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Outlook improves for retail loans amid wholesale pain

 * The run-down of EDEL’s book finally seems to have bottomed out, with AUM growing by 3.7% QoQ to Rs163bn – a decline of 58% YoY. This has come on account of the pick-up in disbursements in the SME and Housing book, while management continues to focus on recoveries in the wholesale book.

* The credit business posted a collection efficiency of 94% in Dec’20. While the company maintained 21% of borrowings (i.e., Rs62bn) as liquidity buffer, management has indicated of a reduction in liquidity as economic risks recede.

* Management remains optimistic on future outlook, with growth momentum returning in retail and SME/MSME lending for the group along with a revival in the ARC business. EDEL also expects a rebound in margins, backed by improved liability profile, well-positioned ALM and strengthening balance sheet.

* We tweak our estimates and change FY21/22 estimates by (9)/10% on improving retail lending and increasing strength in the franchise businesses. Accordingly, we revise our TP from Rs64 to Rs66, corresponding to ~1x FY23E Adj.P/B. We remain UW on EDEL in NBFC-EAP.

Consolidation in lending book continues; watchful of value unlocking: In Q3, EDEL’s loan book fell ~58.1% yoy but posted 3.7% sequential growth to Rs163bn – excluding distressed credit - as SME and Housing book saw a revival amid an improvement in economic conditions.

Management remains optimistic about future outlook, with growth momentum returning on retail and SME/MSME lending for the group, along with a revival in the ARC business. The company also expects a rebound in margins, driven by better liability profile, well-positioned ALM and strengthening balance sheet

Management has reduced D/E from 5.2x during the peak to 3.0x in Dec’20 and has stated that it would reduce further as the PAG (acquisition of 51% stake in EWM) deal would conclude. We remain appreciative of management’s efforts for balance sheet consolidation.

Outlook; maintain Hold: EDEL’s positive factors associated with growing focus on retail lending and decent 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 tweak our estimates and change our FY21/22 estimates by (9)/10% on the strength in the franchise businesses. Accordingly, we revise our TP from Rs64 to Rs66, corresponding to ~1x FY23E Adj. P/B. We remain UW on EDEL in NBFC-EAP.

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