Enough liquidity in the system, but credit flow weak – Edelweiss

Update on Indian equity market:
Indian markets were muted today with Nifty closing the day 4 points higher at 11,935. Within the index, the gainers were led by IT biggies like HCLTECH (+4.1%), INFY (+2.5%) and KOTAKBANK (+2.2%) whereas CIPLA (-3.6%), TITAN (-2.6%) and ADANIPORTS (-2.5%) were the laggards. Among the sectoral indices, only IT (+1.3%) and METAL (+0.4%) closed in green whereas PHARMA (-1.8%), PSU BANK (-1.5%), and PVT BANK (-0.9%) led the laggards.
Excerpts of an interview with Mr. Rashesh Shah, CEO, Edelweiss Financial Services Ltd. (Edelweiss) published on CNBC-TV18 dated 12th October 2020:
50% of the loan book was under moratorium when it was announced by the Government. The same number has been under 20% by the end of September. 80% of customers are paying regularly. He said that the company has exposure to only semi-formal and formal sectors. The current Non-Performing Assets (NPA) is at 2-3%.
Commenting on the impact of the pandemic on the company’s books, he said that 2% should be the impact of credit cost purely because of COVID-19. He said that growth and profitability are the two challenges for the Non-Banking Financial Companies (NBFC) sector.
Liquidity in the system has improved in the last four-five months through various measures like TLTRO, partial credit guarantee schemes taken by the RBI. He said that liquidity is ample but the market is currently lacking the credit flow.
The bond market needs to get stabilized, long term credit flow needs to get started again for risk-taking, and the investment cycle to start again. The bond markets are currently dislocated and not yet back to 60-70% of the pre-ILFS levels.
The company has recently raised Rs 20,000 mn through the stake sale in the wealth management business, which is more than 5% of the company’s book size.
He said that the capital adequacy ratio for the housing finance business is at 25%, retail NBFC at 28%, and ECL finance at 21%.
Consensus Estimate: (Source: market screener & investing.com websites)
The closing price of Edelweiss was ₹ 60/- as of 13-Oct-2020. It traded at 0.9x/ 0.8x/ 0.8x the consensus Book Value estimate of ₹ 66/ 70/ 77 for FY21E/ FY22E/ FY23E respectively.
The consensus target price of ₹ 87/- implies a P/BV multiple of 1.1x on FY23E BV of ₹ 77.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Over A Third of NBFC Loan book under Moratorium – Edelweiss

Update on the Indian Equity Market:

On Friday, NIFTY closed in the red at 9,039 (-0.74%). Top gainers in NIFTY50 were ZEEL (+7.1%),
M&M (+4.4) and CIPLA (+3.3%). The top losers were AXISBANK (-5.2%), HDFC (-5.1%) and
BAJAJFINSERV (-4.6%). Top sectoral gainers were IT (+1.4%), Media (+1.2%) and Pharma (+0.8%) and
sectoral losers were Fin service (-3.1%), PVT bank (-2.8%) and Bank (-2.6%).

Excerpts of an interview with Rashesh Shah, CEO, Edelweiss group with Bloomberg dated 20th May 2020:

  • Mr Shah said, “For us and for most NBFCs, about 35-38 per cent of the customers have availed of the moratorium. For the last 18 months, NBFCs have been squeezed for liquidity. Ironically, when we entered January 2020, I felt that liquidity had now been managed. And then Covid-19 happened.”
  • NBFCs have been coping with a liquidity crisis ever since the collapse of the IL&FS Group in 2018.
  • With the Covid-19 pandemic amplifying the economic slowdown, NBFCs are expected to face liquidity and solvency strains again. Moody’s Investors Services expects the moratorium to eventually weaken asset quality and add to liquidity stress.
  • April has been extremely challenging for NBFCs from a liquidity perspective. That was particularly because, for NBFCs, the moratorium was a one-way ride. While they had to offer moratoriums to their own customers, they themselves did not receive similar relief on repayments from banks—sparking concerns of asset-liability and cash-flow mismatches.
  • Non-bank lenders are continuing to repay their loans as scheduled. Most NBFCs have decided not to ask for a moratorium from banks and instead ask for fresh loans, as fresh funding can come on new terms and with a lot of specificity as to what you need.
  • Mr Shah expects the company to pay back Rs 4,000 crore to banks as part of its normal repayment schedule. Their ask is they get these funds back as long-term repo operation bonds, a loan or some other form so that they can maintain their liquidity reserves.
  • Mr Shah said Edelweiss, at any point, maintains at least Rs 6,000-8,000 crore of liquidity reserves. Over the last 18 months, the company has kept between 14-20% of its borrowings as liquidity reserves. That would be around 1.5-2.5 times their three-month repayments, Shah said. “We have been aiming for at least 2 times the three-month repayment as liquidity reserve and banks have seen that most NBFCs have reserves that will last at least till the end of July.”
  • Despite the government’s initiatives for the NBFC sector, Mr Shah believes that non-bank lenders have been treated somewhat unfairly. Increasingly NBFCs have been curtailed in what they can do and cannot do.
  • “The problem NBFCs are grappling with is asset-liability mismatch, when suddenly the commercial paper market and debt market closed down then the bank moratorium issue has come about, all this creates a lot of asset-liability mismatch risk.”, he added.
  • Someone in the system needs to take the ALM risk,” he said. “Banks can take it because they have the RBI backstop. But in the last 18 months, we said NBFCs cannot take it, now we say mutual funds cannot take it, then who will take that risk?”
  • Edelweiss also expects some amount of increase in stress and credit costs. However, since the company does not have a significant retail portfolio, it expects the risks to be limited. Credit cost was at 2% and then they had upped it to 4-4.5% of the book. It will now go to 5%.
  • For the industry though, retail loans will see some stress in the near-to-medium term. Long term, collateralized loans will not see much of an impact. Short term unsecured loans will see a lot of impacts.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of EDELWEISS was ₹ 42/- as of 22-May-2020.  It trades at 0.5x/ 0.4x its book value of ₹ 90.2 /100.0 for FY21E/22E respectively.
  • The consensus price target of EDELWEISS is ₹ 99/- which trades at 1.0x the book value of ₹ 100/-


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 5th 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 5th 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 100125 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/-.

Edelweiss: Liquidity to improve after a few months

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/-