Rating Rationale

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL PPMLD AA-r/Negative’ rating to the Rs 300 crore long-term principal-protected market-linked debentures of Edelweiss Alternative Asset Advisors Ltd (EAAA; part of the Edelweiss group).

The ratings continue to reflect the adequate capitalisation level of the group, supported by multiple rounds of capital raising; the diversified business profile with presence across lending, asset management, wealth management, broking, asset reconstruction and insurance segments; and demonstrated ability to build significant presence in multiple lines of business, which should continue to support earnings. The group also maintains adequate liquidity on an ongoing basis.

The continuation of the ‘Negative’ outlook reflects the challenges in profitability and asset quality that the group has been facing largely on account of stress on its wholesale lending book. The retail lending book was also impacted amid the Covid-19 pandemic. Trends in profitability and asset quality, over the medium term, will be key monitorables.

Despite the challenging macro environment for non-banking companies, the group has been able to raise capital from marquee global investors. During the last quarter of fiscal 2021, the group concluded the sale of its majority stake in Edelweiss Wealth Management (EWM; comprising wealth management and capital markets business) to PAG (Pacific Alliance Group, Asia-focused alternative investment managers) for Rs 2,366 crore. As on December 31, 2021, PAG holds 55.84% of the business, while the Edelweiss group holds 44.16% (increased from 38.5% as on September 30, 2021). Between March and November 2019, the group raised Rs 1,334 crore (in aggregate) from Caisse de depot et placement du Quebec (CDPQ), Kora Management (Kora; a US-based investment firm) and Sanaka Growth SPV I Ltd (part of Sanaka Capital). It had also raised Rs 268 crore in October 2021, by divesting its 61% stake in the insurance broking venture to Arthur Gallagher. The latter now holds 91% in the insurance broking venture of the Edelweiss group and will acquire the balance 9% in the current fiscal.

These stake sales have helped absorb asset-side risk. Despite business losses in fiscals 2020 and 2021, networth has been steady at Rs 8,542 crore as on March 31, 2021 (Rs 8,715 crore as on March 31, 2019). With decline in borrowings, gearing also reduced to around 3 times from around 4 times over the same period. Networth and gearing stood at Rs 8,663 crore and 2.8 times, respectively, as on December 31, 2021.

The group has diversified business interests in financial services domain. Over the years, It has significantly scaled up operations of its non-lending businesses, including the asset reconstruction company (ARC), asset management and wealth management, which now contribute a higher share of revenue and profits and are likely to support the overall earnings profile going forward.

The group also maintains adequate liquidity. The overnight on-balance-sheet liquidity (including cash, liquid investments and treasury assets) stood at around Rs 1,900 crore and unutilised bank lines at Rs 300 crore as on January 31, 2022. The group also has other liquid assets (investments and securities-based lending) that can be accessed, if necessary. This was Rs 3,050 crore as on January 31, 2022. The group raised Rs 7,565 crore in fiscal 2021 and Rs 5,873 crore from April to January 31, 2022 through bank loans, securitisation, structured NCDs and retail bonds.

As for asset quality, overall reported gross stage III assets in the lending business improved to 4.89% as on December 31, 2021, from 7.7% as on March 31, 2021 (5.3% in the previous year). On an absolute basis, stage III assets reduced to Rs 657 crore as on December 31, 2021, from Rs 1,182 crore as on March 31, 2021 (Rs 1,114 crore, a year earlier), supported by write-offs and sale to ARCs worth Rs 382 crore during the first nine months of fiscal 2022, and Rs 2,047 crore in fiscal 2021. The group had also restructured 3.7% of its portfolio in line with the Resolution Framework for Covid-19-related stress (restructuring 2.0), released by the Reserve Bank of India (RBI) August 2020.

The group had aligned stage III assets with gross NPAs and reported stage III assets to factor in impact of RBI’s clarification on recognition and calculation of NPAs released on November 12, 2021.

The group continues to move towards an asset-light model through sell-down of wholesale assets and co-lending arrangements in the retail lending business. In wholesale finance, it is shifting the assets to a fund platform, which will provide completion finance to projects. Although, the group has already concluded transactions aggregating over Rs 2,500 crore in the past 18 months, the overall sell-down has been lower than anticipated., nevertheless, the group is in discussions for concluding additional transactions.

The increased stress in the loan book and consequent rise in provisions, including management overlay, had impacted the group’s earnings profile during fiscals 2021 and 2020; however, credit cost has normalised during the nine months through fiscal 2022. On a consolidated basis, while the group reported net profit of Rs 254 crore in fiscal 2021 (loss of Rs 2,044 crore in fiscal 2020), it was primarily due to a one-off gain from stake sale in the wealth management business. Excluding this one-off gain, the group would have reported net loss in fiscal 2021 as well. For nine months ended fiscal 2022, the group reported net profit of Rs 146 crore after reducing wealth management shareholder’s profit of Rs 21 crore, compared to loss of Rs 382 crore during corresponding period of previous fiscal.

Improvement in asset quality and profitability will be key rating sensitivity factors.

Downward factors