Edelweiss Financial Services Limited - Research & Ranking · 2 EDELWEISS FINANCIAL SERVICES LIMITED (EDEL) Background and Business Edelweiss Financial Services Ltd. (EDEL), founded

Equentis Wealth Advisory Services (P) Ltd

Registered Office: 712, Raheja Chambers, Nariman Point,

Mumbai – 400021 India

Tel: +91 22 61013800

Email: [email protected]

Main Research Report

Edelweiss Financial Services Limited

Independent Equity Research

APRIL - 2017

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EDELWEISS FINANCIAL SERVICES LIMITED (EDEL)

Background and Business

Edelweiss Financial Services Ltd. (EDEL), founded in 1996 by Mr. Rashesh Shah and Mr.Venkat Ramaswamy, is one of the leading

financial services companies in India with current market capitalization of Rs.148 bn. After starting out as a boutique investment

banking firm, EDEL over the past two decades has transformed itself into a diversified financial services company and consequently

reduced dependence on the highly volatile agency business. Currently EDEL maintains a healthy mix of credit as well as non-credit

revenue stream and envisages to grow the credit business at a higher pace compared to its non-credit (agency) business. Over the

past three years, loan book for the credit business has grown at a CAGR 45% to Rs.200bn (Rs.249bn 9MFY17) and in its agency

business (non-credit) AUM has grown at a CAGR of 52% to currently stand at Rs.422bn (Rs.782bn in 9MFY17). Also, today EDEL

is the largest ARC in India with total asset book of Rs.271bn (Rs.316bn in 9MFY17).

Edelweiss Operating Structure

EDEL has emerged as one of India’s leading financial conglomerates – having 63 subsidiaries (both direct & step down and both

domestic and international) and 6 associates. The company has presence in 122 cities with 237 offices (including 9 international

offices) and employs 6,227 people that service a total client base of ~1 mn. EDEL 's businesses are broadly divided into three

segments viz. Credit, Non-Credit and Insurance.

Business Segments Summary

Businesses Sub-segment Revenue (Rs.bn) (FY16)

Revenue Share (%)

(FY16)

PAT (Rs bn) (FY16)

RoE (%)

(FY16)

Credit business

• Wholesale finance - Structured Collateralized Credit, Real Estate Finance, and Loan Against Shares.

• Retail Finance - Mortgage, Loan Against Property, Loan Against Shares, SME Finance, and Agri Finance.

• Distressed asset capital (ARC) - Largest Asset Reconstruction Company in India

NII of Rs.12.2 bn

46% Rs.3.4 bn 16.1%

Non- Credit business

• Capital Markets: One of the largest domestic institutional broking company with avg. daily volumes of Rs.52bn in FY16. (Rs.67bn as of 9MFY17)

• Wealth Management: Manages Asset under Advice of Rs.295 bn for Ultra HNI, HNIs and mass affluent in FY16 (Rs.537 bn as of 9MFY17)

• Asset Management: Manages AUM of Rs.50bn across Mutual fund (Rs.16.6 bn), PMS (Rs.22bn) and alternative assets (Rs.11.6 bn) in FY16. In Q2FY17, it acquired JP Morgan asset management scheme and Ambit Alpha fund, which increased its total AUM to Rs.172 bn as of 9MFY17.

• Balance Sheet Management Unit: Creates liquidity cushion through investment in high quality liquid assets with AUM of Rs.76.9bn in FY16. (Rs.73.3 bn as of 9MFY17)

• Agri Services & Others: One of the few organized players providing end-to-end business solutions in the Agri value chain with 265 warehouse under management across 15 states and capacity of over 1.4 mn tonne and stock collateral of Rs.16.8 bn as of 9MFY17.

Rs.10.2bn 39% Rs.1.8bn 17.7%

Insurance • One of the fastest growing Life Insurance companies. (Recently it received IRDA’s regulatory clearance for setting up General Insurance Company in India).

Rs.4.0 bn 15% Loss of Rs. 1.04 bn

N.A.

Total Rs.26.5 bn 100% Rs.4.1 bn 12.1%

Total Revenue = Net Interest income + Income from non-credit business + Premium of life insurance business (including other income)

Since its inception, EDEL has carved out a niche for itself across various business segments. Unlike other NBFCs, which are largely

focused on a single product, for example, mortgage, vehicle finance or micro finance, EDEL offers diversified products and services. EDEL has adopted a strategy of building a bank like diversified entity. Prior to 2008, EDEL ’s diversification was largely

confined to the wholesale space. However, post-2008, it diversified into retail business. In 2012, it entered the life insurance business

by tying up with Tokio Life of Japan.

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1. Credit Business: EDEL started credit business in 2007 by raising funds from Greater Pacific Capital and 9 years later its

total AUM stands at Rs.200bn as of FY16 (Rs.249 bn as of 9MFY17), which have grown at robust pace of 45% CAGR

over the past three years and at a CAGR of 63% since FY09. The existing credit book is spread across wholesale and retail

finance segments, details for the same is provided below: -

Particulars FY14 FY15 FY16 9MFY17 3 yr CAGR

Total AUM (Rs.mn) 89,530 150,360 200,140 249,720 45%

- Wholesale Finance 64,600 108,490 142,790 171,490 48%

- Retail Finance 24,930 41,870 57,350 78,230 39%

AUM Mix%

Wholesale Finance 72% 72% 71% 69%

Structured Collateralized 44% 40% 34% 29%

LAS - wholesale 8% 0% 1% NA

Distressed Assets Credit 4% 8% 9% 14%

Real Estate 16% 24% 27% 25%

Retail Finance 28% 28% 29% 31%

Mortgages 23% 14% 13% 12%

LAS and Others 0% 8% 8% 7%

SME & Agri Financing 5% 6% 7% 12%

i. Wholesale Finance segment (71% of AUM): Started in 2007, has achieved a total AUM size of Rs. 143bn in FY16,

i.e. cagr growth of 48% over past three years. This division offers structured collateralized credit and customized

solutions to corporates, including developer financing (real estate finance), promoter financing, trade loans and distress

asset credit. Structured collateralized (short duration loans) and developers funding (3-5 years duration) constitutes

61% of the total AUM, wherein it caters to specialized or structured requirements of corporates that banks are unable

offer. EDEL thereby generates high yield on this segment ranging from ~ 15-18% with high collateral cover of ~2-

2.5x thereby mitigating the risk involved in lending.

ii. Retail Finance segment (29% of AUM): Started in 2011 as a part of long term strategy of synergistic diversification

of asset classes and customer segment. Within this segment, it provides mortgage finance (including small ticket

housing finance), loan against property (LAP), loans against shares (ESOP financing, IPO financing), SME finance and

rural finance. With AUM at Rs.57bn in FY16 it has grown at a 3 year CAGR of 39% CAGR. This segment operates

across 52 cities and over 3,100 villages with a client base of 0.31mn.

2. Asset Reconstruction Business: Edelweiss obtained an ARC license from RBI in 2009, has scaled up this business

significantly over the past two years to emerge as India’s largest ARC. Total AMU at the end of FY16 was Rs.271bn,

registering a growth of 72% CAGR over FY14-16 (AUM of Rs.316bn 9MFY17). It has created a track record of resolution

of assets of Rs.120 bn by the end of FY16.

CDPQ, the second largest pension fund in Canada is in the process of acquiring 20% stake in the ARC subsidiary for a total

consideration of Rs.5 bn. It has already invested Rs.3 bn in H1FY17 and the remaining fund will be infused over the next

3-year period. So effectively, the post money valuation of its ARC subsidiary stands at Rs.25 bn. Over and above the said

deal, CDPQ has also committed to infuse Rs.50 bn spread over 3-4 years. Even EDEL is likely to infuse an equivalent

amount in the business over the same time period.


ARC AUM (Rs.mn) 92,000 203,000 271,000 316,000 72%

3. Non-Credit Business: EDEL’s non-credit business includes investment banking (IB), fixed income advisory, equity and

commodity broking, wealth management, asset management businesses and agri & commodity warehousing services.


Broking - Avg Daily Volumes (Rs.bn) 31 50 52 67 29%

IB & Advisory (no of deals) 61 114 100 72

Wealth Management - AUA (Rs.bn) 89 178 295 537 82%

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Asset Management - AUM (Rs.bn) 29 30 50 172 31%

Business Management Unit - Assets (Rs.bn) 29.8 65 76.9 73.3 61%

Agri Service Warehouse (no's) NA 122 265 365

*Note: - For segmental information we have taken 2 year CAGR as the financial numbers

for some of the parameters prior to FY14 are unavailable.

i. Capital market business - Broking, Investment Banking (IB) & Advisory: EDEL started its journey in 1996 with

focus on investment banking and later diversified into institutional equities, retail broking and fixed income

advisory. EDEL continues to be a leader in IB and advisory services and is one of the largest domestic institutional

broking company (ranked no.1 in IPO distribution in FY16) with consistent market share of 4-5% in institutional

broking and 3-4% in IB. Apart from broking, EDEL also provides various need based capital market services to

its clients.

ii. Wealth Management: Launched in 2008, EDEL is currently the 3rd largest wealth management company in India

in terms of assets size, after Kotak and IIFL. Its total AuA has grown at an impressive CAGR of 82% to Rs.295 bn

over FY14-16 (62% 3 yr CAGR) and further increased to Rs.537 bn as of December 2016 due to rise in equity

market and fresh inflows. It offers wealth advisory and third party financial product distribution to retail and HNI

clients.

iii. Asset Management: Started in 2007, the asset management business is mainly segmented under three sub-heads –

Mutual fund (MF), Portfolio Management Service (PMS) and Alternative Investment Funds (AIF). Total AUM

has grown at 31% CAGR to Rs.50bn (MF – Rs. 16.6 bn, PMS – Rs.22 bn and AIF – Rs.11.6bn) over the past 2

years (36% 3 yr CAGR). EDEL is expanding its asset management business through inorganic acquisitions.

Recently it has acquired two schemes of JP Morgan mutual fund and Ambit Alpha Fund, which aided in AUM

growth further to Rs.172 bn as of 9MFY17.

iv. Balance Sheet Management Unit (BMU): The BMU manages the group liquidity in a similar way to that of the

treasury of a commercial bank. It aims to generate adequate liquidity across verticals to ensure smooth repayment

of maturing liabilities. The BMU assets at the end of FY16 were Rs.76.9bn, which mainly includes fixed income

securities and bank fixed deposits. BMU assets form ~20-25% of the consolidated balance sheet size.

v. Agri services: EDEL started agriculture commodity business in 2010 with the aim to cater to the entire value chain

of agriculture financing including sourcing of commodities, providing storage facility in warehouses, besides

providing finance against warehouse stock, transition, distribution and sale of produce. EDEL has emerged as the

second largest warehousing company in India with 365 warehouse as of 9MFY16 present across 15 states (265

warehouses as of FY16) with aggregate total capacity of 1.4 mn tn (1.1 tn as of FY16).

4. Insurance Business: Edelweiss Tokio Life Insurance (ETLI), a JV between EDEL and Tokio Marine (Japan based life

insurance company), is one of the fastest growing life insurance companies in India. Over the period FY14-16, gross

premium has grown at 67 % CAGR to Rs.3.1 bn and Individual Annual Premium Equivalent (APE) has grown at 59%

CAGR. It incurred a loss of Rs.1.6 bn in FY16, which is likely to continue for the next couple of years. ETLI is continuously

expanding its footprints having 71 branches across 61 cities. The JV has also doubled its personal financial advisors to

15,490 in FY16 from 7,255 in FY14.


Gross Premium (Rs.mn) 1,110 1,930 3,100 2,360 67%

PAT (Rs.mn) (690) (710) (1,550) (1,340) N.A

Financial advisors (no.) 7,255 10,421 15,490 NA 46%

Branches (no.) 58 in 48 cities 59 in 49 cities 71 in 61 cities 81 in 61 cities

*Note: - For segmental information we have taken 2 year CAGR as the financial numbers for few

parameters prior to FY14 are unavailable.

Management and Shareholding

EDEL was co-founded in 1996 by Mr. Rashesh Shah (Co-Founder, Chairman & CEO) and Mr. Venkat Ramaswamy (Co-Founder,

Executive Director). Both the promoters have more than 25 years of experience in the financial sector. Prior to EDEL, Mr. Shah has

worked with ICICI, he has also previously served on executive committee of the National Stock Exchange of India, and is currently

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a member of the SEBI (Securities & Exchange Board of India) committee for review of insider trading regulations. Mr. Ramaswamy

has worked with Spartek Emerging Opportunity Fund and ICICI in his previous roles. EDEL Board comprises of 12 members

including 5 executive/non- executive directors and 7 independent directors. Board members are highly qualified and have varied

experience.

Total promoter stake in Edelweiss stands at 37%. Domestic Institutions held ~0.8% stake and Foreign Institutional Investors held

~29.6% stake in the company as on 31st December 2016. Some of the marquee investors are Fidelity Investment Fund (2.1%), Saif

Holding (3.1%), Amansa Holdings (1.4%), First Carlyle Ventures (8.2%) and even Mr. Rakesh Jhunjhunwala holds 1.1% stake in

the company. EDEL is currently trading at a price of Rs. 177/- (Face value Rs 1.0/-) and on an average, it has generated 4.2-xs returns

(~73% CAGR) and 4.6-xs (~41% CAGR) in the past 3 and 5 years, respectively.

Business evolution and management vision

EDEL began operations 20 years ago by providing investment banking and portfolio advisory services and today is a diversified

financial service firm with a portfolio of high quality growth businesses. During the past 20 years, it has succeeded in building a

resilient and unique business model that is akin to a bank but with several advantages helping the company to grow faster versus

peers, even amidst tepid market conditions.

Evolution over the years: -

Year 1996-2000 2000-2004 2004-2008 2008-2012 2012-2016

Phases Inception Business

realignment Phase Growth Phase

Consolidation Phase

Scale and Balanced Growth Phase

Particulars 1996 2000 CAGR 2004 CAGR 2008 CAGR 2012 CAGR 2016 CAGR

Revenue (Rs.mn) 0.2 85 373% 281 35% 10,888 149% 16,707 11% 53,157 34% PAT (Rs.mn) 0.03 39 514% 78 19% 2,732 143% 1,277 -17% 4,144 34% Employees (no.s) 4 12 32% 95 68% 1,621 103% 3,108 18% 6,227 19% Book Value / Sh. (Rs.) 0.1 0.4 50% 0.9 22% 24.7 128% 34.8 9% 45.1 7% Diluted EPS (Rs.) 0.0 0.2 366% 0.2 10% 4.0 103% 1.7 -20% 4.9 31%

Inception (1996-2000): In the year 1996, foundation of Edelweiss was laid with the belief “to build a great organization and not

just a good business”. The founders incorporated the company with the capital of Rs.10 mn, just enough to obtain merchant banking

license, however the company experienced its first setback with the change in regulation related to capital requirement for obtaining

investment banking license increasing to Rs.50mn. For the want of capital, the company tweaked its business model and started

providing Venture Capital and Private Equity advisory services.

Business Realignment Phase (2000-2004): The management was successful to raise its first round of capital via private equity

placement that helped the company to acquire Category 1 merchant banking license. EDEL then forayed into broking business with

the acquisition of Rooshnil securities. In 2001, with the bursting of internet bubble, which led to fall in capital market and economic

crisis, Edelweiss’s business was severely impacted. During the downturn company management invested in acquiring talent and

started to explore new and innovative business lines to prepare itself for the growth when market cycle turns.

Growth Phase (2004-2008): The boom in capital market led to exhilarating expansion of the organization rapidly graduating from 1

office and 200 people to 12 office and 1,800 people. This phase was characterized by the management’s ambition to grow ten times

in the next ten years. Given high dependence on capital market driven activities, Company management began to explore and evaluate

entry into the credit business. To meet the capital requirement to grow the credit business, EDEL raised capital twice in 2006-07

from private equity investors and this was followed up with its public offering in 2007.

Consolidation Phase (2008-2012): Having entered various new business streams in the previous phase, EDEL management started

to chart out clearly defined goals and objectives to assess risk and investment requirement of individual business segments. Backend

enterprise infrastructure support was created to match the pace of business expansion. During this period, it forayed into Asset

Management and Global Wealth Management. In addition, EDEL also launched its Life Insurance business in JV with Tokio Marine.

Scale& Balanced Growth Phase (2012-2016): By broad basing the business model, the company had reduced its dependence on the

agency business and created multiple strong, sustainable and secure revenue streams. The focus on seeding the new businesses and

gradually scaling up the mature ones translated in an impressive growth in the Company stature and size over this period. This period

is also marked by EDEL’s entry into asset reconstruction business and within three years of operations it has emerged as the leading

ARC in India in terms of AUM size.

We believe, in the past 20 years, EDEL ’s counter cyclical approach and willingness to experiment while taking “Calculated

Risk” has provided the Company with large opportunities in high growth segments for future.

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Investment Thesis

� Favorable industry dynamics: After remaining subdued for several years, domestic economic growth is likely to pick up given

Government’s thrust on increasing spend on infrastructure, housing and domestic manufacturing sectors. Fund flows in the

Indian capital markets, both FII and DII, bear testament to the expected revival in the economic activity in the near term. Pick

up in GDP is likely to boost credit demand and the resultant rise in income levels is only expected to increase the demand for

financial products/services. We believe that the Indian financial services sector is poised for strong growth and Edelweiss will

be on the forefront to benefit from this uptrend.

� Strong business USP: From being a fledgling organization incorporated in 1996, EDEL has emerged as a formidable player

in the financial services space over the last two decades. We largely credit the success to its visionary management that has

strategically and methodically steered the organization to emerge as a one-stop financial services firm catering to varied

financial services requirement of its clientele.

a) Diversified revenue streams: From the onset, EDEL has focused on building a robust business model that can offer non-

linear growth opportunities. While focusing on rapid portfolio expansion through aggressive customer acquisition and

use of technology, the Company has created a synergistic business model that offers high degree of cross-selling

opportunities across key verticals of – a) credit, b) non-credit and c) Insurance. This has enabled the company to

consistently grow its revenue at a very high rate as well as make sustained high margins due to operational synergies.

− In its first 10 years of existence, EDEL’s diversification was largely confined to the wholesale space. However,

post-2008, it diversified into retail business. In 2012, it entered the life insurance business by tying up with Tokio

Life of Japan. With the phase of diversification of the business complete in 2012, the company has shifted its

focus to scaling up its existing businesses.

− Contribution of the agency business has fallen to 39% in revenue in FY16 from 73% in FY11, we view this as

a big positive compared to its peers that have high concentration towards non-credit/agency operations, which are

by nature more volatile. The credit and insurance businesses now form 61% of consolidated revenues (27% FY11).

b) Multiple growth levers: We believe that all the segments in which EDEL is present, holds immense growth potential.

Historically, EDEL’s consolidated revenue has grown at an impressive pace of 24% over the past five years and its net

profit growth was 12% CAGR in the same period (FY12-16). Notably, lower growth in PAT was due to rising investments

in new businesses and also due to losses incurred in the life insurance business, which it ventured into only in the year 2012.

We forecast overall revenue of the Company to grow at 30-35% CAGR over FY17-FY22, supported by strong growth

both in the credit and non-credit businesses. Also, we expect the insurance business to break even at net profit level by FY22. Further, turnaround of insurance operations coupled with high operating leverage across other businesses is also

likely to result in the profitability to improve at consolidated level.

− Credit business (excl. ARC): Loan book growth expected to grow by 25% CAGR over FY17 to FY22. NII from

the business is also likely to mirror the loan book growth at 25-26% CAGR.

− Asset reconstruction: EDEL has established itself as the largest ARC in India today, with assets under

management of Rs.316bn in 9MFY17 and is set to grow its AUM at a CAGR of 20% over the next five years in

view of rising NPA issues in the banking system.

− Non-credit: Flourishing economy and improving capital market activities is expected to support non-credit

business and we expect EDEL’s combined AUM (wealth mgt., asset mgt. and BMU) to grow at a CAGR of 23%

over FY17 to FY22, with contribution from the segment declining to 26% in FY22 compared to 39% in FY16.

− Life Insurance: India is world’s largest life insurance market in the world in terms of the total policies outstanding,

which is growing at 12-15% p.a. However, per capita insurance density in India is still very low compared to the

global standards, indicating significant under penetration. We therefore expect the incumbents like EDEL to benefit

immensely as penetration of insurance as a financial planning tool increases. As stated by the Company

management, this business is expected to break even at the net level by FY22, compared to losses of Rs.1.04bn

reported in FY16 (11.3% of revenue in FY16).

− Aspiration to be a bank: Management is keen on winning banking license and has even applied for it in the past.

Gaining banking licenses is an uphill task and in the past one decade, RBI has issued only two new banking

licenses. However, EDEL is already operating like a quasi-bank, where despite the disadvantages on the liability

side, it is well diversified into credit, non-credit and insurance businesses. Winning banking license remains a

strong upside trigger in future.

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� Strong balance sheet to aid growth:

a) Comfortable capital position: According to regulatory requirements, NBFCs are required to maintain minimum capital

adequacy ratio (CAR) of 15%. With CAR ratio at 17.9% as of FY16 (CAR of 17.85% in 9MFY17), EDEL is well funded

to sustain high growth for the next two-three years.

Going forward, with the sustained high growth in its assets, we expect that EDEL’s CAR for the credit business may drop

to 15% level by FY19-20. We believe that EDEL may not resort to equity dilute for raising fresh funds as it would have

the option of partly selling its stake in various subsidiaries in order to meet growth capital requirements. Key subsidiaries

where it may reduce its holding includes its housing and commodities financing subsidiaries. Notably, in its insurance

business, the Company has recently sold part of its stake to CDPQ, which now holds 49% stake in the subsidiary. CDPQ

has further committed to infuse more funds in the subsidiary to meet capital requirement in future. We expect EDEL

management to adopt this strategy in other verticals as well.

b) Stable asset quality despite stress in the environment: Despite the stress environment seen in the last couple of years,

asset quality of EDEL has held up well over the years. this can be attributed to implementation of stringent underwriting

and risk management practices. For FY16, Gross NPA was 1.4% and Net NPA was 0.47% and its provision coverage ratio

was 67%, which is better than the industry average.

EDEL has evolved a four-tier risk management approach including reviews at the board level committee, besides carrying

out independent risk assessment at individual business level. Further, its loan-diversification strategy lowers the

concentration risk. Also, EDEL’s high collateral cover at ~2.0-2.5xs of loans in the wholesale book has ensured better

recoverability of bad loans. Going forward, we do not expect significant asset quality deterioration and despite high asset

growth, gross NPAs are likely to remain range bound. At the same time, we expect provision coverage ratios to be

maintained around ~65-70%.

� Visibility of asset growth and improvement in return parameters very high: Majority of the businesses that EDEL ventured

into post 2008, as part of its diversification strategy, are now attaining a critical mass and these businesses viz. retail lending,

ARC, Insurance, housing finance, SME lending, etc., are likely to scale up significantly over the next few years, adding to the

visibility on asset growth front. With the growth in asset, segmental revenues are likely to grow at a healthy pace and benefits

of economies of scale is likely to be reflected in profitability improvement as well, providing high visibility on ROE expansion.

Consolidated revenue is expected to grow at a CAGR of ~30% over FY16 to FY22, this along with operating leverage across

segments and breakeven of insurance business is likely to result in the net profits to grow at 35% plus over the same time period.

PAT margins in this period is projected to improve from 15.6% in FY16 to 18.0% by FY22. Improvement in profitability is

expected to translate into a higher return ratios, which is expected to see a 1.8-2.0xs jump from 12% reported in FY16 to 20%

plus by FY22.

� Valuation multiple expansion and value unlocking potential:

a) Listing of subsidiaries to unlock value: EDEL has housed its businesses under separate subsidiaries headed by focused

management teams. Baring agency business, most other segments are currently in different stages of maturity and growth.

We expect the group to list some of its subsidiaries in the future and thereby unlock value for the shareholders. The same

would act as a trigger for the stock price, as and when it happens.

b) Rerating Potential- We expect RoA and RoE of the company to improve further supported by strong growth in earnings

on the back of shift in loan mix towards high yield retail credit, high revenue growth from non-credit business, maturing

ARC business, reduction in loss from the insurance business and productivity improvement due to operating leverage. We

expect RoE to almost double from 12.1% in FY16 to 20% plus by FY22E and similarly, even RoA is likely to more than

double from 1.2% in FY16 to 2.5% in FY22E. This in our view should trigger multiple expansion for the stock. EDEL is

currently trading at a Price to Book multiple of 2.9-3.0-xs on FY17 estimated BV of Rs.62 and PE of 20-22-xs on FY17

estimated EPS of Rs.8.0.

Historically, EDEL has been valued on par with other financial services companies like JMFL and IIFL, but it traded

at a significant discount to other NBFCs (like Capital First and Bajaj Fin BAF). However, given the superior business

mix compared to its peers and quasi bank like business operations of the Company, one may expect this discount to

reduce, thus presenting a strong case for valuation upside for EDEL.

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Key assumptions for our forecast

1. Credit Business assumptions

Particulars FY16 FY17E FY18E FY19E FY20E FY21E FY22E 5 yr CAGR / Avg

Capital Employed / Loans (Rs.mn) 200,140 265,416 344,587 437,087 546,330 657,195 794,880 25%

Loan growth (incl Distress asset credit) 33% 33% 30% 27% 25% 20% 21%

NII (Rs. Mn) 12,223 16,294 21,350 27,359 34,420 42,123 50,823 26%

NIM's 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Avg.7.0%

Cost to Income Ratio 44% 39% 40% 40% 40% 40% 40% Avg.40.0%

Credit Cost % 1.0% 1.2% 1.3% 1.3% 1.4% 1.3% 1.3% Avg.1.3%

PAT (Rs.mn) 3,370 4,515 5,859 7,535 9,961 12,263 14,783 27%

PAT growth 47% 34% 30% 29% 32% 23% 21%

Parameter Commentary & Outlook

Capital Employed / Loans (incl. Distress asset capital) – CAGR

- Over past three years, capital employed (incl. distress asset credit) in the credit business has grown at a CAGR of 45% to Rs. 200bn, driven by 48% CAGR growth in the wholesale lending AUM (incl. distress assets) and retail lending book growth of 39% during the same period.

- Currently, EDEL’s credit book is skewed towards wholesale lending (incl. distress credit) contributing 71%, while retail lending contributes the remaining 29%.

- We expect total capital employed to grow 4-xs (over FY16) to Rs.795bn over the next 5-year period, translating in a CAGR of 25% over FY17-22E. Growth to be supported by higher growth in retail as well as ARC loan book.

- Wholesale credit: We expect wholesale credit to grow at slower pace of 20% CAGR to Rs.364 bn over the next 5 years (FY17-22E). Contribution from this segment to overall capital employed is likely to decline from 62% in FY16 to ~46% in FY22E.

- Retail Credit: We forecast retail credit to grow at 30% CAGR to Rs.309 bn over FY17-22E driven by affordable housing finance, SME and agriculture financing. Contribution from retail credit is expected to be increase to 39% of total capital employed. EDEL has invested in new products, which have registered high growth on low base over past 3 years, we expect strong growth to continue as the business matures and investment yields results.

- Distress Asset credit: Capital employed in ARC business was Rs.18.9 bn as of FY16 (Rs.35.4 bn as of 9MFY17), accounting for 9% of capital employed. We expect distress asset credit to grow at 28% CAGR to Rs.123bn over FY17-22E and form 15% of the total capital employed.

NII – CAGR NIMs

- With the loan growth of 25% CAGR over FY17-22E, along with stable NIMs, we project NII to grow at CAGR of 26% over FY17E-22E.

- NIMs are expected to remain stable at 7.0%. Shift towards low yielding retail loans is likely to be countered by the lower cost of funds and increasing share of distress asset in total loan book.

Cost to Income ratio (C/I) - Avg - C/I is likely to fall to 40% by end of projection period compared to 44% reported in FY16.

Credit cost – Avg - EDEL leads the peer set in terms of superior asset quality. We expect credit cost to increase marginally to 1.3% in FY22E

from 1.0% in FY16 due to shift in loan mix towards retail credit while maintaining provision cover at 65%.

PAT - CAGR - Overall, we project net profits from the credit business to register 27% CAGR over the next 5 years (FY17-22E) aided by

strong growth in loans, stable NIMs and improving operating efficiency.

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2. Asset Reconstruction


AUM (Rs.mn) 271,000 385,524 552,191 718,857 885,524 922,570 961,469 20%

Capital employed (Rs.mn) 18,960 36,139 61,139 86,139 111,139 116,696 122,530 28%

Capital employed growth 54.6% 90.6% 69.2% 40.9% 29.0% 5.0% 5.0%

Income (Rs.mn) 3,700 6,554 9,387 12,221 15,054 15,684 16,345 20%

Income growth 81.4% 77.1% 43.2% 30.2% 23.2% 4.2% 4.2%

Cost to income ratio 81.4% 80.0% 80.0% 80.0% 80.0% 70.0% 70.0% Avg. 76.0%

PAT (Rs.mn) 450 852 1,220 1,589 1,957 3,058 3,187 30%

PAT growth 32% 89% 43% 30% 23% 56% 4%


AUM - CAGR - Given the wide spread problem of growing banking loan NPAs, EDEL’s ARC AUM has increased at a CAGR of 72% over the period

FY14-16 to Rs.271 bn. This is expected to grow at CAGR of 20% by FY22E to Rs.961 bn.

Capital Employed - CAGR

- CDPQ has targeted investment of Rs.50 bn over four year in the ARC business. Through this investment CDPQ will also be acquiring a 20% equity stake in Edelweiss Asset Reconstruction Company (EARC).

- Also, EDEL is expected to invest ~Rs.10-15 bn per annum over the next 3-4 years. Overall therefore total capital employed is estimated to grow by Rs.20-25 bn per annum to Rs122bn by FY22.

- We thus expect capital employed to increase at 28% CAGR over FY17-22E.

Income growth

- ARC charges 1.4% as annual management fee of AUM. We expect Fee income to grow in line with AUM growth of 20%.

- Also, any recovery over and above the purchase value of assets will entail payment of bonus to EDEL but it is impossible to ascertain any gains on account of performance bonus at this stage.

C/I ratio - We expect C/I ratio to reduce going forward with avg. C/I at 76% aided by operating leverage and resolution of assets.

PAT growth - Overall, we expect PAT to grow at 30% CAGR over the next 5 years aided by stable fee income and lower C/I ratio.

3. Non-Credit Business assumptions


Total AUM (Rs.mn) 421,930 879,750 1,095,382 1,377,617 1,669,519 2,024,117 2,454,779 23%

AUM growth 56% 109% 25% 26% 21% 21% 21%

- Wealth Management AUA (Rs.mn) 295,000 604,750 755,938 944,922 1,133,906 1,360,688 1,632,825 22%

- Asset Management AUM (Rs.mn) 50,000 200,000 260,000 338,000 422,500 528,125 660,156 27%

- BMU Assets (Rs.mn) 76,930 75,000 79,444 94,695 113,113 135,304 161,797 17%

Revenue (Rs.mn) 11,070 13,636 16,431 20,664 25,043 30,362 36,822 22%

Revenue growth -1% 23% 20% 26% 21% 21% 21%

Cost to Income Ratio 76.0% 74.0% 73.0% 73.0% 70.0% 70.0% 70.0% Avg. 71.2%

PAT (Rs.mn) 1,820 2,340 2,884 3,627 4,883 5,921 7,180 25%

PAT growth 20% 29% 23% 26% 35% 21% 21%

PAT Margins 16.4% 17.2% 17.6% 17.6% 19.5% 19.5% 19.5% Avg.18.7%

RoE 17.7% 19.0% 19.4% 20.0% 21.8% 21.3% 20.9% Avg.20.7%

10


AUM - CAGR (wealth mgt, asset mgt and BMU assets)

- We expect EDEL’s total AUM in non-credit business to grow at 23% CAGR to Rs. 2,455 bn over the next 5 years driven by:

• Favorable market conditions to help sustain inflows

• Increasing distribution network

• Strong branding of its franchisee “Edelweiss”.

• Aggressive spend towards building the franchisee.

a) Wealth Management – EDEL has witnessed wealth management asset under advice (AuA) growing at an impressive pace of 82% CAGR over past 2 years (62% 3 yr CAGR) to Rs.295 bn (Rs.537 bn as of Q3FY17). We expect AUA to grow at a CAGR of 22% over the period FY17-22E to Rs. 1,633 bn keeping with its aspirations of fast closing the gap with its peers.

b) Asset Management - EDEL’s mutual fund business is set to benefit with the growing brand value. Its AUM from asset management has grown at a CAGR of 31% to Rs.50 bn over FY14-16 (36% CAGR 3-yr). Recently EDEL expanded its asset management business through acquisition of schemes of JP Morgan and Ambit Alpha Fund and thus in Q3FY17 itself the AUM has jumped to Rs.200bn. We forecast AUM from this business to grow at CAGR of 27% to Rs.660 bn crore over FY17-22E.

c) BMU Assets: BMU has grown at 61% CAGR over FY14-16. We assume it to grow at 17% CAGR over next five years, averaging 15% of the consolidated assets.

Revenue - CAGR - Revenues have grown at a CAGR of 11% over FY14-16 (19.5% 3-yr CAGR). With the buoyancy in capital market

activities, acquisition of fund business from peers and strong inflow in mutual fund business post demonetization and improvement in yields, we expect revenue to grow at a faster pace of 22% CAGR over FY17-22E to Rs.36.8 bn.

C/I ratio - Currently, the cost to income ratio stands at ~76% as of FY16 as EDEL has invested heavily in technology and

manpower. We believe that the company is at an inflection point, given the expected aggressive expansion of its AUM over the next five years we forecast C/I ratio to improve by ~600bps to be at 70% by FY22.

PAT – CAGR

PAT – Margins(Avg)

- With the robust growth in AUM and rising operating leverage, we expect PAT to grow at strong pace of 25% CAGR over next five years and PAT margins is likely to improve from 16.4% in FY16 to 19.5% by FY22, with avg 5-year PAT margins at 18.7%.

RoE - Avg - With the improvement in profitability and less capital required for non-credit business, we expect RoE to improve over

the next 5 years, with avg RoE at 20.7% over FY17-22E.

4. Insurance Business assumptions


Premiums

- Total premiums of the Edelweiss Tokyo Life Insurance (ETLIC) business has grown by 61% in FY16 to Rs.3.1 bn and 67% CAGR over past 2 years (49% YoY growth in 9MFY17). Going forward, the management expects total premiums to grow at CAGR of 40-50% over next few years.

- ETLIC is continuously expanding its footprints across agency and in partnership with direct channels. We expect Premium income to grow at 50% CAGR over FY17E-22E.

PAT - ETLIC, which commenced operations in 2012 reported loses of Rs.1.55 bn in FY16.

- The JV is expected to continue to be in investment phase and is expected to breakeven in next 5-6 years of operations.

11

5. Consolidated Performance

Particulars Historical Forecast Comments

AUM Mix (Rs.mn) FY16** FY22E

Credit Business - Capital Employed / Loans (Rs.mn) 200,140 794,880 - We expect total capital employed (incl distress asset credit) to grow 4xs over FY16 to Rs.795 bn translating into 25% CAGR over the next 5-year period with the shift in loan mix towards retail and distressed asset credit.

5-yr CAGR- Capital Employed growth (%) 50% 25%

3-yr CAGR- Capital Employed growth (%) 45% 27%

Non - Credit Business - AUM (Rs.mn) 421,930 2,454,779 - We expect non-credit business AUM to grow at 23% CAGR to Rs. 2,455 bn over next 5 years driven by strong growth both in Asset Management and Wealth Management units supported by strong fund flows.

5-yr CAGR- AUM growth (%) NA 23%

3-yr CAGR- AUM growth (%) 52.1% 24%

Revenue Mix (Rs.mn)

Credit Business (NII) 12,223 67,168 - We Expect revenues to grow at a CAGR of 29% to Rs.139bn led by – o Strong 46% CAGR in Insurance business revenue, o Robust loan book growth and stable NIMs leading to 26%

CAGR in NII from the credit business, o Buoyancy and rapid AUM growth in capital market business

resulting in 22% CAGR growth in non-credit revenues.

Non - Credit Business 10,246 35,594

Insurance 3,002 34,192

Total 26,480 139,348

5-yr CAGR- Revenue growth (%) 24% 29%

3-yr CAGR- Revenue growth (%) 35% 33%

Cost to Income

C/I Ratio 78.4% 72.2% - We expect operating cost to moderate going forward with the technological initiatives undertaken by the company and better cost management resulting into operating leverage.

5-yr Avg - C/I ratio (%) 76.1% 73.8%

3-yr Avg - C/I ratio (%) 76.1% 74.6%

PAT

PAT (Rs.mn) 4,144 25,151 - We expect PAT to grow by 30% CAGR over next five years to Rs.25.1bn driven by higher contribution from the credit & ARC businesses, higher fee income from non-credit business, operating leverage and reduction in insurance business losses.

5-yr CAGR- PAT growth (%) 12.2% 30.4%

3-yr CAGR- PAT growth (%) 32.4% 32.6%

RoE

Consolidated RoE 12.1% 20.9% - Rising profitability, lower cost to income ratio, stable credit cost and reduction in losses in insurance business we expect a marked improvement in return parameters for the company.

- We expect consolidated RoE to increase to ~21% by FY22.

5-yr Avg- RoE(%) 8.7% 18.8%

3-yr Avg- RoE(%) 10.4% 17.5%

Credit Business 16.1% 20.3% - We expect RoE of credit business to improve on back of stable NIMs, lower operating cost, and higher fee income from ARC business.

5-yr Avg- RoE (%) NA 19.8%

3-yr Avg- RoE (%) 15.1% 19.2%

Non - Credit Business 17.7% 20.9% - With the improvement in profitability and less capital required for non-credit business, we expect RoE to improve over next 5 years.

5-yr Avg- RoE (%) NA 20.7%

3-yr Avg- RoE (%) 14.2% 20.4%

RoA

Consolidated 1.2% 2.5% - We expect consolidated RoAs to double to 2.5% from 1.2% in FY16.

5-yr Avg- RoE (%) 1.2% 2.2%

3-yr Avg- RoE (%) 1.3% 2.0%

Capital Adequacy

CAR (%) 17.9% 15.7% - As on FY16, the CAR of EDEL stood at 17.9%. While the CAR is sufficient to cater to its future growth, we expect EDEL may need growth capital by FY20/FY21.

5-yr Avg- CAR (%) NA 16.1%

3-yr Avg- CAR (%) 22.4% 16.3% Historical 3-yr period FY13-FY16 for cagr calculation; FY14-FY16 for average calculation

Historical 5-yr period FY11-FY16 for cagr calculation; FY12-FY16 for average calculation

Forecast 3-yr period FY17-FY20 for cagr calculation; FY17-FY19 for average calculation

Forecast 5-yr period FY17-FY22 for cagr calculation; FY18-FY22 for average calculation

** FY16 Numbers are not directly comparable. Earlier as Edelweiss ARC was an associate, profits were reported as profit from associates. Since

Q3FY17, EARC would be reported as subsidiary, hence profits from ARC would be reported in income statement and will be part of credit business.

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Valuation and Recommendation

We believe Edelweiss is one of its kind financial services firms in India today. Set up in in early 1996, with its roots in the capital

markets, EDEL has since branched out into a well-diversified financial services company. EDEL’s transition from a full-fledged

agency business to a quasi-bank like NBFC, can be largely credited to the strategic focus of the promoters of the Company. We

believe that a healthy mix of credit and non-credit businesses is what sets EDEL apart in the financial services space. Where credit

business provides steady high growth opportunities, its non-credit business brings in scalable, asset light and highly profitable

revenue streams. EDEL with its multi-line business model, pan India reach, strong brand equity, healthy balance sheet and high asset

quality, stands to benefit immensely as economic and consequently capital market activity picks up in coming years. Further, EDEL’s

aspirations of transitioning into a full-fledged bank will give it access to lower cost funds to fuel its growth and can be a significant

upside trigger in foreseeable future.

We forecast EDEL’s PAT to grow at a healthy rate of 33-35% CAGR over FY17-22. After considering average dividend payout of

35%p.a., we project its book value to increase from Rs.45 per share to Rs.158 per share in FY22.

Valuing EDEL on sum-of-the-parts (SOTP) basis, we arrive at the target price range of Rs.600-700 over the next 4-5 years,

providing an upside potential of 3.0-3.5xs (30-35%CAGR) over the current market price. Hence, we strongly recommend investors

to BUY Edelweiss at current levels as a potential wealth creator over the next 4-5-year time frame.

Sum-Of-The-Parts Valuation

Valuations FY17E FY18E FY19E FY20E FY21E FY22E

1. Credit Book (incl ARC)

Diluted Book Value (Rs) 43 52 63 77 96 117

Target P/BV multiple assumption 5.0 5.0 5.0 5.0 5.0

Per share value (Rs.) 259 314 386 478 586

2. Non-Fund Based Business

Diluted EPS (Rs.) 2.8 3.5 4.4 5.9 7.1 8.6

Target P/E multiple assumption 15 15 15 15 15


3. Insurance Business

Q3FY17 BV 10 10 10 10 10

Target P/BV multiple assumption 1.50 1.50 1.50 1.50 1.50


Target Price (Rs) 326 394 489 600 730

CMP (Rs) 177

Potential Upside (%) 86% 125% 179% 243% 317%

The above table captures the value of individual business segments based on their organic growth outlook. However, we feel that

there are several triggers await the counter that can lead to much higher stock price appreciation well within the forecast period itself. Some of these developments include: -

a) Receipt of banking license

b) Faster ramp up of life insurance subsidiary

c) Demerger of credit business from non-credit business

d) Listing of individual subsidiaries

We will be closely monitoring Edelweiss for any such event and would communicate to our clients our assessment and revised target

prices, when necessary. The table below details the sensitivity of FY22 target price to different levels of Book Value estimates and

P/BV multiples.

FY-22 BV sensitivity -15% -10% -5% 0% 5% 10% 15%

FY-22 BV est. (Rs./-) 135 143 151 159 167 175 183

BV 3.0xs 405 429 453 476 500 524 548

BV 3.5xs 472 500 528 556 584 611 639

BV 4.0xs 540 572 603 635 667 699 730

BV 4.5xs 607 643 679 715 750 786 822

BV 5.0xs 675 715 754 794 834 873 913

BV 5.5xs 742 786 830 873 917 961 1,004

BV 6.0xs 810 857 905 953 1,000 1,048 1,096

Note – shaded cells indicate fair value of equity range.

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“Our 5yr. Target prices are rolling estimates. These factor in changes in accounting period, estimates v/s actual performance and

changes in current valuation multiples periodically. Accordingly, our 5yr target prices on the dashboard may be different from

the ones published at the time of Initiating coverage.”

Risks to the recommendation

� Inherent volatility in the businesses due to linkages with the equity market

� Lending business subject to intense competition

� Challenges in scaling up new business

� Increase in competitive intensity impacting yields and NIMs

� Any negative surprises on asset quality would cause multiple contraction

� Any adverse regulatory guidelines

� Integration challenges from the inorganic route

� Ability to retain key management personnel

� Higher than expected equity dilution

14

Peer Set Analysis

In this section, we have analyzed leading diversified financial services companies, which are present both in the credit as well as non-credit businesses, namely Edelweiss, JM

Financials, IIFL Holdings and Motilal Oswal. Provided below is their performance summary, where we have compared the peers on various growth, composition, business size,

asset quality and valuation parameters. We have also ranked all the peers to reflect the order of preference for the purpose of investment.

We have a very positive outlook on the financial services space in India in view of huge untapped and highly underpenetrated market. Also, we believe that current Government’s

thrust on ‘financial inclusion’ has added to the growth prospects of the sector and will provide access to the huge underserviced and unreached population. In such a scenario,

players that lead in terms of technological investments, scale, reach, brand equity, balance sheets health and asset quality are likely to be the frontrunners, benefitting from the

impeding growth in the sector.

Summary - We rank EDEL highest in the peer set due to- superior business mix, better franchise on credit as well as non-credit side, multiple levers for capturing the growth

momentum across business segments and value unlocking potential due to demerger or listing possibility of its various subsidiaries/verticals. Also, given management’s

aspiration of gaining a banking license, it can be a very strong upside trigger for the stock in the medium term.

The pecking order highlighting investment worthiness of the peers in the financial services space is as follows: -

Peer Set Performance Comparison -Summary

Particulars EDEL JMFL IIFL MOFSL ** Order of preference and remarks

Revenue growth and mix Besides growth in CAGR terms, we have ranked these companies based on the robustness of their revenue mix as well. Companies with a better mix between credit and non-credit business segments have been ranked higher.

Rank 1: - EDEL’s revenue in the past has grown at a higher pace of 35% CAGR led by its diversified revenue mix. EDEL derives 46% of revenue from credit business, 39% from non-credit business and 15% from life insurance.

Rank 2: - JMFL reported 21% revenue CAGR with credit business contributing 48% to total revenues and non-credit business 52%.

Rank 3: - IIFL registered 10% revenue CAGR over the past 3 years, with 2nd largest asset management AUM in the industry. Share of revenue from credit business is at 48%, while non-credit business forms 52% of the total revenue.

Rank 4: - MOFSL has registered high revenue CAGR of 25% over the past 3 years, but it has very high (88%) revenue contribution coming from the non-credit business.

Revenue - FY16 (Rs mn) 26,480 11,726 23,863 9,058

3 yr CAGR 35% 21% 10% 25%

Revenue Mix (%)

Credit 46% 48% 48% 12%

Non-Credit 39% 52% 52% 88%

Insurance 15% n.a. n.a. n.a.

AUM - FY16 (Rs.mn)

Credit 200,140 72,140 177,695 20,900 Companies ranked not just based on growth but also on size and mix of the credit book / non-credit AUM

Rank 1: - EDEL has registered highest credit business loan growth CAGR of 45% over the past 3 years with well-diversified book distributed between wholesale, retail and distress asset credit. Loan book was Rs.200 bn as of FY16, highest compared to the peer set. Also, AUM of its agency (non-credit) business has registered highest growth of 52% fto be at Rs422bn in FY16.

Rank 2: - IIFL’s credit business loan book is well-diversified, with book growing at 24% CAGR over the past three years and its non-credit business is the largest amongst its peers at Rs.794bn, which has grown at a 3-year CAGR of 28%.

Rank 3: - JMFL’s credit business AUM reported 3-yr CAGR of 34% with loan book concentration towards wholesale credit (real estate) and its non-credit business has grown at 30% CAGR in the past three years.

Rank 4: - MOFSL started credit business (affordable housing finance) only in 2014 and has loan book size of Rs.20.9 bn as of FY16. The non-credit business has registered AUM CAGR of 75% over the past 2 years.

3 yr CAGR 45% 34% 24% NA

Non-Credit (excl. BMU) 421,930 438,920 794,130 169,400

3 yr CAGR 52% 30% 28% 75%

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Particulars EDEL JMFL IIFL MOFSL ** Order of preference and remarks

Net profitability and mix

PAT - FY16 (Rs.mn) 4,144 4,005 5,112 1,691 Ranked based on growth and contribution mix from and within credit business Rank 1: - EDEL has reported 32% PAT CAGR over past 3 years even with losses reported in the insurance business.

Rank 2: - IIFL reported 23% PAT CAGR within which credit business contributing 61%.

Rank 3: - JMFL reported 30% PAT CAGR over the past 3 years, with credit business contributing 79% to total PAT. Its credit business has higher NIMs compared to EDEL and IIFL due to concentration towards wholesale book (Real estate)

Rank 4: - MOFSL reported 16% YoY PAT growth with higher contribution from non-credit business. Credit business has low NIMs as it is present in secured affordable low cost housing segment.

3 yr CAGR 32% 30% 23% n.a.

PAT margin % FY16 15.6% 34.2% 21.4% 18.4%

PAT Mix (%) FY16

Credit 81% 79% 61% 24%

Non-Credit 44% 21% 39% 73%

Insurance -25%

Asset Quality - FY16

GNPA (%) 1.4% 0.3% 1.4% 0.2% Rank 1: - JMFL has robust asset quality with GNPA of only 0.3% in FY16 as it has higher exposure towards wholesale collateralized loans backed by cash flows and strong collaterals.

Rank 2: - EDEL reported stable asset quality with GNPA of 1.4% as of FY16 despite rising share of retail loans aided by strong underwriting skills.

Rank 3: - IIFL reported strong asset quality metrics with GNPA at 1.4% as of FY16 despite retail focus.

Rank 4: - MOFSL which started lending operations in 2014 reported strong asset quality with GNPA at 0.2% of loans. However, the book has not seasoned.

NNPA (%) 0.47% NA 0.5% NA

Return parameters

RoA - FY16 1.2% 4.1% 2.4% 4.0% Rank 1: - JMFL despite having high RoA of 4.1 %( aided by better NIMs and low C/I) in FY16 reported subdued RoE of 15.3% due to low leverage. Rank 2: - MOFSL has reported 4% RoA in FY16 due to low capital requirement for the non-credit business and RoE of 12.4% is low due to relatively subdued PAT growth in the past. Rank 3: - IIFL reported RoA of 2.4% and RoE of 17.3% in FY16, reflecting better leverage. Rank 4: - EDEL has low RoE sad RoA compared to peers due to losses in insurance business. However, ex-insurance RoA and RoE for FY16 stands at 1.8% and 18.6%, respectively.

3 yr Avg 1.3% 4.0% 2.4% 3.8%

5 yr Avg 1.2% 3.4% 2.2% 4.6%

RoE - FY16 12.1% 15.3% 17.3% 12.4%

3 yr Avg 10.4% 13.1% 16.6% 9.1%

5 yr Avg 8.7% 11.0% 14.4% 9.2%

Valuation

CMP (Rs) 174 105 453 800

Rank 1: - EDEL’s multiples have recently expanded in line with its latest quarter performance. We expect multiples to expand further supported by best business mix and expansion in return parameters. Rank 2: - IIFL has the best business mix after EDEL and its multiples are likely to expand with the growth in profits in coming years on the back of expected improvement in market conditions. Rank 3: - MOFSL in terms of multiples looks expensive but the growth that it can achieve in the non-credit business is humungous given the franchise it has built that will enable the company to grow at a very rapid pace with the growth in capital market activity in coming years. Rank 4: - JMFL is the weakest in the pack, due to high concentration towards real estate financing on the credit side, also, we are of the opinion that MOFSL, EDEL and IIFL have a better franchise in non-credit operations compared to JMFL.

EPS - FY16 (Rs) 5.0 5.0 16.1 11.8

TTM EPS (Rs) 6.8 5.6 20.0 22.2

BV - FY16 (Rs) 44.2 35.3 105.5 100.1

BV Q3FY17 (Rs) 52.7 39.5 137.0 120.2

P/E Multiple

Current Price / TTM EPS (xs) 25.6 18.8 22.7 36.0

P/E-FY16 (xs) 11.3 7.6 12.8 23.1

P/E- 3yr Avg (xs) 12.7 9.5 11.5 28.5

P/BV Multiple

Current Price / Q3FY17 BV - (xs) 3.3 2.7 3.3 6.7

P/BV-FY16 (xs) 1.3 1.1 2.0 2.7

P/BV- 3yr Avg (xs) 1.3 1.2 1.8 2.3 ** MOFSL – 2 yr CAGR

16

I. Background and Consolidated Past Financial Performance

Particulars Edelweiss JM Financials IIF Holdings Motilal Oswal Fin Services

Consolidated Financials (as Reported)

FY16 FY15 YoY gr. FY16 FY15 YoY gr. FY16 FY15 YoY gr. FY16 FY15 YoY gr.

Total Income Rs mn 52,539 38,798 35% 16,728 13,924 20% 39,837 35,510 12% 10,549 7,690 37.2%

C/I ratio (%) 37.8% 38.2% 27.5% 32.2% 35.3% 37.9% 61.3% 67.0%

EBITDA Rs mn 32,673 23,991 36% 12,134 9,445 28% 25,758 22,042 17% 4,086 2,535 61.2%

EBITDA Margins (%) 62.2% 61.8% 72.5% 67.8% 64.7% 62.1% 38.7% 33.0%

PBT Rs mn 5,712 5,099 12% 6,929 5,169 34% 8,423 7,239 16% 2,246 1,956 14.8%

PAT Rs mn 4,144 3,287 26% 4,005 3,305 21% 5,112 4,473 14% 1,691 1,436 17.8%

PAT Margins (%) 7.9% 8.5% 23.9% 23.7% 12.8% 12.6% 16.0% 18.7%

RoE(%) 12.1% 10.9% 15.3% 14.3% 17.3% 19.0% 12.4% 11.7%

Business and Background

Background: EDEL, promoted by Mr. Rashesh Shah and Mr. Venkat Ramaswamy is a diversified financial service company having presence across spectrum of services ranging from stock broking, asset management, NBFC operations, asset reconstruction and life insurance businesses. It is largest ARC in India with AUM of Rs.310 bn as of 9MFY17. Consolidated Financial Performance:

• Consolidated income has grown by 35% over past 3 yrs to Rs.26.5 bn

• Credit business – Fund Based Activity (46% of total income and 81% of profits in FY16), have grown at 43% CAGR and revenue share have improved from 25% in FY11.

• Non-credit business (40% of total income and 39% of profits) has grown at a slower pace of 24% 3-yr CAGR.

• Life Insurance business constitutes 15% of revenue and has negative contribution to PAT and RoE.

• Cost to Income (C/I) Ratio: C/I have been avg at 76% over past 3 years.

• PBT and PAT both have grown at 32%, respectively.

• PBT and PAT margins are lower due to loss from Insurance business.

Background: JMFL, promoted by Mr. Nimesh Kampani, is a leading player in the capital markets with a strong presence in investment banking, wealth management and asset management along with its NBFC operations spread across commercial real estate lending and capital market activities. It also has an asset reconstruction company with AUM of Rs.113 bn. Consolidated Financial Performance:

• Consolidated total income have grown by 21% CAGR over past 3yr-to Rs.11.7bn

• Credit business – Fund Based Activity (48% of total income and 80% of profits in FY16) have grown at 48% CAGR and revenue share from credit business have improved by 16% over past 3 years.

• Non-credit business (52% of income and 20% of profits) have grown at slower pace of 7% CAGR over past 3 years, share in total revenue have declined from 68% in FY14 to 52% in FY16.

• Cost to Income (C/I) Ratio: C/I have declined from 60% in FY14 to 41% in FY16 aided by higher share of fund based activity.

• PBT Margin improved from 40% in FY14 to 60% in FY16.

Background: IIFL, founded by Mr.Nirmal Jain, is a diversified player present across capital markets, investment banking, wealth mgt and lending and financing verticals. In 2015, Fairfax group promoted by Mr. Prem Watsa acquired 36% stake into the company. In its key NBFC business, CDC – UK govt fund holds 15% stake and in wealth management arm General Atlantic holds 24%. Consolidated Financial Performance:

• Consolidated income has grown by 10% CAGR over past 3 years to Rs.23.9bn

• Credit business – Fund Based Activity (48% of total revenue) have grown at 10.4%.

• Non-credit business (52% of total revenue) have grown at 10%.

• Cost to Income (C/I) Ratio: C/I have declined by 11% over past 3 years to 65%. Cost to income is high compared to peers due to higher cost in non-fund based activities.

• PBT Margin improved by 12% over past 3 years to 35% in FY16

• PAT have grown at 23% CAGR and margins have improved by 5% over past 3 years to 21.5%.

• RoE have improved by 4% to 17.3% in FY16 from 13.5% in FY14. Avg RoE at 16.6%.

Background: MOFSL is founded by Mr. Motilal Oswal and Mr. Ramdeo Agarwal. MOFSL is diversifying its business model from pure play capital market player providing equity broking, wealth management and 3rd party distribution to also include affordable housing finance as a vertical. Consolidated Financial Performance:

• Consolidated Total income have grown by 25% CAGR over past 3-years to Rs.9bn. Till FY15 Non-credit business contributed 97% of income, which has come down to 88% in FY16 with the expansion into housing finance business.

• Cost to Income (C/I) Ratio: avg C/I have been at 70% in line with peers.

• PBT Margin have doubled from 13% to 25% over past 2 years

• PAT have grown at 100% CAGR over past 2 years and margins have improved from 8.5% in FY14 to 19% in FY16.

• RoE: MOFSL management has been focusing more aggressively on delivering healthier RoEs to stakeholders. Its strategy has thus involved winding down equity deployed in low yield business and re-allocating the same to non-broking businesses that can deliver better returns. RoE has

17

Particulars Edelweiss JM Financials IIF Holdings Motilal Oswal Fin Services

• RoE has improved from 8.2% in FY14 to 12.1% in FY16. RoE excluding Insurance has improved from 11.9% in FY14 to 16.6% in FY16.

• PAT reported 30% CAGR over past 3 years, margins have improved from 30% in FY14 to 34.2% in FY16.

• RoE have improved from 10% in FY14 to 15.5% in FY16.

improved from 3.5% in FY14 to 12.4% in FY16. Prior to entering the NBFC business, MOFSL remained debt free, hence RoEs are low.

II. Credit Business

Particulars EDEL JMFL IIFL MOFSL**

AUM - FY16 (Rs. bn) Rs.200.1 bn Rs.72.1 bn Rs.195.1 bn Rs.20.9 bn

AUM growth 3 yr CAGR 45% 34% 25% NA

AUM segments

Segment AUM Mix

Wholesale : 62%

Retail : 29%

Distress asset credit : 9%

Segment AUM Mix

Real Estate Financing :78%

Capital Market (LAS) :22%

Segment AUM Mix

Mortgage : 53%

Gold loans : 16%

Capital market (LAS) : 15%

Commercial Vehicle : 10%

SME/ Medical Equipment: 6%

Affordable Home Finance:100%

Segment Mix & Risk Diversified,

Moderate Risk Concentrated,

High Risk Diversified Loan book,

Moderate Risk Only one segment,

Low Risk

NII – FY16 (Rs.mn) Rs. 12,223 mn Rs.5669 mn Rs. 11,563 mn Rs. 1,109 mn

Revenue 3 yr CAGR 43% 48% 10% 8%

Credit business income as % of Total Revenue

46% 48% 48% 12%

NIMs on AUM (FY16) 7.0% 8.4% 5.5% 3.9%

Comments on NIMs

High NIMs Higher share of wholesale loans in AUM - Developer funding and collateralized / structured loans are high yield loans (range 15-18%) while within retail provides high yielding SME and agri financing.

High NIMs Increase in construction finance / real estate lending which are structured collateralized loans with reputed developers.

Lower NIMs Shift in loan mix towards low yielding segments - secured mortgage lending which led NIM decline from 8.3% in FY13 to 5.5% in FY16.

Lower NIMs As it is present in secured housing finance business with LTV of 55-60%.

Cost to Income ratio (C/I ratio) (FY16)

44% <10% 46% 38%

Comments on C/I ratio

In-line with industry avg. in retail lending

• C/I ratio have increased by 600 bps over last 3 years to 44% in FY16 due to shift towards retail lending which has higher origination cost.

Lowest C/I ratio

• Reflective of focus on wholesale clients in construction finance and focus on repeat business, LAS business is restricted to broking customers.

Highest C/I ratio amongst peers

• With higher share of granular retail loans and high origination cost.

In-line with peers C/I ratio

• With higher share of granular affordable housing loans

RoAUM (FY16) 1.9% 5.0% 1.9% 3.3%

RoE (FY16) 16.1% 13.5% 16.9% 16.0%

Comments on RoA & RoE

In-line with the peers. High RoA (better than peers due to low

opex cost and better NIMs) and low leverage led to subdued RoE.

In-line with peers. High RoA with low leverage.

GNPA (%) FY16 1.4% 0.3% 1.4% 0.2%

18


Comments on Asset Quality

Stable asset quality with avg. GNPA at 1.2% and avg credit cost at 100 bps over past 3 years.

Robust asset quality with collateral backed loans with cash flow.

Stable asset quality with avg. GNPA at 1.2% and avg. credit cost at 60 bps over past 3 years.

Robust Asset Quality, loan book has not seasoned yet.

Capital adequacy ratio (FY16)

18% 29% 18% NA

** MOFSL – 2 yr CAGR

III. Non-Credit Business:


AUM (Rs mn)

Total AUM: Rs.422 bn

• Wealth management: Rs.295 bn

• Asset Management: Rs.50 bn

• BMU segment assets: Rs.77 bn


• Wealth management: Rs.269.6bn

• Mutual Fund: Rs.161.6 bn

• Alternative Assets: Rs.7.7bn



• Mutual Fund & 3rd Party Distribution: Rs.77 bn

• Private Equity: Rs.28bn

• Wealth Management: Rs.64 bn

AUM 3 yr CAGR 57% 30% 28% 64%

Capital market volume share – FY16 2%+ 0.74% 2.1% 2%

Revenue (FY16) (Rs. mn) Rs. 10,246 mn Rs. 6,057 mn Rs. 12,300 mn Rs. 7,949 mn

Revenue 3 yr CAGR 22% 7% 10% 31%

Non- credit business income as % of total revenue

39% 52% 52% 88%

C/I ratio – 3 yr Avg 78% 78.5% 80% 72%

PAT gr 3 yr CAGR 33% 19% 33% 72%

PAT margins – 3 yr Avg 14% 14% 14% 15%

RoE (FY16) 17.7% NA 22.8% 11.1%

Comments

• Total AUM has grown at 57% CAGR over past 3 years, contributed by growth in mutual fund and wealth management AUM.

• The Business Management Unit (BMU) has treasury assets of Rs.77bn, manages the group liquidity.

• C/I ratio in line with peers, it has declined to 76% as of FY16.

• Though a strong Investment Banking player, its broking business was impacted by the sluggish capital market activity. Market share has declined from 1%+ in FY12-13 to ~0.7% in FY16.

• Total AUM has grown at 30% CAGR over past 3 years.

• C/I ratio in line with peers.

• Wealth management contributes 26-27% of total income and capital market (broking and IB) constitutes ~23%.

• Revenue and profits have degrown from capital market / broking business with pressure on commission rates and decline in market volumes.

• AUM grown at 28% CAGR over past 3 years

• C/I has been marginally on higher side

• MOFSL is the only player which continues to derive a dominant part of revenues from stock broking activity, although contribution from broking in revenues have declined from 64% in FY13 to 46% in FY16

• Broking segment: have gained market share by 50 bps over last 2 years to 2% helped by continuous client acquisition.

• AUM growth at 64% CAGR with strong traction from mutual fund and wealth management segment on account of higher inflows and inclination to invest in financial asset.

• Lowest C/I amongst peers

** MOFSL – 2 yr CAGR

19

IV. 9-month Analysis (as per reported financials)

Company EDEL JMFL IIFL MOFSL

Particulars (Rs.mn) 9MFY17 9MFY16 YoY gr. 9MFY17 9MFY16 YoY gr. 9MFY17 9MFY16 YoY gr. 9MFY17 9MFY16 YoY gr.

Total Income 46,628 37,349 25% 16,327 12,088 35% 35,114 28,551 23% 12,097 7,527 61%

C/I ratio 39.4% 36.5% 24.7% 27.3% 31.0% 34.3% 50.3% 62.8%

EBITDA 28,256 23,707 19% 12,291 8,783 40% 24,228 18,752 29% 6,016 2,798 115%

EBITDA Margins % 60.6% 63.5% 75.3% 72.7% 69.0% 65.7% 49.7% 37.2%

PBT 6,886 3,908 76% 6,455 4,915 31% 8,609 6,033 43% 3,706 1,615 130%

PAT 4,393 2,926 50% 3,193 2,867 11% 4,997 3,747 33% 2,698 1,219 121%

PAT Margins 9.4% 7.8% 19.6% 23.7% 14.2% 13.1% 22.3% 16.2%

V. Valuations

Particulars EDEL JMFL IIFL MOFSL

Shareholding (Dec 2016)

Promoters 37% 65.3% 29.1% 71.3%

FII 29.6% 14.9% 26.4% 12.5%

DII 0.8% 2.7% 2.0% 1.5%

Others 32.6% 17.1% 42.5% 14.7%

Stock Return

5 yr Cagr Return 36% 40% 40% 43%

3 yr Cagr Return 66% 49% 76% 101%

1 yr Return 147% 121% 107% 164%

6 mth Return 23% 30% 56% 51%

EPS - FY16 (Rs.) 5.0 5.0 16.1 12.1

TTM EPS (Rs) 6.8 5.6 20 22.2

Book Value - FY16 (Rs) 44.2 35.3 106 102.5

Book Value – Q3FY17 52.7 39.5 137 120.2

CMP (Rs.) 137 85 395 728

Current P/TTM EPS (xs) 20.1 15.2 20 32.2

Current P / Q3FY17 BV (xs) 2.6 2.2 2.9 6.0

P/E - FY16 (xs) 11.3 7.5 12.8 22.6

P/BV - FY16 (xs) 1.3 1.1 1.9 2.7

P/E 3 yr Avg (xs) 12.7 9.3 11.5 27.8

P/E 5 yr Avg (xs) 14.1 9.0 11.1 21.6

P/BV 3 yr Avg (xs) 1.3 1.1 1.8 2.3

P/BV 5 yr Avg (xs) 1.1 0.9 1.5 1.8

20

ANNEXTURE-I

Management Background and Pedigree

Management team Designation With EDEL since

Previous Assignment Qualification

Rashesh Shah Co-Founder, Chairman & CEO

Since inception,1995

- Has more than 25 years of experience in the financial services sector.

- Prior to co- founding EDEL in 1995, he worked with ICICI Ltd. He has previously been on the executive committee of the National Stock Exchange of India (NSE) and is a member of the SEBI (Securities & Exchange Board of India) committee for review of insider trading regulations.

- Recently he has been appointed as Vice President of FICCI and also serves as the Chairman of Maharashtra State council of FICCI.

- MBA from IIM Ahmedabad. - Diploma in International Trade

from IIFT, Delhi.

Venkat Ramaswamy Co-Founder, Executive Director

Since inception,1995

- Has more than 25 years of experience in the financial services sector.

- Prior to starting EDEL, has worked with Spartek Emerging Opportunities Fund and ICICI Ltd as part of project financing team.

- Currently he co-heads EDEL’s Distress Asset & Global Asset Management along with heading its Investment Banking business.

- MBA from University of Pittsburgh, USA.

- Bachelor’s Degree in Electronic Engineering

Himanshu Kaji, Executive Director and Group COO

2004

- Has more than two decades of experience in the areas of business strategy, risk, finance, and corporate advisory.

- Prior to joining EDEL, Himanshu worked in Investment Banking team at ICICI and also served as Honorary Treasurer and official spokesperson for The Bombay Stock Exchange (BSE) and advised domestic and foreign capital market players for acquisition of related businesses in India.

- Chartered Accountant - Post Graduate Diploma in

Securities Law

Rujan Panjwani Executive Director, Edelweiss Group

2000

- Has more than 25 years of experience in the financial services industry working across all asset classes.

- He plays key role in several strategic initiatives for the Group and currently is a member of the Assets & Liabilities Committee that primarily manages the Group's balance sheet and the Global Risk Committee.

- Besides being on the Board of Directors of EDEL, he is also on the board of ECL Finance Limited – Edelweiss Group's NBFC and Edelweiss Asset Management Company.

- Electrical Engineer

Nitin Jain

CEO, Global Asset & Wealth Management, Edelweiss Financial Services

2004

- Mr. Nitin has extensive multi asset class investment experience across local and global markers.

- He has played an integral role in the Edelweiss transformation from a boutique investment bank into a diversified financial services company, and is member of the core management committee.

- In his earlier role of head of Retail Capital market, he was instrumental in expanding the retail broking business across asset classes and led to the successful integration of Anagram Stock Broking Ltd.

- B.Tech from IIT- Kharagpur - MBA from IIM Calcutta

Vikas Khemani

President & CEO, Edelweiss Securities Limited

2002 - Prior to joining EDEL, Mr. Vikas worked for 6 years with ICICI

Securities Ltd. - He currently heads the wholesale capital market SBU.

- Chartered Accountant - Chartered Financial Analyst

21

Management team Designation With EDEL since

Previous Assignment Qualification

Ravi Bubna

President and Co-Head Credit and Fixed Income, ECL Finance

2007

- Mr. Ravi has over 2 decades of experience across corporate finance, quantitative financing, risk, credit as well as general management.

- Prior to joining EDEL, he was Joint President and Country Head of Birla Global Finance Limited spending over 13 years in the group’s financial services business and has worked as Group Head – Treasury for Parasrampuria Group of Companies.

- Currently he is the President and Co-head of credit and fixed income.

- Bachelors of Commerce

S. Ranganathan

President and CFO, Edelweiss Financial Services Limited

2011

- Mr. Ranganathan has over 2 decades of experience in finance industry.

- Prior to working with EDEL, he worked as Vice President with Citi Bank India between 2003-07 and later joined Bank of America Merrill Lynch as its CFO.

- Qualified Chartered Accountant, Cost Accountant.

- Fellow member of the Institute of Company Secretaries

- Law Graduate

Deepak Mittal MD & CEO, Edelweiss Tokio Life Insurance

2001

- Prior to joining EDEL, Deepak worked with Telecom and Utilities Group of N M Rothschild & Sons in India and has also worked on fund raising, M&A and financial advisory assignment with leading corporates.

- After joining EDEL, Deepak worked with capital market division and subsequently became CFO at the time of EDEL IPO.

- Currently, Mr. Mittal is working as the CEO and Managing Director of Edelweiss Tokio Life Insurance Company and is also an integral part of the EDEL’s core management committee.

- MBA from IIM Ahmedabad. - Chemical Engineer from IT-

BHU.

Anil Kothuri

President & CEO, Edelweiss Retail Finance Limited

2010

- Mr. Kothuri has over 16 years of experience in the field of mortgage and asset financing in small and medium enterprises (SME), auto loans and unsecured lending.

- Prior to joining EDEL he was with Citibank leading audit, operations, sales, product management and marketing.

- MBA from IIM Ahmedabad. - Computer Engineer from Andhra

University.

Hemant Daga CEO, Global Markets

2005

- Prior to EDEL, Hemant has worked with ICICI Bank in the Global Markets division. He has extensive multi asset class investment experience across local and global markets.

- Currently, he heads the global market business and responsible for managing the treasury and overseeing all investment decision for the group.

- MBA from IIM Bangalore

22

The Board of Directors of EDEL consist of imminent and highly qualified individuals, having vast experience in the Financial

Services and Advisory space. Many of them have served in various capacity for Government institutions as well as in Indian

Administrative Services. The board is led by Mr. Rashesh Shah as Chairman of the Company.

Non-Executive and Independent Directors

Members Designation Previous Assignment Qualification

Vidya Shah Non- Executive Director

- Ms. Vidya has 11 years of experience working in investment banking team for companies like ICICI, Peregrine, and NM Rothschild advising corporations in capital raising and M&A transactions.

- Prior to Edelweiss Give Foundation, she has worked as CFO of EDEL.

- Presently she is responsible for the philanthropic activities of Edelweiss group (Edelweiss Give Foundation)

- Bachelor’s degree in Commerce - MBA from IIM Ahmedabad

Kunnasagaran Chinniah

Independent Director

- Served as Global Head - Portfolio, Strategy and Risk Group with GIC Special Invst. (Pvt. Equity arm of the Govt. of Singapore Invst Corp).

- B.E. in Electrical Engineering from the National University of Singapore.

- MBA from the University of California, Berkeley

- Chartered Financial Analyst.

P. N. Venkatachalam


- Mr. Venkatachalam has wide experience in the banking sector in India and abroad and has also worked in the software industry in Banking and Finance verticals.

- He retired as Managing Director of State Bank of India in 2004. He was a member of the Interim Pension Fund Regulatory Authority of India and a Director on the Board of Small Industries & Development Bank of India (SIDBI).

- Master’s degree in Economics - Certified associate from Indian

Institute of Bankers.

Berjis Desai Independent Director

- Mr. Desai has varied experience in the legal field, with specialization in Corporate Law, Mergers & Acquisitions, Derivatives, Securities & Financial Laws, International Business Laws and International Commercial Arbitration.

- He is the Managing Partner of J. Sagar Associates, one of India’s leading law firms.

- Master’s degree in Law from the University of Cambridge.

Sanjiv Misra Independent Director

- Mr. Misra has a rich and varied experience in the financial services industry, having worked with various organizations, including Goldman Sachs and Citigroup.

- Mr. Misra is the President of Phoenix Advisers Pte. Ltd., an advisory and principal investing firm and is also working as the Chairman on the Apollo Group’s Asia Pacific Advisory Board.

- Bachelors of Arts in Economics from St. Stephens College.

- MBA from IIM Ahmedabad. - Masters of Management from J. L.

Kellogg Graduate School of Management

Sunil Mitra Independent Director

- Broad experience in economic policy making. Former Finance Secretary of Govt. of India

- Bachelor’s degree in Science from Delhi University

- Indian Administrative Service (1975 batch)

Navtej S. Nandra Independent Director

- President of E*TRADE Financial Corporation. Prior to this he served as Head of the International business for Morgan Stanley Investment Management

- MBA from IIM, Ahmedabad, - Bachelor's degree in Commerce

(Honors) from the University of Delhi.

Biswamohan Mahapatra


- Former RBI Executive Director. He was in-charge of the Department of Banking Operations & Development, as well as has worked with the Department of Bank Accounts & Inspection.

- Master of Science in Management (MSM) degree from the Arthur D. Little Management Education Institute, USA.

- MBA from University of Delhi - M.A. from Jawaharlal Nehru

University.

23

Shareholding pattern

Total promoter stake in Edelweiss Financial Services Ltd. stands at 37%, which is distributed between Mr.Rashesh Shah, Mr Venkat

Ramaswamy and their Family & Entities. Domestic Institutions held 0.8% stake and Institutional Investors held 30% stake in the

company as on 31th December 2016. Some of the Marquee Institutional Investors are First Carlyle Venture (8.2%), Saif India

Holdings (3.1%), Privatbank IHAG Zurich AG (3.1%), Fidelity Investment Trust (2.1%) and Amansa Holdings (1.4%). Also, Mr.

Rakesh Jhunjhunwala a renowned long-term investor also holds over 1% stake in the Company.

Particulars Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Dec-16 bps change over March 2012

A. Promoter 37.8% 37.4% 37.2% 37.7% 37.8% 37.0% - 77 bps

B. Public 62.2% 62.6% 62.9% 62.3% 62.3% 63.0% + 77 bps

Institution 19.8% 21.1% 22.6% 26.8% 30.3% 30.3% + 1057 bps

Non-Institution 42.5% 41.5% 40.2% 35.4% 31.9% 32.7% - 979 bps

(A+B) Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0 bps

Strong credit rating

Year Long term credit rating

FY11 AA-

FY12 AA-

FY13 AA-

FY14 AA-, AA

FY15 AA, A1+

FY16 AA, A1+

FY17 AA, A1+

EDEL long term credit rating has been inching up from AA- in FY10 to AA (ICRA) & A1+ (CRISIL) in FY17. The company also

has a good short term rating of A1+, which draws strength from EDEL strong capitalization, healthy asset quality, comfortable

earnings profile, robust business model and experienced management team. The strong credit ratings enable EDEL to raise debt from

international market through masala bonds, bank borrowings and retail deposits at competitive rate, which is also reflected in lower

cost of borrowings. CRISIL has reaffirmed its A1+ rating on short term debt in January 2017.

Key Market Data Table

Close of 19th April, 2017

Bloomberg Code EDEL: IN

Last Price, M. Cap, 52w H/L Rs. 177/- (BSE) – Rs. 148bn/ USD 2.2 bn Rs.185.3/56.2

Shares outstanding, Face Value 831.21 mn, Rs. 1.0/- (Dec 2016)

Promoter holding (as on 30th December 2016)

Promoter holding at 36.98% (41% of promoter’s shares representing 15% of total; shares outstanding are pledged). vs 37.81% as on 30th December 2015 and 37.11%as on 30th Sept 2016.

Institutional holding (as on 30th December 2016)

FII – 29.56% (vs 28.39% as on 30th Dec 2015 and 30.32% as on 30st Sept 2016).

DII – 0.78% (vs 1.39% as on 30th Dec 2015 and 0.92% as on 30st Sept 2016).

Marquee Investors (as on 30th December 2016)

First Carlyle Ventures Mauritius (8.2%), Saif India Holdings (3.1%), Privatbank IHAG Zurich AG (3.1%), Fidelity Investment Trust (2.1%), Amansa Holdings (1.43%) and Rakesh Jhunjhunwala(1.08%)

24

Key Financial Parameters for Investment Screening

Sr. No.

Aspect

Required Criteria for Equentis 5x5 strategy

FY12-16 Actual Value (Historical)

Grading of Historical

Performance

FY17-22E Future Value (Forecasted)

Grading of future estimates

1 Credit Business - Loan Book -CAGR

20-25% CAGR over last 5yrs 50% 25%

Achieved on higher base

2

Non-Credit Business - AUM - CAGR

20-25% CAGR over last 5yrs

52% 3 yr CAGR

23% Achieved on higher

base

4 Total Income -CAGR 25-30% CAGR over last 5yrs 24% 29%

5 PAT -CAGR 30-35% CAGR over last 5yrs 12% 30%

6 NIM- AVG At least avg. 5-8% over last 5yrs with increasing bias

Avg.6.8% (3 yr avg)

inc. bias 7.0% in FY16

Avg. 7.0% stable

7 RoA- AVG Avg. around 2.0-3.0% over last 5yrs with increasing bias

Avg.1.2% 1.2% in FY16

Avg.2.2%

with inc. bias 2.5% proj. in FY22

8 RoE- AVG Avg. around18-20% over last 5yrs with increasing bias

Avg.8.7% 12.1% in FY16

Avg.18.8%

with inc. bias; 21% in FY22E

9 Leverage -AVG Avg. 8-9xs over last 5 yrs Avg.7.6xs 10.1xs in FY16

Avg.8.5xs

8.2xs in FY22E

Note - Above – Blue, In-Line – Green, Below – Red

Note- We expect a marked improvement in profitability and return parameters of the company supported by strong loan book growth,

higher income growth from non-credit business, reduction in loss from insurance business and rising operating leverage.

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Annexure –II

Quarterly Financial Snapshot- Consolidated

Particulars (Rs.mn) Q3FY16 Q2FY17 Q3FY17 YoY (%) QoQ (%) 9MFY16 9MFY17 YoY (%) FY16 Q3FY17 performance commentary

Interest Earned (capital based business) 10,762 12,277 11,339 5% -8% 30,410 35,756 18% 41,704

− Interest income grew only 5% YoY while declining by 8% QoQ to Rs11.3 bn in Q3FY17 despite AUM (excl. distress assets) growth of 26% YoY to Rs.214 bn.

− While reported yields have remained flat at 16.1% on YoY basis but calculated yields (Interest income to annualized AUM) show a marked drop on YoY basis.

Interest Expended 6,809 7,089 6,767 -1% -5% 19,241 20,842 8% 26,201

− Interest Expense declined by 1% YoY to Rs.6.8 bn.

− Total Borrowings have increased by 18% YoY to Rs.319.7 bn.

− CoF have reduced by 30bps YoY to 10.4% in Q3FY17 on account of steady diversification in sources of borrowings.

Net interest income 3,953 5,189 4,572 16% -12% 11,169 14,914 34% 15,503 − NII have increased by 16% YoY to Rs.4.6 bn

− NIM expanded by 20 bps YoY to 7% on the back of decline in cost of funds.

Agency Business (Fee & commission income) 1,807 2,405 3,556 97% 48% 4,916 7,669 56% 6,966

Fee income has reported a strong growth of 97% YoY to Rs.3.6 bn supported by:

− Robust growth is seen across all non-credit activities including, Wealth Management, Asset Management, Capital Market Services, Agri Services and Balance Sheet Management Unit.

− Further fee income is also higher due to consolidation of the ARC business as a subsidiary from Q2FY17.

Life Insurance 637 846 877 38% 4% 1,515 2,255 49% 3,002

Life insurance business witnessed strong gross premium collection at 38% YoY due to:

− Continued focus on new product development

− Change in mix towards higher proportion of non-par products

Expansion of distribution footprint continues across agency and alternate channels. EDEL has established presence across 81 branches in 64 major cities and has over 19,100 personal financial advisors on board.

Other Operating income 204 393 280 38% -29% 508 947 86% 868

Other Income 23 44 73 217% 64% 75 185 147% 142

Total Income 6,624 8,877 9,358 41% 5% 18,183 25,970 43% 26,480

Payment to Employees 2,162 2,765 2,773 28% 0% 6,410 8,014 25% 8,821 − Employee expense increased at 28% YoY as the

company added ~750 employees over Q3FY16. The current employee count stands at 6,902.

26

Particulars (Rs.mn) Q3FY16 Q2FY17 Q3FY17 YoY (%) QoQ (%) 9MFY16 9MFY17 YoY (%) FY16 Q3FY17 performance commentary

Other Operating Expenses 3,146 3,786 4,101 30% 8% 7,865 11,070 41% 11,947

− Other operating expense have increased by 30% YoY with the significant investment in technology.

− Credit cost for 9MFY17 was high at 84 bps versus 70 bps in 9MFY16.

Total operating expenses 5,309 6,551 6,875 30% 5% 14,275 19,084 34% 20,768 − Cost to Income ratio declined by ~650 bps YoY to 73.5% with a much higher increase in income and better control on costs due to operating efficiencies.

Cost to Income ratio % 80.1% 73.8% 73.5% 78.5% 73.5% 78.4%

Profit before tax 1,316 2,326 2,483 89% 7% 3,908 6,886 76% 5,712

Provision for Taxes 489 969 1,042 113% 8% 1,442 2,839 97% 2,354

Tax Rate % 37% 42% 42% 37% 41% 41%

Net Profit before MI & Share of Associates 827 1,358 1,441 74% 6% 2,466 4,047 64% 3,358

Share of profit & loss of associates 179 49 (36) 351 74 477

Minority Interest (51) (37) (147) (110) (272) (309)

Net Profit after minority interest and share of profit or loss of associates

1,057 1,444 1,552 47% 7% 2,926 4,393 50% 4,144

− PAT after minority interest and share of profit from associates grew at 47% YoY (lower than PAT before minority interest and share of profit from associate growth of 74% YoY) to Rs1.55 bn due to higher tax rate and lower share of profit from associates (as Edelweiss ARC now is accounted as Subsidiary).

No of Eq Shares 831 831 831 831 831 831

Diluted EPS(Rs.) 1.27 1.74 1.87 3.5 5.3 5.0

Financial Snapshot – 9MFY17

Particulars (Rs.mn) NII / Revenue PAT PAT Mix % Networth Networth Mix % RoA RoE

Credit Business 11,780 3,210 73% 34,300 66% 2.1% 18.2%

Non Credit Business 10,900 1,870 43% 9,490 18% 2.5% 24.4%

Total Ex Insurance 22,680 5,080 115% 43,790 84% 2.3% 20.1%

Insurance 3,470 (680) -15% 8,100 16%

Consolidated 26,150 4,400 100% 51,890 100% 1.7% 15.2%

27

Annexure - III

Financial Summary – Consolidated

Profit & Loss (Rs. Mn.) FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E CAGR 3 yr CAGR 5 yr CAGR 3 yr CAGR 5 yr

FY13-16 FY11-16 FY17-20E FY17-22E

Income

Credit Business (NII & ARC fee income) 2,364 4,222 5,653 7,536 12,223 19,571 30,737 39,579 49,473 57,807 67,168 42.5% 40.6% 36.2% 28.0%

Non-Credit Business 5,747 5,649 6,297 10,696 10,246 13,196 15,883 19,975 24,208 29,350 35,594 22.0% 9.4% 22.4% 22.0%

Life Insurance Business 107 525 1,062 1,866 3,002 4,503 6,754 10,131 15,197 22,795 34,192 78.8% n.a. 50.0% 50.0%

Other Income 192 311 312 528 1,009 1,353 1,507 1,696 1,892 2,122 2,393 48.1% 40.5% 11.8% 12.1%

Total Income 8,410 10,707 13,325 20,625 26,480 38,624 54,881 71,382 90,770 112,074 139,348 35.2% 24.2% 33.0% 29.3%

YoY -6% 27% 24% 55% 28% 46% 42% 30% 27% 23% 24%

Total Expense 6,423 8,114 9,934 15,524 20,768 28,794 41,046 53,432 67,360 81,785 100,654 36.8% 30.6% 32.7% 28.4%

YoY 17.6% 26.3% 22.4% 56.3% 33.8% 38.6% 42.5% 30.2% 26.1% 21.4% 23.1%

Cost to Income ratio (%) 76% 76% 75% 75% 78% 75% 75% 75% 74% 73% 72% Avg.76.1% Avg.76.1% Avg.74.6% Avg.73.8%

PBT 1,987 2,593 3,391 5,101 5,712 9,829 13,836 17,949 23,411 30,289 38,693 30.1% 10.3% 33.5% 31.5%

YoY -43% 31% 31% 50% 12% 72% 41% 30% 30% 29% 28%

Taxes 681 882 1,346 2,017 2,354 4,087 5,801 7,427 9,047 11,438 13,543 38.7% 18.0% 30.3% 27.1%

Effective Tax Rate 34% 34% 40% 40% 41% 42% 42% 41% 39% 38% 35%

Reported PAT 1,277 1,784 2,203 3,289 4,144 6,672 8,980 11,614 15,558 20,023 25,151 32.4% 12.2% 32.6% 30.4%

YoY -45% 40% 23% 49% 26% 61% 35% 29% 34% 29% 26%

Balance Sheet as at (Rs. Mn.)

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E CAGR 3

yr CAGR 5

yr CAGR 3

yr CAGR 5

yr

FY13-16 FY11-16 FY17-20E

FY17-22E

NET WORTH 26,360 24,576 28,902 31,606 36,749 51,620 60,891 72,851 88,469 108,372 131,984 14.4% 8.5% 19.7% 20.7%

TOTAL BORROWINGS 104,140 115,333 129,479 235,102 277,103 333,276 399,931 479,917 575,901 691,081 829,297 33.9% 28.7% 20.0% 20.0%

TOTAL LOANS & ADVANCES

47,847 65,715 89,530 150,360 200,140 265,416 344,587 437,087 546,330 657,195 794,880 45.0% 49.9% 27.2% 24.5%

TOTAL ASSETS 145,451 162,291 181,904 304,810 369,846 445,244 529,627 631,298 754,085 902,029 1,078,649 31.6% 19.6% 19.2% 19.4%

EPS (Rs) 1.5 2.1 2.6 4.0 5.0 8.0 10.8 14.0 18.7 24.1 30.3 32.4% 12.2% 18.5% 30.4%

BVPS (Rs) 31.7 29.6 34.8 38.0 44.2 62.1 73.3 87.6 106.4 130.4 158.8 14.4% 8.5% 11.4% 20.7%

28

Key Financial Ratios FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E 3 yr Avg 5 yr Avg 3 yr Avg 5 yr Avg

FY14-16 FY12-16 FY18-20E FY18-22E

NIM 6.4% 7.4% 7.3% 6.3% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 6.8% 6.9% 7.0% 7.0%

NPA Provision/Avg. Assets 0.6% 0.5% 0.8% 1.2% 1.0% 1.2% 1.3% 1.3% 1.4% 1.3% 1.3% 1.0% 0.8% 1.3% 1.3%

RoA = PAT/Avg. Assets 0.9% 1.2% 1.3% 1.4% 1.2% 1.6% 1.8% 2.0% 2.2% 2.4% 2.5% 1.3% 1.2% 2.0% 2.2%

RoE = PAT/Avg. Net Worth 5.0% 7.0% 8.2% 10.9% 12.1% 15.1% 16.0% 17.4% 19.3% 20.3% 20.9% 10.4% 8.7% 17.5% 18.8%

Leverage 5.5 6.6 6.3 9.6 10.1 8.6 8.7 8.7 8.5 8.3 8.2 8.7 7.6 8.6 8.5

P/BVPS 0.9 1.0 0.8 1.7 1.3 2.5 2.4 2.0 1.6 1.3 1.1 1.3 1.1 2.0 1.7

P/E 17.9 14.4 10.8 16.1 11.3 19.3 16.2 12.5 9.3 7.3 5.8 12.7 14.1 12.7 10.2

Non – Credit Business

Particulars (Rs.mn) FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E CAGR 2 yr CAGR 3 yr CAGR 3 yr CAGR 5 yr

FY14-16 FY13-16 FY17-20E FY17-22E

Total AUM - incl BMU assets (Rs.mn) 147,820 269,730 421,930 879,750 1,095,382 1,377,617 1,669,519 2,024,117 2,454,779 68.9% 52.1% 23.8% 22.8%

YoY 23% 82% 56% 109% 25% 26% 21% 21% 21%

Wealth Management AuA (Rs.mn) 89,000 177,500 295,000 604,750 755,938 944,922 1,133,906 1,360,688 1,632,825 82.1% 61.5% 23.3% 22.0%

YoY 27% 99% 66% 105% 25% 25% 20% 20% 20%

Asset Management (Rs.mn) 29,000 27,000 50,000 200,000 260,000 338,000 422,500 528,125 660,156 31.3% 35.7% 28.3% 27.0%

YoY 45% -7% 85% 300% 30% 30% 25% 25% 25%

Revenue (incl. other income) 6,297 10,696 10,246 13,196 15,883 19,975 24,208 29,350 35,594 27.6% 22.0% 22.4% 22.0%

Cost to income ratio 80% 78% 76% 74% 73% 73% 70% 70% 70% Avg.77.0% Avg.78.0% Avg.72.0% Avg.71.2%

PAT 1,040 1,520 1,820 2,340 2,884 3,627 4,883 5,921 7,180 32.3% 32.7% 27.8% 25.1%

YoY 34% 46% 20% 29% 23% 26% 35% 21% 21%

PAT Margins (%) 11.6% 13.5% 16.4% 17.2% 17.6% 17.6% 19.5% 19.5% 19.5% Avg.15.0% Avg.13.9% Avg.18.2% Avg.18.7%

RoE 9.7% 15.1% 17.7% 19.0% 19.4% 20.0% 21.8% 21.3% 20.9% Avg.16.4% Avg.14.2% Avg.20.4% Avg.20.7%

EPS (Rs) 1.3 1.8 2.2 2.8 3.5 4.4 5.9 7.1 8.6 32.3% 32.7% 27.8% 25.1%

BV(Rs) 12.9 11.3 13.4 16.2 19.7 24.0 29.9 37.0 45.7 2.0% n.a. 22.7% 23.0%

29

Credit Business

Particulars (Rs.mn) FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E CAGR 2 yr CAGR 3 yr CAGR 3 yr CAGR 5 yr

FY14-16 FY13-16 FY17-20E FY17-22E

Lending Business

Capital Employed (including Distress Credit) 89,530 150,360 200,140 265,416 344,587 437,087 546,330 657,195 794,880 49.5% 45.0% 27.2% 24.5%

Net Interest Income 5,653 7,536 12,223 16,294 21,350 27,359 34,420 42,123 50,823 47.0% 42.5% 28.3% 25.5%

YoY 34% 33% 62% 33% 31% 28% 26% 22% 21%

Operating Expense 2,120 3,090 5,378 6,355 8,540 10,943 13,768 16,849 20,329 59.3% n.a. 29.4% 26.2%

YoY 46% 74% 18% 34% 28% 26% 22% 21%

Cost to Income ratio (C/I) (%) 38% 41% 44% 39% 40% 40% 40% 40% 40% Avg.42.5% Avg.40.8% Avg.40.0% Avg.40.0%

Credit Cost (%) 0.8% 1.2% 1.0% 1.2% 1.3% 1.3% 1.4% 1.3% 1.3% Avg.1.1% Avg.1.0% Avg.1.3% Avg.1.3%

PAT 1,700 2,300 3,370 4,515 5,859 7,535 9,961 12,263 14,783 40.8% n.a. 30.2% 26.8%

RoA % 2.2% 1.9% 1.9% 1.9% 1.9% 1.9% 2.0% 2.0% 2.0% Avg.1.9% Avg.2.0% Avg.2.0% Avg.2.0%

GNPA Ratio % 0.92% 1.31% 1.40% 1.40% 1.50% 1.50% 1.50% 1.50% 1.50% Avg.1.4% Avg.1.2% Avg.1.5% Avg.1.5%

Provision coverage Ratio 74% 71% 67% 65% 65% 65% 65% 65% 65% Avg.68.8% Avg.70.5% Avg.65.0% Avg.65.0%

ARC Business

ARC AUM (Rs.mn) 92,000 203,000 271,000 385,524 552,191 718,857 885,524 922,570 961,469 71.6% n.a. 31.9% 20.1%

YoY 121% 33% 42% 43% 30% 23% 4% 4%

Capital employed 3,250 12,260 18,960 36,139 61,139 86,139 111,139 116,696 122,530 141.5% n.a. 45.4% 27.7%

YoY 277% 55% 91% 69% 41% 29% 5% 5%

Total Income (Rs.mn) 2,040 3,700 6,554 9,387 12,221 15,054 15,684 16,345 n.a. n.a. 31.9% 20.1%

YoY 81% 77% 43% 30% 23% 4% 4%

C/I ratio 77% 81% 80% 80% 80% 80% 70% 70% Avg.79.4% Avg.79.4% Avg.80.0% Avg.76.0%

PAT 340 450 852 1,220 1,589 1,957 3,058 3,187 n.a. n.a. 31.9% 30.2%

YoY 32% 89% 43% 30% 23% 56% 4%

Credit Business - Summary

CAR % 30.1% 19.3% 17.9% 18.6% 17.3% 16.1% 15.5% 15.7% 15.7% Avg.18.6% Avg.22.4% Avg.16.3% Avg.16.1%

RoA (%) 2.2% 1.9% 1.9% 2.1% 2.3% 2.3% 2.4% 2.5% 2.5% Avg.1.9% Avg.2.0% Avg.2.4% Avg.2.4%

RoE (%) 14.2% 15.0% 16.1% 16.7% 17.9% 19.1% 20.5% 21.3% 20.3% Avg.15.5% Avg.15.1% Avg.19.2% Avg.19.8%

EPS (Rs) 2.0 2.8 4.1 5.9 8.5 11.0 14.3 18.4 21.6 40.8% n.a. 34.1% 29.5%

BV(Rs) 14.4 22.5 27.9 43.3 51.9 62.8 77.2 95.6 117.2 39.1% n.a. 21.2% 22.0%

30

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