Hold Edelweiss Financial Services Ltd For Target Rs. 72 - Emkay Global
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Lending book to consolidate further
* Edelweiss Financial (EDEL) continued to run down its loan book in Q4, reporting ~22% YoY and ~8.7% QoQ decline in AUM to Rs149.1bn. However, the pace of rundown has continued to reduce. Overall wholesale book declined to Rs114.1bn from Rs129.7bn last year and management intends to reduce it to half by FY23E.
* ECL Finance Ltd and Edelweiss Housing Finance Ltd reported collection efficiency of 94% and 99%, respectively, in March 2021. However, we remain cautious on the credit business, given the second Covid wave. EDEL also expects margins to rebound, backed by improved liability profile, well-positioned ALM and a strengthening balance sheet.
* With the second wave of Covid-19, FY22 is off to an uncertain start, and management has indicated its focus on strengthening balance sheet and liquidity. The company also intends to continue the EWM demerger process (probable listing by Q3FY23), which will be a key value unlocking event for shareholders.
* We value the company on SOTP basis and expect decline in AUM to continue with further resolution in wholesale book. Franchise business to witness gradual growth and we await for insurance business to turn profitable. We maintain Hold and remain UW in NBFC-EAP with revised TP to Rs72 (Rs66 previously), corresponding to ~1x FY23E P/Adj Book.
Consolidation in lending book continues; watchful of value unlocking:
EDEL has continued to run down its loan book in Q4, reporting ~22% YoY and ~8.7% QoQ decline in AUM to Rs149.1bn. However, the pace of rundown has continued to reduce. Of the company’s total AUM of Rs149.1bn, Rs105bn is for ECL Finance and balance Rs43.8bn is for Housing Finance. Overall wholesale book declined to Rs114.1bn from Rs129.7bn last year. Management intends to reduce it to half by FY23E.
After the stake sale in EWM (the wealth management and capital markets business) to PAG, management is optimistic about future outlook, with growth momentum returning on retail and SME/MSME lending for the group, along with a revival in its ARC business. The company also expects margins to rebound, backed by improved liability profile, well-positioned ALM and a strengthening balance sheet.
Outlook; maintain Hold/UW:
The positive factors associated with growing focus on retail lending and decent performance of wealth and asset management businesses were offset in part by credit and concentration risks in the group’s wholesale lending business and risks associated with the distressed assets business. We value the company on SOTP basis and expect decline in AUM to continue with further resolution in wholesale book. Franchise business to witness gradual growth and we await for insurance business to turn profitable. We maintain Hold and remain UW in NBFC-EAP with revised TP to Rs72 (Rs66 previously), corresponding to ~1x FY23E P/Adj Book.
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