Edelweiss: Liquidity to improve after a few monthsMrunmayee Jogalekar
Update on the Indian Equity Market:
On Monday, NIFTY closed lower by 0.4%. NIFTY Media (+1.3%), NIFTY Pvt Bank (+0.2%) and NIFTY Bank (+0.1%) were the sectoral indices that closed positive. Among the decliners, the worst performers were NIFTY Pharma (-3.4%), NIFTY Metal (-1.2%) and NIFTY Realty (-1.2%).
Edelweiss: Liquidity to improve after a few months
Excerpts from an interview with Mr. Rashesh Shah- Chairman & CEO, Edelweiss Group published in Economic Times dated 4th October 2019.
- Though Edelweiss has NBFC business, it is a diversified group. The business includes asset management, wealth management, Asset Reconstruction Company and a lot of other businesses. Edelweiss has always focussed on being a diversified group.
- The overall book of Edelweiss is not expected to grow but the wholesale/retail mix will go more in favor of retail. Whatever repayments are coming in wholesale, are being used to grow retail.
- The availability of liquidity has been fairly okay. The partial credit guarantee scheme that was announced in the budget will get operationalized soon and the expectation is about Rs 350-400 bn of the asset portfolios of NBFCs will be bought by banks. This will give a lot of additional liquidity to NBFCs. The credit cycle should start coming back because of this improved liquidity.
- The stress in the corporate book, wholesale book, and the cash flow has been there for one year. The only good news is that there is no unknown anymore. Everybody knows what sort of cash flows can be expected and everybody is aligned with that.
- In another three to six months, a lot of things should be back to normal for liquidity in the economy as a whole.
- Overall, while credit was frozen around April- June, the banking system, especially the PSU banks have opened up the credit flow into the economy. The optimism is more now compared to three months ago. On the whole, the banking system is on a much better footing to ensure that the economy does not freeze up and make sure that the free flow of credit continues.
- In the next three to six months things should at least get normalized and then improvement should start. At least, things have stopped getting worse in the last four-five weeks.
- In terms of real estate, in India, it has been observed that if the project gets completed, then usually recoveries and sales are not a problem. The current effort is to make sure the projects get completed. Also, the demand-supply equation in housing has started to correct. Due to slower launches, the supply of inventory will slowly reduce and as the demand comes back with interest rates coming down and banks pushing home loans, the demand-supply equation will correct.
- Edelweiss has a 20% portion of its balance sheet exposed to real estate. The P&L is further diversified by earnings from other businesses. The real estate book is also spread over 160 projects and is fairly granular. Out of the 160 projects, all along for the last 8-10 years, about 10 to 20% of the portfolio is always under watch because some intervention is required to make sure the project execution happens, and those parameters have not worsened.
- Edelweiss has a lot of experience with ARC where they acquire NPAs from banks. Last year Edelweiss resolved quite a few of them with Rs 70 bn worth of recoveries in the ARC business. This year, the aim is for a Rs 120 bn recoveries in the ARC business.
Consensus Estimate (Source: market screener website)
- The closing price of Edelweiss was ₹ 78 /- as of 07-October-19. It traded at 8.6x /6.8x/ 5.1x. The consensus EPS for FY20E/ FY21E/ FY22E of ₹ 9.1/11.4/15.3 respectively.
- Consensus target price of ₹ 169/- implies a PE multiple of 11.0x on FY22 EPS of ₹15.3/-