents huge growth opportunity. This opportunity is driven by long-term trends in democratisation of credit, rising household income and increased consumption. Financialisation of assets, wealth democratisation and increasing sophistication are few emerging trends in Indian wealth management industry.
Stock of Edelweiss Financial Services Limited has seen a strong run up of ~72.9% between Mar 25, 2020-Jul 5, 2022. Simply put, an investment of INR1,00,000 on Mar 25, 2020 would have become INR1,72,902.7 on Jul 5, 2022.
