Edelweiss: Multiple growth drivers

While brokerage continues to do well, insurance and other recent businesses are likely to fuel growth and spread risks

Edelweiss Financial Services’ scrip has significantly outperformed the BSE exchange’s benchmark Sensex in the past month, rising a little over 60 per cent versus the latter’s five per cent gain.

 Last Friday, it even made a new 52-week high of Rs 64.90, on reports that Rakesh Jhunjhunwala, known as India’s Warren Buffett, bought 10 million shares (about 1.3 per cent stake) worth Rs 55 crore in the company via open market deals. The rising investor interest is not surprising, as the company is placed well to gain from improving activity in the capital markets, as well as economic revival.

Unlike some peers, Edelweiss, a leading brokerage player, has successfully diversified into other financial service segments. Most of these are earning a healthy return on equity. Foreign institutional investors collectively held 39 per cent stake in Edelweiss as of March 31 — including Carlyle, the government of Singapore, Fidelity and Sequoia Capital — and this, too, provides confidence.

Edelweiss has a two per cent market share in the Indian broking services segment. It has over the past five years diversified into lending, life insurance and asset reconstruction. As these new businesses gain scale, Edelweiss’ susceptibility to volatility in the capital markets is reducing.

“Our long-term strategy of diversifying across businesses, asset classes and client segments continues to stand us in good stead. Increasingly, our profits are being contributed by multiple businesses and we have reduced concentration risk in our efforts to make the profits more sustainable,” said Rashesh Shah, chairman and chief executive, after its FY14 results.

While its brokerage business is doing fairly well compared to peers, the diversification is likely to boost growth further. The balance sheet has grown and so have profits. Consolidated net profit was up from Rs 128 crore in FY12 to Rs 178 crore in FY13 and Rs 220 crore in FY14. This has been aided by a focus on quality and profitable growth across businesses.

 

Santosh Singh of Espirito Santo Securities believes Edelweiss is on the way to a diversified financial superstore, with strong broking and investment banking franchises. “It also has the option to leverage its strong balance sheet position to grow its financing book. We view its foray into insurance (joint venture with Tokio Marine) as a potential game changer in the longer term,” he says.

In the lending/credit business, Edelweiss’ loan book has grown at a compounded annual rate of a little over 30 per cent over three years, albeit on a smaller base. This business accounted for 44 per cent (or Rs 1,112 crore) of FY14 revenue versus 15 per cent in FY08, and about three-fourth (Rs 291 crore) of the pre-tax profit of Rs 351 crore in FY14.

Analysts expect the business to grow by a little more than 20 per cent annually over the next two years (driven by housing and loans against property) and the lending business to contribute significantly to Edelweiss’ financials. A focus on retail loans, which have been growing fast, should help on profits, too.

Though its life insurance business (six per cent of revenue) is making a loss of Rs 17 crore every quarter, analysts expect it to turn around over the next two years. The rest of the revenue comes from treasury and commodities (14-15 per cent each).

At Rs 62.35, the stock trades at 16.5 times the FY15 estimated earnings and appears fairly valued. Investors with a long-term perspective can consider it on corrections.