Edelweiss - A Turnaround Idea: Shifting from Fund-Based to Fee-Based Business Model

Over the past few quarters, post the IL&FS (AAA rated) default in Sep 2018, NBFCs in India have witnessed high levels of liquidity crunch. In particular, the environment has been challenging for NBFCs with exposure to real estate developer financing, as significant liquidity crunch has led to adverse knock down effects on real estate development, bringing to halt many ongoing projects, especially in the residential sector.

Edelweiss with size-able exposure to real estate developer financing segment has definitely taken some hit it terms of asset quality. It has come under severe investor scrutiny over the past one and half years with stock price decline of ~75% from peak to trough and peak to current of ~65%. We believe market has been short-sighted and myopic in associating Edelweiss with being a real estate development financier when in reality, it derives <23% of PAT (pre-minority interest and ex-insurance) from the segment. This is when its exposure to this segment is likely to come down significantly over the next one year as Edelweiss shifts bulk of this exposure to an Alternative Investment Fund (AIF) offering.

Edelweiss is a well-diversified NBFC with multiple lines of businesses across financial services. Its businesses range from fund-based to fee-based and span across credit, advisory and insurance. We believe Edelweiss presents an attractive investment opportunity with favorable risk/reward asymmetry, as it is transitioning from a fund-based to a fee-based business model led by the below drivers:

• Booming private credit in India is helping Edelweiss accelerate its shift to fee-based model from fund-based model in its corporate credit book through co-investments and increased pace of capital raising via its AIF (Alternative Investment Fund) offerings. Note that Edelweiss is already a leader in the private credit space in India through it alternative investment fund and distressed credit offerings housed within its asset management and ARC business.
• Increasing focus on co-origination in the retail credit business
• Rising proportion of fee-based advisory services in the revenue mix as the advisory business scales

What’s Original:

• Deep-dive insights into Edelweiss through management discussions at various forums including investor day, earnings conference calls, annual reports, etc.
• Channel Check insights on culture, risk underwriting and future course of business, through interactions with current and ex employees of Edelweiss
• Catalyst Roadmap
• Detailed Sum-of-the-Parts Valuation

Insight Flow:

1. Introduction to Edelweiss
2. Large and Growing Opportunity Set for Edelweiss
3. Edelweiss’ Business Segments and Respective Key Drivers of Performance
   1. Credit Business
   2. Advisory Business
   3. Insurance Business
4. Valuation
5. Catalyst Roadmap - Next One Year

6. Channel Check Insights

7. Other Due Diligence Items

   1. Edelweiss' Key Qualitative Strengths

   2. Edelweiss' ESG Standards

8. Key Risks