Edelweiss: Market confidence needs to return for corporate earnings revival.

Update on the Indian Equity Market:

On Thursday, RBI maintained status quo on repo rates at 5.15% in its 5^th bi-monthly monetary policy meeting. The market was expecting another rate cut after a cumulative 135 bps cut so far in 2019.  RBI has lowered its Real GDP growth forecast for FY20E from 6.1% to 5.0%. NIFTY turned negative after the surprise announcement and closed 0.2% lower. Among NIFTY50 stocks, the top performers were ZEE (6.2%), TCS (+2.0%) and ITC (+1.6%) while the worst performers were JSWSTEEL (-3.5%), COALINDIA (-3.4%) and BHARTIAIRTEL (-2.7%). NIFTY MEDIA (+2.9%), NIFTY IT (1.3%) and NIFTY FMCG (+0.3%) were the top gaining sectors while NIFTY METAL (-2.3%), NIFTY PSU BANK (-1.8%) and NIFTY PHARMA (-0.9%) were the top losing sectors.

Edelweiss: Market confidence needs to return for corporate earnings revival.

Excerpts from of an interview of Mr Rashesh Shah- Chairman and CEO- Edelweiss Financial Services published in Mint dated 5^th December 2019.

• Comment on the Emerging Ideas Conference: The event is mainly for High Net Worth Individuals (HNIs). The mood is starting to change from the sense of gloom that prevailed from last 5-6 months. People are now looking for opportunities to invest looking at 2020 and 2021.
• Comment on Corporate Earnings recovery: The last 4-5 years have had very low corporate earnings growth rate. Looking at the current environment, there is a lot of liquidity, interest rates are fairly low and corporate tax rates are lowest in India’s economic history. Now the confidence just needs to come back and that will have a snowball effect. Edelweiss economists have estimated about 100–125 bps of India’s GDP growth comes from global growth. If global growth picks up, India’s GDP growth and corporate earnings growth can get some revival. 
• Comment on Edelweiss and NBFC sector: For NBFCs, the worst seems to be over. Repairing earnings and growth is still 4-5 quarters away. A lot of NBFCs have become stronger, raised capital, managed liquidity and re-evaluated their business approach. NBFCs have been working on a model where they will be in partnership with banks rather than having competition with banks. All this will take 4 quarters where there will not be a lot of growth.
• On non-NBFC front, Edelweiss is seeing fair amount of activity in asset management and wealth management including ARC.
• On Edelweiss’s asset quality: In last one year, asset quality was under stress for all banks and NBFCs due to system liquidity stress. Stalled projects that are economically viable need to be completed. Availability of last mile funding will help. With lower interest rates, lower corporate tax rate profitability of housing projects will improve. In next 2-3 quarters many projects will be back on stream. In 1HFY20, Edelweiss took credit cost of Rs 4,460 mn compared to Rs 4,600 mn in FY19 as they took a proactive provisioning approach. Credit cost in FY20E will be double that of FY19E.
• Comment on Bond ETF: Government of India is sponsoring a bond ETF where Edelweiss is the asset manager. The first ETF is going to be a bond portfolio of highly rated government PSUs. The average retail investor will get a yield of 7% – 7.5% and liquidity as it will be listed in the market.

Consensus Estimate (Source: market screener)

• The closing price of Edelweiss was ₹ 113/- as of 05-December-2019. It traded at 1.3/ 1.2x/ 1.1x the consensus BV for FY 20E/ FY 21E/ FY 22E of ₹ 87/ 94/ 105 respectively.
• Consensus target price of ₹ 145/- implies a PB multiple of 1.4x on FY22E BV of ₹ 105/-.