Key Rating Drivers & Detailed Description
Strengths:
Adequate capitalisation, supported by multiple capital raises
The Edelweiss group has demonstrated its ability to raise capital from global investors across businesses, despite the tough macroeconomic environment. The group has raised ~Rs 6,000 crore since 2016 across lending, wealth management and asset management businesses. This has helped the group to maintain its capital position despite elevated credit costs, and absorb asset-side risks. The networth stood at Rs 6,386 crore as on September 30, 2024, against Rs 6,309 crore as on March 31, 2024 (Rs 8,581 crore as on March 31, 2023). The networth reduced from March 2023 levels as ~30% of Nuvama’s networth was distributed to the shareholders of EFSL as part of the demerger.
The gearing stood at 3.0 times (excluding collateralised borrowing and lending obligation [CBLO], gearing was 2.8 times) as on September 30, 2024, compared with 3.2 times (excluding CBLO, 2.9 times) as on March 31, 2024 (2.5 times as on March 31, 2023, and 2.6 times as on March 31, 2022). With increased focus on fee-based businesses, and strategy to grow in the credit business through an asset-light model, the incremental debt requirement will be low. The group has plans to divest its remaining stake in the Nuvama group, and fully or partly exit housing, alternate assets and general insurance businesses, which will further aid in unlocking capital and debt reduction.
Demonstrated ability to build significant competitive position across businesses
The Edelweiss group is a diversified financial services player with presence in four verticals: credit (wholesale and retail), insurance (life and general), asset management, and asset reconstruction. The group has attained leading positions in the alternate asset and asset reconstruction businesses and is focusing on building market position in other businesses too, which should lend greater stability to earnings over a period of time.
The asset management business comprises mutual fund and alternate asset businesses. The group is a leading player in the alternate asset segment and its mutual fund AUM has been growing steadily. The asset management AUM grew to Rs 1,97,750 crore as on September 30, 2024, from Rs 1,81,700 crore as on March 31, 2024.
In the distressed assets segment, EARC is the largest ARC in India, with total securities receipts managed at Rs 28,910 crore as on September 30, 2024, compared with Rs 31,590 crore as on March 31, 2024 (Rs 37,100 crore as on March 31, 2023, and Rs 40,200 crore as on March 31, 2022). From being largely corporate focused, the ARC has, in the recent past, started focusing on the retail and micro, MSME segments. The share of retail is expected to grow over the medium term.
In the lending business, while the wholesale book is under run down, the group’s focus is on growth in retail through the asset-light model. The key product offerings in the retail credit book would be mortgage and MSME loans. The group has entered into agreements with various co-lending partners for retail product offerings, which are large domestic and foreign banks, for both the priority and non-priority sector portfolios. Although the retail AUM picked up pace in fiscal 2024, the growth has been relatively slow due to delay in operationalising the onboarding and underwriting process with the co-lending partners. Subsequently, the overhang of the regulatory embargo has impacted growth across the lending business. After growing to Rs 5,368 crore as on March 31, 2024, from Rs 4,879 crore as on March 31, 2023, the retail AUM stood at Rs 5,134 crore as on September 30, 2024.
The group also houses the life and general insurance businesses, which are gaining scale and are expected to break even over the medium term.
However, with the rundown of wholesale credit, divestment of the wealth management business, and planned stake sale of the asset management, housing finance and general insurance businesses, the diversity in the business risk profile is monitorable.
Weakness:
Subdued profitability for current size and scale considering presence in multiple businesses
The group’s profitability is lower than other large, financial sector groups. However, most of the businesses have been reporting profit since the last quarter of fiscal 2021.
The group reported a profit after tax (PAT) of Rs 528 crore in fiscal 2024 (excluding any one-off items) against PAT of Rs 406 crore in fiscal 2023. However, profitability in 2023 was supported by a one-off item of revaluation gains (and also accelerated provisions made basis the one-off gain), excluding which the profit would have been Rs 248 crore in fiscal 2023.
In the first half of fiscal 2025, the group reported PAT of Rs 222 crore compared Rs 173 crore in the first half of fiscal 2024 (Rs 112 crore in the first half of fiscal 2023). The RoA was 1.0% for the first half of fiscal 2025 compared with 0.8% for the first half of fiscal 2024 and 0.5% for the first half fiscal 2023. The group’s overall profitability is weighed down by loss in the insurance businesses; however, ex-insurance profit stood at Rs 201 crore for the second quarter of fiscal 2025 against Rs 145 crore for the first quarter of fiscal 2025 and Rs 808 crore for fiscal 2024 (Rs 730 crore for fiscal 2023).
Of the various businesses, the asset reconstruction and asset management businesses, mainly alternate assets, remain the largest contributors to overall profitability (forming 87% of the overall PAT[2] for the first half of fiscal 2025). While the profitability of the credit business had improved from the past levels with credit costs reducing, for fiscal 2025, there was a decline in the profitability of the lending businesses in first half of fiscal 2025, stemming from the stagnation of business growth. Furthermore, any additional provisioning required on the monitorable book based on the pace and extent of recovery from underlying assets will need to be seen. The insurance businesses are expected to breakeven only over the next 2-3 fiscals. The group’s profitability is expected to be impacted by the restriction on acquisitions on EARC for nearly three quarters as well as slowdown visible in the lending business due to slowdown in funding access. The alternate assets business should continue to support profitability. Going ahead, the group’s ability to scale up the retail lending business while managing overall credit costs will be important over the medium term and will remain a key monitorable.
Asset quality monitorable with elevated level of monitorable portfolio
The group’s overall gross loan book (excluding monitorable portfolio net of on-book gross stage III assets) stood at Rs 5,401 crore as on September 30, 2024, compared with Rs 5,537 crore as on March 31, 2024, and Rs 7,548 crore as on March 31, 2023. Of this, retail on book stood at Rs 4,153 crore (Rs 4,261 crore and Rs 3,795 crore) and the remaining was wholesale book.
The group has been consciously running down the wholesale portfolio through various modes. While recoveries have contributed to this, the reduction has been primarily due to sell-down to ARCs (both internal and external) and alternative investment funds (AIFs). Given the Reserve Bank of India restrictions, this process is likely to be slower than earlier.
The Edelweiss group has retained risks and rewards on a large portion of this and hence, CRISIL Ratings tracks the monitorable portfolio to assess the asset quality of the group. This includes gross stage III accounts in the lending book (Rs 738 crore), security receipts held by the group (including in EARC) pertaining to sell down (Rs 6,517 crore) and loans sold down to AIFs (Rs 1,495 crore). Overall monitorable portfolio stood at Rs 8,750 crore as on September 30, 2024. While the monitorable portfolio has reduced from Rs 12,097 crore as on March 31, 2022 (Rs 11,383 crore as on March 31, 2021), it remains elevated. CRISIL Ratings notes that although majority of this monitorable portfolio is on-book exposure of the Edelweiss group, some part pertains to exposure of external ARC or AIF wherein the group has extended a put option.
The group has made provisions against the monitorable portfolio and, therefore, the net monitorable portfolio stood at Rs 6,018 crore as on March 31, 2024, and Rs 5,308 crore as on September 30, 2024. Based on management estimates, there is a reasonable level of collateral cover on most of this portfolio.
The overall gross stage III assets in the lending business stood at Rs 738 crore (13.7% of loans) as on September 30, 2024, compared with Rs 720 crore (13%) as on March 31, 2024, Rs 794 crore (10.5%) as on March 31, 2023, Rs 930 crore (8.9%) as on March 31, 2022, and Rs 1,601 crore (10.9%) as on March 31, 2021. Retail book gross stage III was Rs 114 crore (2.8%) as on September 30, 2024, against Rs 78 crore (1.84%) as on March 31, 2024, and Rs 124 crore (3.3%) and Rs 182 crore (2.7%) as on March 31, 2023, and March 31, 2022, respectively.
However, any challenges effecting recoveries as per plan could necessitate higher provisioning and put pressure on profitability and hence, will remain monitorable.