Rating Rationale
May 08, 2017 | Mumbai
ECap Equities Limited
Rating Reaffirmed 
 
Rating Action
Rs.750 Crore Short Term Debt (Including Short Term NCD) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating on ECap Equities Limited (ECEL) continues to reflect the strong support that ECEL is expected to receive from its parent, Edelweiss Financial Services Ltd. (EFSL; rated, 'CRISIL A1+', holding company of the Edelweiss group), and its strong risk management systems for the arbitrage business. The rating strengths are partially offset by ECEL's volatile earnings profile on account of the susceptibility inherent in capital market related business.

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of ECEL. CRISIL has also factored in the support that ECEL is expected to receive from its ultimate parent, Edelweiss Financial Services Ltd. (EFSL).

Key Rating Drivers & Detailed Description
Strengths
* Strong support from parent
ECEL's primary business is arbitrage trading, which is an integral part of the group's liquidity and balance sheet management operations. The Edelweiss group has been carrying out this business since 2001. EFSL, the holding company of the Edelweiss group, holds 100% economic interest in ECEL. The Edelweiss group had a net worth of Rs 4372 crore and a total asset base of Rs 37985 crore as on March 31, 2016. It has been diversifying its business and earnings profile over the past few years and has built significant competitive position across multiple business segments. The group also has a comfortable liquidity policy; the liquidity cushion, which was around Rs 1000 crore till March 31, 2014, increased to Rs 3300 crore as on March 31, 2016 and is being further increased to be at a level of around 10% of the balance sheet size. Given that arbitrage trading is one of the long-standing businesses of the group and that it has built significant expertise in this business, CRISIL believes that ECEL will benefit from strong support from the parent.
 
* Strong risk management systems for the arbitrage business
The group has also put in place strong systems and processes to manage the arbitrage trading business. While arbitrage trading is inherently low risk in nature when the positions are fully hedged, certain strategies can involve a directional element or open position, and therefore, carry a higher element of risk. While the group undertakes positions across the risk spectrum within arbitrage trading, it operates within the pre-defined VaR limit. These limits are very comfortable in relation to the group's networth. Breaches of the VaR limit have been rare. Given the group's long-standing expertise in arbitrage trading, CRISIL believes it is well-equipped to manage any potential risks in this segment.
 
Weakness
* Volatile earnings profile on account of the susceptibility inherent in capital market related business.
Earnings in the arbitrage business are susceptible to opportunities in the market, which is inherently cyclical. Arbitrage volumes and earnings are heavily dependent on the level of trading activity in the capital markets. Furthermore, the arbitrage trading business is also exposed to regulatory changes. There have been several regulations in the arbitrage business in the past few years, including imposition of securities transaction tax (STT) and change in tax treatment of STT. These regulations have had a significant impact on the volumes and profitability of the business. To some extent, these risks are partially offset by the fact that ECEL engages in arbitrage trading across multiple asset classes, which allows them to capitalize on opportunities in whichever segment they may be present.

About the Company and Group
ECEL, incorporated in 2008, is a part of the Edelweiss group. It is primarily engaged in arbitrage trading. It also has significant equity stake in group companies and has also invested in their preference shares. For 2015-16 (refers to financial year, April 1 to March 31), ECEL reported profit after tax (PAT) of Rs 49.8 crore on total income of Rs.625.1 crore, against PAT of Rs 47.9 crore on total income of Rs.322.0 crore for fiscal 2015.
 
The Edelweiss group comprised Edelweiss Financial Services Ltd (EFSL, the parent company), 63 subsidiaries, and 6 associate companies as on March 31, 2016. The group conducts its business from 237 offices (including 9 international offices) across 122 cities as on March 31, 2016. Its main business lines are credit (comprising wholesale, retail, SME, and agricultural financing), non-credit businesses (comprising financial markets-related fee businesses, asset management and commodities) and life insurance. These businesses entail loans to corporates and individuals, mortgage finance, including loans against property and small-ticket housing loans, SME finance, commodity sourcing and distribution, life insurance, institutional and retail equity broking, corporate finance and advisory, wealth management, third-party financial products distribution, and alternative and domestic asset management. In addition, the balance sheet management unit focuses on liquidity and asset-liability management.

For 2015-16, the Edelweiss group reported profit after tax (PAT) of Rs 414 crore on total income of Rs.5316 crore, vis-a-vis PAT of Rs 329 crore on total income of Rs 3912 crore for fiscal 2015. For the nine months ended December 31, 2016, the group reported a PAT of Rs 439 crore on a total income of Rs 4,689 crore as against Rs 293 crore and Rs 3777 crore respectively in the corresponding period in the previous year.

Any other information:
On December 26, 2016, CRISIL had upgraded the long term ratings of the Edelweiss group companies based on the increasing share of retail and small and medium enterprise (SME) loans to its overall credit book over the past few years. In terms of diversification in lending, the share of retail and small and medium enterprise (SME) loans increased to almost 38% per cent of the group's overall loan portfolio (excluding loans to its associate company and distressed assets credit) as on September 30, 2016 from 18% four years earlier; this portfolio stood at Rs 8,040 crores as on September 30, 2016. The share is expected to continue to increase further over the medium term with the group planning to do most of its incremental real estate lending from the real estate fund which is being launched. The increasing trend in share of retail and SME loans in the overall credit book is expected to increase the granularity of its lending portfolio. The group has scaled up its retail and SME credit book while maintaining its asset quality. The gross non-performing assets (GNPA) stood at 1.46% as on September 30, 2016 and has been under or around 1.5% for the past several years. However, the GNPA levels have seen an increasing trend (increasing from 0.95% as on March 31, 2014) and it remains a key rating monitorable. The gearing decreased marginally to 6.4 times as on September 30, 2016, from 6.6 times on March 31, 2016. At the same time, the net gearing excluding the liquid assets of Balance Sheet Management Unit (BMU) stood at 5.1 times as on September 30, 2016. Although the gearing has been lower than CRISIL's expectations, it still remains higher than its peers.

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Banker Name Date of Allotment Coupon Rate (%) Maturity Date Issue Size (INR. Crs) Rating Assigned with Outlook
NA Short Term Debt (including Short Term NCD) NA NA NA 7-365 days 750 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Short Term Debt (including Short Term NCD) ST  750  CRISIL A1+    No Rating Change  18-03-16  CRISIL A1+    --    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
 
Links to related criteria
Rating Criteria for Securities Companies
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Criteria for rating Short-Term Debt (including Commercial Paper)

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