Uncertain times ahead
* EDEL reported weak Q4 results, with AUM falling for the fourth straight quarter). AUM declined 47.1% YoY and 32.2% QoQ to Rs191bn amid tight liquidity conditions and economic headwinds. Management intends to gradually run down its wholesale book. Accordingly, we expect AUMs to remain under pressure for the foreseeable future.
* The company has improved its overall borrowing profile with a decline in CPs and rise in NCD/banks. Management has highlighted its plan to collapse the holding company and issue direct equity in the various companies of Edelweiss group by issuing fresh equity of Rs10-15bn in EGIA. We await to hear more from the management regarding the revised structure.
* Gross NPAs deteriorated sequentially to 3.8% from 2.8% in Q3. The company has made provisions of Rs26bn in Q4 on account of revision in the ECL model, additional impairment to facilitate sell downs and a one-time Covid-19 provision. Management has been prudent in providing, though we believe asset quality may not be as bad as it may appear.
* We remain cautious given the current economic risks and the tight liquidity scenario. We maintain Hold with a TP of Rs64, corresponding to ~0.9x FY23E P/B on a consolidated basis. We are UW in NBFC-EAP.
Tight liquidity and adverse macro pressurize margins and trigger elevated credit costs; watchful of value unlocking:
In Q4, EDEL’s loan book dropped by ~47.1% yoy/32.2% sequentially to Rs191bn (excluding the distressed credit) as consolidation in the loan book continued amid tight liquidity conditions and headwinds in its developer finance segment.
Management has highlighted its plan of collapsing the holding company and issuing direct equity in the various companies of Edelweiss group. Management plants to issue equity of Rs10-15bn in EGIA and another Rs10-15bn in ECL Finance, if necessary. Management also plans to bring down the wholesale book to nil and focus on retail, capital markets, asset management, ARC and insurance. We await to hear more from the management regarding the revised structure.
Outlook; maintain Hold/UW:
EDEL’s positive factors associated with growing focus on retail lending and strong performance of its wealth and asset management businesses were offset in part by credit and concentration risks in the group’s wholesale lending segment and risks associated with the distressed assets business. We maintain Hold with a TP of Rs64, corresponding to ~0.9x FY23E P/B on a consolidated basis. We have an UW stance in NBFC– EAP. Key risks: Uncertainty of the wholesale book and the revival of retail credit demand.
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