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Edelweiss Financial Services Ltd.

BUY

-1 of 30- Monday 6th February, 2017

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Target Price ₹ 217 CMP ₹ 124 FY19E P/Adj. BV 1.8X

Index Details Edelweiss Financial Services Ltd (EFSL) is on the cusp of accelerated

growth given the growth opportunities presented by:

Under penetration of credit in India

Exponential growth of the wealth management industry

Unique opportunity presented by the Asset Reconstruction space

Emergence of Insurance as a high growth sector

Changing investment habits of Indian investor, which is expected

to spearhead the growth of the asset management industry

Buoyant capital markets which are expected to fuel the growth of

the broking segment

We believe that EFSL has a robust business model in place to cater to all

the above opportunities and partake in the India growth story while

keeping risk under control.

Overall we expect consolidated revenue to grow at CAGR of 23.6% over

the period FY16-19 to Rs.9,933 crore. Consolidated PAT to grow at

CAGR of 35.6% over FY16-19 to Rs.1,032 crore. RoA to expand by 68bps

to 1.9% by FY19. RoE to broaden by 581bps to 17.1% by FY19.

We are optimistic about the prospective fortunes of EFSL given that:

Credit book is set to grow at a CAGR of 21.3% to Rs.35,748 crore by FY19. Over the same period asset quality (which is already superior than that of its peers and private banks) is expected to remain stable.

We expect the wealth management AUM to grow at a CAGR of 30.8% over FY16-19 to Rs.77,600 crore driven by:

o Strong branding of its franchise ‘Edelweiss’ o Aggressive spend towards building the franchise

Sensex 28,241

Nifty 8,741

Industry NBFC

Scrip Details

Mkt Cap (₹cr) 10,263

BVPS (₹) 45.1

O/s Shares (Cr) 83.1

Av Vol (Cr) 1.4

52 Week H/L 44/123

Div Yield (%) 1.2

FVPS (₹) 1

Shareholding Pattern

Shareholders %

Promoters 36.9

Public 63.1

Total 100.0

EFSL vs. Sensex

0

20

40

60

80

100

120

140

0

5000

10000

15000

20000

25000

30000

35000

01-Jan-14 01-Jan-15 01-Jan-16 01-Jan-17

SENSEX EFSL

Rs.Rs.

Key Financials (₹ in Cr)

Y/E Mar Net

Interest Income

Non Interest Income

PAT EPS Adj. BV RoE (%) RoA (%) P/E(x) P/Adj. BV(x)

2016 1197.9 2351.2 414.5 5.0 45.1 11.3 1.2 24.8 2.7

2017E 1497.0 3445.9 578.3 7.0 49.7 13.6 1.4 17.7 2.5

2018E 1830.0 4191.8 756.7 9.1 58.3 15.1 1.6 13.6 2.1

2019E 2231.2 4973.5 1032.2 12.5 69.9 17.1 1.9 9.9 1.8

- 2 of 30- Monday 6th February, 2017


o Favorable capital markets

o Hallmark equity research

The business which till date was in the investment phase is

expected to start contributing to the profitability.

Acquisition of JP Morgan schemes and Ambit alpha funds schemes

to augment AUMs of the Asset Management business. Buoyed by

the changing investment habits of Indian investors the AUM is

expected to grow at a CAGR of 91.3% to Rs.35,000 crore by FY19.

CDPQ’s investment in its ARC business is expected to bolster

fortunes of this segment. We expect ARC AUM to grow at a CAGR

of 26.3% over the period FY16-19 to Rs. 54,552 crore.

Favorable sentiments for the capital markets are expected to lead

to a surge in revenues of this segment at CAGR of 12.9% to Rs.753

crores by FY19.

Although the Insurance business is not expected to break even

until FY21, we expect premiums to grow at a CAGR of 52.0% to

Rs.1,054 crore by FY19.

We initiate coverage on EFSL as a Buy with a SOTP based price objective

of Rs.217 representing a potential upside of ~75.0 % over a period of 21

months. At CMP of Rs.124, the stock is trading at 2.5X FY17 P/Adj. BV.

SOTP valuation of EFSL

Business Segment Valuation basis Multiple Business valueHolding company

discount

Value after holding

company discount

Value per

share

(Rs. In Cr) (Rs. In Cr) (Rs.)

Credit P/Adj book value 2.7 X 10528 13% 9160 110

Wealth management % of AUM 5% 3880 10% 3492 42

ARC % of AUM 5% 2728 10% 2455 30

AMC % of AUM 5% 1750 10% 1575 19

Broking PE 13 X 451 10% 406 5

Insurance Networth 1.2 X 543 10% 488 6

BMU & Others Book value 1.0 X 470 10% 423 5

Enterprise Value 20350 17999 217

Source: Ventura Research



Company background

Edelweiss Financial Services Ltd (EFSL) is one of India's leading diversified financial

services company providing a broad range of financial products and services to a

substantial and diversified client base that includes corporations, institutions and

individuals. EFSL's products and services span multiple asset classes and consumer

segments across domestic and global geographies. Its businesses are broadly classified

as shown under

EFSL’s Business Verticals

Source: EFSL ,Ventura Research

Edelweiss

Credit

Wholesale

AUM - Rs. 13306

Retail

AUM - Rs.8043

Wealth Management

AUM - Rs.44200

Asset Management

AUM - Rs. 6900

Broking & Allied

Revenue - Rs.524 Cr

Asset Reconstruction

AUM - Rs.31100

Insurance

Premium - Rs.145Cr

As on Q2FY17 except capital markets which is as on FY16 and Insurance as on H1FY17



Lower credit penetration presents a huge opportunity

Credit penetration in India is extremely low as compared to other economies. On

similar benchmarks, the Non Bank Finance Companies (NBFCs) penetration in India

is even lower.

While it is commonly expected that credit will grow rapidly as economic growth

gathers pace, it is safe to assume that non bank finance will grow even faster. This is

borne out by the growth rates seen over the past several years.

Why NBFC growth will accelerate?

NBFC sector growth should accelerate in the medium term in India on the back of:

Indian economy has a huge latent credit demand fuelled by a massive self-

employed and MSME business

Public sector banks are under severe stress due to mounting bad debts

Unique nature of credit demand such as inadequate income proof makes it

difficult for traditional bank lending

Digital trends in consumer and MSME segments offer new disruptive

opportunities for innovation and partnerships

Deepening of wholesale debt markets to provide easier access to funds for

NBFCs

Demonetization and Digitalization will result in loss of market share for the

various practices of unorganized money lenders as borrowers move away

towards organized lenders viz., Banks and NBFCs.

Credit penetration in India Vs Other economies NBFC size substantially lower than Other economies

447

374

244

165149

127 12797

0

50

100

150

200

250

300

350

400

450

500

UK Japan US China Germany Thailand Malaysia India

Total credit as % of GDP

264

130

74

33 29 27 2613

0

50

100

150

200

250

300

UK US Japan China Germany Thailand Malaysia India

NBFC credit as % of GDP

Source: Global Shadow Banking Monitoring Report 2015, Ventura Research

Source: Global Shadow Banking Monitoring Report 2015, Ventura Research



Superior profitability and better asset quality

Asset quality of NBFCs next only to that of private banks but far better than

other scheduled and PSU banks

NBFCs share growing marginally in overall credit

21.3% 20.9% 20.3%

48.2% 48.2% 47.2%

4.5% 4.6% 4.6%

18.0% 18.4% 19.6%

5.7% 5.5% 5.8%

0%

20%

40%

60%

80%

100%

120%

FY13 FY14 FY15

SBI & Associates Nationalized Banks Foreign Banks

Regional Rural Banks Private Banks NBFC

Source: Basic Statistical Returns of Scheduled Commercial Banks in India , ASSOCHAM PWC Report on NBFC, Ventura Research

Higher operating ratios for NBFC

0.4%

4.8%

2.2%

10.6%

1.2%

11.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

RoA RoE

Scheduled commercial banks NBFCs Edelweiss

Source: Financial Stability Report 2016,Ventura Research

As on FY16



Key investment highlights:

The business of EFSL can be broadly divided into Credit, Non Credit and Insurance

Credit Business: Assets set to double over the next four years

A structured and methodical approach has aided in the brisk growth of its credit

portfolio:

From the onset of its foray into the credit business EFSL has adopted a very conservative

and methodological approach in lending:-

They have avoided lending to risk prone sectors (viz. Power, Infra and Auto

loans)

They have emphasized on diversification to curtail risk and have operated like a

typical bank despite being in a non banking framework.

After identifying 55 credit opportunities within the lending space they have

strategically chosen verticals which have high growth

Once a potential high growth credit opportunity is identified they assign its

responsibility to a carefully chosen business head who has experience,

knowledge and the ability to handle the business

All aspects of the business segment are subject to intense scrutiny to understand

feasibility, operational issues and all risks involved

GNPA NNPA

3.8%4.5%

5.2%

9.6%

3.0%

4.0%4.4%

7.6%

1.8%

1.7%

2.0%2.7%

1.5%1.8%

3.3%

4.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FY13 FY14 FY15 FY16

NBFC Pvt banks All Sch banks PSUBanks

2.0%

2.7%

3.2%

6.1%

1.7%

2.3%2.5%

4.6%

0.7%

0.8%1.0%

1.3%

0.7%1.0%

1.5%

2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

FY13 FY14 FY15 FY16

NBFC Pvt banks All Sch banks Psu Banks

Source: Financial Stability Report 2016, Ventura Research

Source: Financial Stability Report 2016 ,Ventura Research



Once all the nitty-gritty elements has been sorted out and operational risks

addressed, a full fledged roll out is undertaken.

Loan book to grow at a brisk rate with increased focus on retail lending

Over the period FY12-16, the loan book has grown at a CAGR of 43.0% to Rs. 20,014

crore, driven by wholesale lending. Wholesale lending comprises of structured

collateralized credit to corporates and real estate finance while retail lending includes

housing finance, LAP, SME, Agri finance and Rural finance. During the period FY14-16,

NII has grown from Rs.520 crores to Rs.1,192 crores while asset quality has been

commendably maintained at less than 1.5% despite a challenging period.

Currently EFSL’s lending book is skewed towards wholesale lending which contributes

70% while retail lending contributes the remaining 30%. However going forth, we expect

that increased thrust on the retail segments will lead to a more balanced spread between

the two segments. Overall we expect the loan book to grow at a CAGR of 22.7% from

FY16-19 to Rs.35,748 crores with the thrust being on growing the retail book.

Advances book by verticals

Products FY14 FY15 FY16 FY17E FY18E FY19E% of total book

as on FY16

% of total book

as on FY193 Year CAGR

Wholesale book 5815 12954 13993 14249 16506 18939 70% 53% 11%

Structured collaterized book 6014 6750 8100 9558 11087 34% 31% 18%

Distress Asset Book 1226 1896

Wholesale mortgage 5714 5347 6149 6948 7852 27% 22% 14%

Retail book 2089 2105 6021 10213 13293 16809 30% 47% 41%

Retail mortgage 752 2641 3169 3740 4301 13% 12% 18%

Agri & Rural financing 301 590 944 1369 1848 3% 5% 46%

Loan against shares 451 1940 3500 4025 4629 10% 13% 34%

SME & others 601 850 2600 4160 6032 4% 17% 92%

Total Credit book 7904 15059 20014 24462 29800 35748

Earlier a associate, now a subsidiary. So loan book converted into caoital




Wholesale lending: Backbone of historical growth

As a strategy, EFSL gives loans to corporates with high collateral (~2.5 times) or on the

basis of a strict check on the credit worthiness of the counter party. Collateral may be in

liquid or illiquid form. Its sub-divisions include:

o Structured collateralized credit to corporates

o Wholesale mortgage which caters to real estate developers

o Distress asset book which is now converted into capital of EFSL, as its ARC arm

has become a subsidiary.

Wholesale book share to dwindle to 53%

FY16

Wholesale Retail

Source: EFSL, Ventura Research

on the back of faster growth of retail book

FY19

Wholesale Retail



Overall we expect the wholesale book to grow at a CAGR of 10.6% over FY16-19 to

Rs.18,939 crore.

Retail lending: A future thrust area

EFSL’s retail lending includes housing finance, LAP, SME, Agri finance and Rural

finance. Overall we expect the retail book to grow at a CAGR of 40.8% to Rs.16,809

crore over the period FY16-19.

Wholesale book

0

5000

10000

15000

20000

FY15 FY16 FY17E FY18E FY19E

Structured Collateralized Assets Distressed Assets Credit

Wholsesale Mortgage

Rs in Cr


Degrowth, as ARC business is converted into subsidiary

Retail book to grow at blistering pace

0

2000

4000

6000

8000

10000

12000

14000

16000

18000


Retail Mortgage Agri & Rural Financing Loan against Shares SME & Others

Rs in Cr




EFSL’s retail mortgage book is expected to grow at a CAGR of 17.6% over FY16-19 to

Rs.4,301 crores. The company has rightly chosen to foray into and expand its housing

finance business considering under penetration of the mortgage market, the gap between

demand and supply and improved affordability as a result of tax incentives.

Agri and Rural finance to grow at a CAGR of 46.3% over FY16-19 to Rs.1,848 crores.

EFSL’s Agri financing also involves providing loans to farmers against which the farmers

keep their stock as collateral in EFSL’s warehouses. For this EFSL earns warehousing

charges in addition to financial income. Today, EFSL is the second largest warehousing

company (315 warehouses) with a capacity of 13.2M tones. It is planning to grow its

warehouses to 500–600 by FY19.

SME finance is expected to grow at CAGR of 92.2% over FY16-19 to Rs.6,032 crores.

With the growing contribution of the SME segment to the economy, the government has

taken a good number of initiatives to encourage the growth of this sector. Considering

this opportunity EFSL has forayed to expand its SME book.

NII to increase steadily with marginal increase in NIMs

Over the period FY14-16, the NII has grown at a scorching pace of 51.4% CAGR to

Rs.1192 crore. Going ahead we expect the NII to increase to Rs.2,270 crore by FY19 (3

Year CAGR of 23.9%). Driven by a surge in retail lending overall yields are expected to

fall by 80bps to 15.4% by FY19. However NIMs are expected to improve marginally by

10bps to 6.9% given the improved cost of funds.

NII NIMs

520

804

1192

1518

1858

2270

0

500

1000

1500

2000

2500

2014 2015 2016 2017E 2018E 2019E

Rs. in Cr

6.7% 6.7% 6.8% 6.8% 6.8% 6.9%

10.1%10.9% 10.7% 10.5% 10.4% 10.3%

15.1%15.8% 16.2%

15.6% 15.5% 15.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2014 2015 2016 2017E 2018E 2019E

NIM Cost of funds Yields





Cost to Income to witness continuing improvement:

Over the years, the C/I have declined from 48% in FY14 to 44% in FY16. As the benefits

of size accrue we expect the C/I to fall further to 41% by FY19. However the pace of

decline would be significantly lower as the retail book rollout consumes more cost than

wholesale lending.

Asset quality to remain stable:

EFSL has been a step ahead of its peers in managing its asset quality. We have factored

in a deterioration of 30bps/15bps in GNPA/NNPA to 1.7% / 0.7% by FY19.

Cost to Income to decline with increase in credit book

48%

46%

44%

43%

42%

41%

36%

38%

40%

42%

44%

46%

48%

50%

2014 2015 2016 2017E 2018E 2019E


GNPL NNPL

0.90%

1.30%

1.40%

1.50%

1.60%

1.70%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2014 2015 2016 2017E 2018E 2019E

0.20%

0.40%

0.50%

0.55%

0.60%

0.70%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

2014 2015 2016 2017E 2018E 2019E





EFSL has a better asset quality than its peers High capital adequacy ensures room for ample growth:

As on FY16, the CAR of EFSL stood at 16.7%. While the CAR is sufficient to cater to its

future growth, we expect EFSL to raise capital in FY18.

High Capital Adequacy to drive future growth

15.312.9 12.3 11.6

10.5

4

3.83.6

3.43.2

0

5

10

15

20

25


Tier I Tier II

In %


GNPL NNPL

1.4% 1.4%

2.7%

7.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Edelweiss IIFL L&T Finance holding

Magma Fincorp

0.5% 0.5%

1.7%

5.7%

0%

1%

2%

3%

4%

5%

6%

Edelweiss IIFL L&T Finance holding

Magma Fincorp





Non - Credit Business

Wealth Management: The next growth driver

AUM to grow at a scorching pace

After Kotak and IIFL, EFSL is the 3rd largest wealth management company in India in

terms of AUM size. EFSL has witnessed its wealth management business growing at a

scorching pace of 82% CAGR in its Asset under Advice (AUA) over the period FY14-16.

Presently, EFSL is serving 300 Ultra High-Net worth individuals and more than 1,100 high

net worth families. We expect AUA to grow at a CAGR of 38.0% over the period FY16-19

to Rs.77,600 crore driven by:

Strong branding of its franchise ‘Edelweiss’

Aggressive spend towards building the franchise

Favorable capital markets

Hallmark equity research

Credit business at a glance

Particulars FY16 FY17E FY18E FY19E

Interest Income 2894 3475 4194 5038

(-) Interest expended 1701 1957 2336 2768

Net Interest Income 1192 1518 1858 2270

Growth (%) 27.3% 22.4% 22.2%

Operating cost 562 674 809 960

Operating Income 630 844 1049 1310

(+) Other Income 40 49 60 71

Total income 671 893 1108 1381

Provision 160 216 250 288

Profit before tax 511 678 858 1094

Tax 174 230 292 372

Profit After Tax 337 447 566 722

Growth (%) 32.7% 26.6% 27.5%

(Rs in crore)




Building a platform for future growth:

The profitability of the wealth management business has yet to start unraveling as the management is burning cash in order to build a franchise of respectable size. This is in keeping with its aspirations of fast closing the gap with its peers. Currently, the cost to income ratio stands at ~98% as EFSL has invested heavily in technology and manpower. However we believe that the company is at an inflection point and profitability should ensure, given the expected aggressive expansion of its AUM to Rs.77,600 crore over FY19 and optimum utilization of its human resources. Over the period FY16-19 we expect the cost to income to improve by ~3300bps to ~65% - 70% by FY19 from the current level of ~98%.

Investment in technological up-gradation to continue

EFSL has also recently signed an agreement for technology business transformation for its two key businesses –Wealth Management and Insurance, where it will undertake about 15 projects across these businesses and spend close to Rs.100 to 175 crore over the next 5-years.

Wealth Management AUM

8900

17750

29500

49500

62000

77600

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

2014 2015 2016 2017E 2018E 2019E

In Rs. Cr


Outcome of wealth management business


Commission & fee 201 336 474 593

Growth 67% 41% 25%

Operating Expense 197 295 355 386

Growth 50% 20% 9%

Operating profit 4 40 118 208

Growth 903% 194% 75%

(Rs in crore)




Asset Reconstruction (ARC): How the ARC business works?

Asset reconstruction companies (ARCs) are formed as a response to a systemic crisis to

protect commercial banks by creating one ‘bad bank’ that takes over the stressed loans of

the entire system. It is a market-driven model that allows banks to take their own decisions

to sell bad loans to ARCs, based on bilateral negotiations and/or auctions.



The market for stressed assets is not adequately developed in India and ARCs are facing

capital constraints.

ARC: A business with latent benefits:

The main objective of EFSL in acquiring any book is to turnaround the company for

unlocking maximum value. On an average it takes around 5-7 years to get money back to

the ARC Company. EFSL ARC which got its license in the year of 2009 is relatively a

Funding for ARC business to improve

2427

3128 30

3430 31 32 34

43

69

0

10

20

30

40

50

60

70

80

FY10 FY11 FY12 FY13 FY14 FY15

Owned funds total assets

In Rs. Billion


Indian ARC market to mature further

90110

70100

500 500

20 305

30

200 210

0

100

200

300

400

500

600


Book value of asset acquired Acquisition cost

In Rs. Billion




new business with an AUM of Rs.9,200 crores in FY14 which has rapidly grown to

Rs.31,100 crores as on H1FY17. As these funds (Capital + bonus) start returning, the

ARC business will make a serious contribution to EFLS’s profitability. Any bonus accruals

will be a windfall over and above the invested capital.

EFSL’s ARC AUM has increased at a CAGR of 71.6% over the period FY14-16 to

Rs.27,100 crore. This is expected to grow at CAGR of 26.3% by FY19 to Rs.54,522 crore

on the back of:

NPA problem plaguing the banking sector As NPAs in the banking system have soared to ~6.3 lakh crore, we see a huge

opportunity for ARC companies. However the banking companies are still not interested

in offering their NPAs to ARC companies as they are expecting higher valuations for their

accounts. However, as the NPA woes persist, we expect more banks to unload their

stressed assets on to ARCs. Recently there is an encouraging trend of high value

accounts being turned over to ARC companies.

Reworking of business enhances confidence in business model EFSL has a robust team of specialists, acknowledged for their experience in

debt/business restructuring as well as strong executional capabilities. The Team chooses

case-specific appropriate resolution strategies to unlock maximum value from financially

stressed or distressed companies for the benefit of all stake holders. The primary focus of

ARC has been on the revival and turnaround of potentially viable industrial enterprises

and towards this end, EFSL draws synergistic support from the EFSL Group to extend

additional need based funding, if any required.

ARC AUM

9200

20000

27100

35772

44715

54552

0

10000

20000

30000

40000

50000

60000

2014 2015 2016 2017E 2018E 2019E

In Rs. Cr




Fund investment of Rs.5,000 crore provides for the next leg of growth CDPQ has targeted investment of Rs.5,000 crore 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). Investment will be in the form of equity as well

as debt. The same is the single largest investment by an institutional investor in this

sector. The partnership aims to channel between Rs. 12,000-14,000 crore (including

CDPQ’s Rs. 5,000 crore and investments from the EFSL Group and other international

institutional investors) into private debt and restructuring of stressed assets in the

country.

Contribution from the ARC is expected to grow at a CAGR of 43% to Rs.245 crores from

the current Rs.83 crore.

Asset Management: Industry in a sweet spot

Assets managed by the Indian mutual fund industry have grown from Rs. 5.87 lakh crore

in FY12 to Rs.12.32 lakh crore in FY16 representing a growth of CAGR 28% in assets

over FY12-16.

Contribution from ARC business


(Rs in crore)

Commission & Fee 389 534 684 844

Growth 38% 28% 23%

Other Income 48 65 81 97

Total Income 437 599 765 941



Growth 59% 39% 33%




EFSL’s mutual fund business is set to benefit with the growing brand value of EFSL. Its

AUM from asset management has grown at a CAGR of 19.9% to Rs.5,000 crore over

FY14-16. However post the acquisition of a few schemes from its peers we expect the

AUM to grow at CAGR of 91.3% to Rs.35,000 crore over the period FY16-19.

AMC AUM

2900 3000

5000

20000

28000

35000

0

5000

10000

15000

20000

25000

30000

35000

40000

FY14 FY15 FY16 2017E 2018E 2019E

In Rs. Cr

Source: EFSL , Ventura Research

Mainly due to acquisition of JP Morgan and Ambit alpha schemes

Indian Mutual Fund Industry AUM

5.9

7.0

8.3

10.8

12.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY12 FY13 FY14 FY15 FY16

Mutual Fund AUM

In Rs. lakh crore




Growth through acquisition

EFSL is expanding its asset management business through acquisition of schemes.

Recently it has acquired 2 schemes of JP Morgan and Ambit Alpha Fund, whose formal

closure is expected by end of FY17. As per the deal between EFSL and JP Morgan,

EFSL would acquire all onshore fund schemes managed by JP Morgan Asset

Management in India including its country-based onshore mutual fund business and the

international fund of funds. EFSL is also acquiring Ambit Alpha Fund with an AUM of over

Rs.1,100 crore. The transaction is subject to due diligence and requisite regulatory

approvals. Acquisition of both these schemes will take the overall AUM to ~Rs.15,000

crores.

Profitability to come in with increase in AUM

Currently EFSL AMCs business contribution is quite low; however post the acquisition of

JP Morgan and Ambit schemes and increased efforts to grow the AMCs AUM should lead

to higher contribution. We expect EFSL AMC’s AUM to increase at a CAGR of 91.3%

over FY16-19 to Rs.35,000 crore (including acquisition of above mentioned schemes).

The contribution from the AMC business is expected to grow at CAGR of 153% to Rs.83

crore over the period FY16-19 from current level of Rs.5 crores.

Capital Markets: India’s ‘Star’ market status augurs well for future growth

Brokerage business to grow along with capital markets

EFSL has a good mix of retail and institutional clients in its daily trading volumes.

However we expect a marginal increase in profit from this business considering the

increased participation from institutional clients. Apart from broking, EFSL also provides

various need based capital market services to its clients.

AMC Outcome


Commission & Fee 14.2 68.8 156.0 236.3

Growth 385% 127% 51%


Total Income 20 75 163 244



Growth 343% 131% 59%

(Rs in crore)




Brokerage Average Daily Volumes

3100

50005200

6700

0

1000

2000

3000

4000

5000

6000

7000

8000

FY14 FY15 FY16 H1FY17

Nos. in '000 Cr


Outcome of Capital Market business


Brokerage income 232 242 254 270

Fee Income 292 356 420 483

Total Income 524 598 675 753

14% 13% 12%

Operating expense 394 439 479 507


Growth 23% 23% 26%

(Rs in crore)




Industry trends for the Indian Capital Markets Life Insurance: Under penetration implies huge opportunity

In 2016, the size of the Indian life insurance sector (excluding Sahara Life Insurance

Company Limited) was Rs. 3.7 lakh crore on a total premium basis, making it the tenth

largest life insurance market in the world and the fifth largest in Asia [According to Swiss

Re, sigma No 3/2016].

Market Capitalization NSE (In Rs’000 Crore) Number of shares listed on NSE

67

03

60

97

62

39

72

78

99

30

93

10

35

95

42

73

49

28

51

29

57

39

59

65

0

2000

4000

6000

8000

10000

12000


Capital Market Wholesale Debt Market

In Rs. '000 Cr

1646

1666

1688

1733

1808

1550

1600

1650

1700

1750

1800

1850


Number of shares listed

In Nos.

Source: NSE Fact Book 2016, Ventura Research

Source: NSE Fact Book 2016,Ventura Research

Trading value of different market segments (INR Cr)

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000


Capital Markets Equity F&O Currency F&O

In Rs. Cr

Source: NSE Fact Book 2016 , Ventura Research



The total premium in the Indian life insurance sector grew at a CAGR of ~ 17% between

fiscal 2001 and fiscal 2016. Despite this, India continues to remain an underpenetrated

insurance market with a life insurance penetration of 2.7% in fiscal 2015, as compared to

3.7% in Thailand, 7.3% in South Korea and a global average of 3.5% in 2015. This under

penetration offers a significant opportunity and augurs well for the future grows of EFSL’s

insurance business.

Partnership with Tokio Life Insurance

EFSL expanded its addressable retail market by launching EFSL Tokio life insurance

company (ETLIC) in 2011 in partnership with Tokio Marine of Japan. EFSL Tokio was

launched with the highest startup capital for an Indian Life Insurer with Rs.550 crore.

Tokio Marine infused fresh capital of Rs.530 crore taking its share to 49% with EFSL

holding the remaining 51%. Its net worth at the end of FY16 was Rs.939 crore.

Fastest growing insurance company

Over the period FY14-16 ETLIC has emerged as the fastest growing life insurance

company in India with gross premium growing at 68.1% CAGR to Rs.300 crore. ETLIC is

continuously expanding its footprints across agency and partnership with direct channels.

The JV has also scaled up its personal financial advisors. We expect gross insurance to

grow at a CAGR of 52.0% to Rs.1,054 crore by FY19.

Premium as % of GDP as of fiscal 2015 Insurance Density (Prem. Per Capita (US$)) as of fiscal 2015

12.0%

8.3%

7.3%

3.7%3.1%

2.7%2.0%

1.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

S. Africa Japan S. Korea Thailand US India China Indonesia

2717

19401719

688

215 178 15343 43 17 15

0

500

1000

1500

2000

2500

3000

Source: Swiss Re, sigma No 3/2016, Ventura Research

Source: Swiss Re, sigma No 3/2016,Ventura Research



The JV is expected to continue to be in investment phase and breakeven is

expected only by FY2021 onwards.

Insurance premium

106

187

300

495

753

1054

0

200

400

600

800

1000

1200

FY14 FY15 FY16 FY17E FY18E FY19E

In Rs. Cr


Insurance business outcome


(Rs in crore)

Premium 300 495 753 1054

Growth 65% 52% 40%


Total Income 387 590 855 1166

Cahnge in liability 255 354 487 641

Other Expense 287 413 538 664

Total Expense 542 767 1026 1305

PAT -155 -177 -171 -140




Financial Performance:

Credit business

The overall credit book of EFSL grew by 29.6% YoY to Rs.21,349 crore (Excluding

Distress Asset Credit) in Q2FY17. Robust increase in the wholesale segment contributed

to NIM expansion by 20 bps. Overall yield also increased by 10bps to 16.2%. Asset

quality slightly declined as GNPA and NNPA increased by 10 bps each.

Financial performance

Particulars Q2FY17 Q2FY16 FY16 FY15

Income from operation

Fee & Commission 240.5 148.0 696.6 572.7

Fund based activities 1227.7 1017.8 4170.4 3082.0

Premium from life insurance 84.6 57.5 300.2 186.6

Other operating income 39.3 16.4 86.8 38.5

Total income from operation 1592.1 1239.7 5253.9 3879.8

Expenses

Employee benefit expenses 276.5 213.4 882.1 708.6

Depreciation & ammortization

expense 22.8 20.7 90.2 71.6

Change in life insurance policy

liability 86.8 49.6 255.5 139.5

Other expense 268.9 188.1 849.0 632.6

Total expense 655.0 471.8 2076.8 1552.4

Profit / (Loss) from operation

befor other income 937.1 767.9 3177.1 2327.4

Other Income 4.4 0.6 14.2 14.0

Profit / (Loss) from ordinary

activities before finance cost 941.5 768.5 3191.3 2341.4

Finacne cost 708.9 637.7 2620.1 1831.5

Profit / (Loss) before tax 232.6 130.8 571.2 509.9

Tax expense 96.8 48.2 235.4 201.7

Net profit /(Loss) after atx 135.8 82.6 335.8 308.2

Share of profit/ (Loss) of

associates 4.9 8.2 47.7 18.1

Minority interest -3.7 -4.9 -30.9 -2.4

Consolidated profit / (Loss) 144.4 95.7 414.4 328.7




Non Credit business

Wealth Management AUM grew by 126% YoY to Rs.44,200 crore for Q2FY17.

Asset management AUM has grown to Rs.6,900 crore for Q2FY17 excluding

acquisition of JP schemes.

ARC AUM has grown to Rs.31,100 crore.

Gross premium income from life insurance also grew 49% YoY to Rs.85 crore.

Financial Outlook:

Consolidated earnings are expected to grow at a CAGR of 35.6% to Rs.1032 crores

by FY19 driven by:

Credit book set to double in next four years while NII to grow strongly at a CAGR

of 23.9% over FY16-19 to Rs.2,270 crore.

Rapid growth in the wealth management AUM should lead to higher traction in

earning from wealth management.

Capital infusion from CDPQ should cater to planned growth of the ARC business

with RBI getting aggressive on cleaning up NPAs of banking companies. We

expect opportunity to ARC companies to grow over the next couple of years.

Broking business to grow along with growth in capital markets

AMC to grow with acquisition of JP Morgan and Ambit schemes.

Rapid expansion of insurance business.

.

PAT Bifurcation

170 230337

447566

722

101

152

182

241

311

396

-51 -53 -104 -110 -121 -86

-200

0

200

400

600

800

1000

1200

FY14 FY15 FY16 FY17E FY18E FY19E

Credit Non Credit Insurance

220

329

414

578

757

1032




Valuation

As EFSL is a well diversified NBFC, we have adopted the SOTP method to value the

company. We initiate coverage on Edelweiss Financial Services Ltd with a BUY with a

price objective of Rs.217 representing a potential upside of 75.0% over the next 21

months.

P/BV


0

20

40

60

80

100

120

140

CMP 0.3X 0.8X 1.3X 1.8X 2.3X

SOTP valuation of EFSL

Business Segment Valuation basis Multiple Business valueHolding company

discount

Value after holding

company discount

Value per

share

(Rs. In Cr) (Rs. In Cr) (Rs.)

Credit P/Adj book value 2.7 X 10528 13% 9160 110

Wealth management % of AUM 5% 3880 10% 3492 42

ARC % of AUM 5% 2728 10% 2455 30

AMC % of AUM 5% 1750 10% 1575 19

Broking PE 13 X 451 10% 406 5

Insurance Networth 1.2 X 543 10% 488 6

BMU & Others Book value 1.0 X 470 10% 423 5

Enterprise Value 20350 17999 217




P/E

0

20

40

60

80

100

120

140

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

CMP 8X 12X 16X 20X 24X




Financials and Projection

Y/E March (` crore) FY16 FY17E FY18E FY19E Y/E March (` crore) FY16 FY17E FY18E FY19E

Income Statement Ratio Analysis

Interest Income 2,898.9 3,453.7 4,166.3 4,999.3 Efficiency Ratio (%)

Interest Expense 1,701.0 1,956.7 2,336.3 2,768.1 Int Expended / Int Earned 58.7 56.7 56.1 55.4

Net Interest Income 1,197.9 1,497.0 1,830.0 2,231.2 Int Income / Total Funds 78.9 81.2 83.2 82.8

YoY change (%) 25% 22% 22% NII / Total Income 33.8 30.3 30.4 31.0

Non Interest Income 2,351.2 3,445.9 4,191.8 4,973.5 Other Inc. / Total Income 66.2 69.7 69.6 69.0

Total Net Income 3,549.1 4,942.9 6,021.8 7,204.7 Ope. Exp. / Total Income 78.8 78.5 76.0 72.0

Total Operating Expenses 2,795.1 3,878.9 4,579.4 5,186.8 Net Profit / Total Funds 11.3 13.6 15.1 17.1

Pre Provision profit 754.0 1,064.0 1,442.4 2,017.9 Credit / Deposit

YoY change (%) 41% 36% 40% Investment / Deposit

Provisions for expenses 182.6 215.5 250.0 287.5 NIM 6.8 6.8 6.8 6.9

Profit Before Tax 571.3 848.4 1,192.4 1,730.4

YoY change (%) 49% 41% 45% Solvency

Taxes 235.4 339.4 482.9 709.5 Gross NPA (Rs. Cr) 280.2 366.9 476.8 607.7

Reported PAT 336.0 509.1 709.5 1,020.9 Net NPA (Rs. Cr) 100.1 134.5 178.8 250.2

YoY change (%) 52% 39% 44% Gross NPA (%) 1.4 1.5 1.6 1.7

Minority Interest 30.9 39.3 22.3 -8.7 Net NPA (%) 0.5 0.6 0.6 0.7

Share of Associate 47.7 30.0 25.0 20.0

PAT 414.6 578.3 756.7 1032.2 Capital Adequacy Ratio (%) 17.5 16.1 14.9 13.2

YoY change (%) 40% 31% 36% Tier I Capital (%) 13.7 12.5 11.5 10.0

Tier II Capital (%) 3.8 3.6 3.4 3.2

Balance Sheet

Cash & Balances with RBI 1,934.0 1,672.0 1,602.0 1,550.0 Per Share Data (`)

Inter bank borrrowing EPS 5.0 7.0 9.1 12.4

Investments 2,628.0 2,966.1 3,203.4 3,395.6 Dividend Per Share 1.3 1.3 1.3 1.3

Loan and Advances 20,014.0 24,462.3 29,799.9 35,748.2 Book Value 45.1 51.2 60.3 72.7

Other Assets 12,229.0 14,604.7 15,833.4 16,972.4 Adjusted Book Value of Share 45.1 49.5 58.1 69.7

Total Assets 36,805.0 43,705.0 50,438.6 57,666.2

Deposits Valuation Ratio

Demand Price/Earnings (x) 24.8 17.7 13.6 9.9

Savings Price/Book Value (x) 2.7 2.4 2.0 1.7

Term Price/Adj.Book Value (x) 2.7 2.5 2.1 1.8

Borrowings 27,773.0 33,090.0 36,700.0 41,500.0

Other Liability 5,357.1 6,363.9 8,730.7 10,126.2 Return Ratio

Equity 81.4 81.4 81.4 81.4 RoAA (%) 1.2 1.4 1.6 1.9

Reserves 3,593.5 4,169.7 4,926.4 5,958.6 RoAE (%) 11.3 13.6 15.1 17.1

Total Liabilities 36,805.0 43,705.0 50,438.6 57,666.2

Growth Ratio (%)

Dupont Analysis Interest Income 22.9 22.8 19.0

% of Average Assets Interest Expenses 17.32 20.82 17.77

Net Interest Income 3.6 3.7 3.9 4.1 Other Income 37.03 21.87 18.54

Non Interest Income 7.0 8.6 8.9 9.2 Total Income 34.9 23.0 19.2

Net Income 1.2 1.4 1.6 1.9 Net profit 25.6 35.9 44.7

Operating Expenses 8.3 9.6 9.7 9.6 Deposits

Operating Profit 2.2 2.6 3.1 3.7 Advances 22.2 21.8 20.0

Provisions & Contingencies 0.5 0.5 0.5 0.5

Taxes 0.0 0.0 0.0 0.0

Avg.Assets / Avg.Equity (x) 9.8 10.2 10.2 9.8



Disclosures and Disclaimer Ventura Securities Limited (VSL) is a SEBI registered intermediary offering broking, depository and portfolio management services to clients. VSL is member of BSE, NSE and MCX-SX. VSL is a depository participant of NSDL. VSL states that no disciplinary action whatsoever has been taken by SEBI against it in last five years except administrative warning issued in connection with technical and venial lapses observed while inspection of books of accounts and records. Ventura Commodities Limited, Ventura Guaranty Limited, Ventura Insurance Brokers Limited and Ventura Allied Services Private Limited are associates of VSL. Research Analyst (RA) involved in the preparation of this research report and VSL disclose that neither RA nor VSL nor its associates (i) have any financial interest in the company which is the subject matter of this research report (ii) holds ownership of one percent or more in the securities of subject company (iii) have any material conflict of interest at the time of publication of this research report (iv) have received any compensation from the subject company in the past twelve months (v) have managed or co-managed public offering of securities for the subject company in past twelve months (vi) have received any compensation for investment banking merchant banking or brokerage services from the subject company in the past twelve months (vii) have received any compensation for product or services from the subject company in the past twelve months (viii) have received any compensation or other benefits from the subject company or third party in connection with the research report. RA involved in the preparation of this research report discloses that he / she has not served as an officer, director or employee of the subject company. RA involved in the preparation of this research report and VSL discloses that they have not been engaged in the market making activity for the subject company. Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of VSL. This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients / prospective clients of VSL. VSL will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of clients / prospective clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. And such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by VSL, its associates, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts. The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. We do not provide tax advice to our clients, and all investors are strongly advised to consult regarding any potential investment. VSL, the RA involved in the preparation of this research report and its associates accept no liabilities for any loss or damage of any kind arising out of the use of this report. This report/document has been prepared by VSL, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. VSL has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change. 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The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of VSL and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. 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Edelweiss Financial Services Ltd. - Powerchats.moneycontrol.com/.../EdelweissFinancial_PYT.pdf · Edelweiss Financial Services Ltd. BUY ... Edelweiss Credit Wholesale AUM - Rs. 13306