Edelweiss Financial Services

I think to really reap the fruit it will take 4-5 years management also mention it in the concall they optimistic to maximize the value for shareholders in 4-5 years It can be a multi special situation opportunity
Current SOTP valuation
Nbfc business – 3900cr equity 0.8<1×p/b
1)Currently I don’t think they have started to lend still in the process to do tie ups
2)don’t know the capital allocation strategy the equity of nbfc is rising management was telling they will use this capital for other businesses now they have taken debt(135cr) for alternatives.
3) demerging their nbfc business can be a good option after wealth management business like the piramal did with it’s nbfc and pharma business but I think management want to show they can also create value in credit business too this will take time FY26 (guys tell your views on it)

For ARC Business
2511cr equity cdpq valued this business at ×5 p/b can be 12500cr

1. headwinds – bond markets issue not able to leverage RBI should look into it or company should giving regular update about developments 2) NARCL large assets will go there large assets has good IRR and high changes of carry income yes they are lumpy every government try to establish bad bank but they failed now also RBI is concerned retail assets are low IRR and less carry income business 3) if there is possibility to move it to asset management business and unlock value the business can get valuation on the earnings

For asset management business- mutual fund/AIF currently AUM 124500cr 4% of Aum comes 4500 to 5000 cr so they have to earn 250cr to justify 20pe AIF carry income should add to it after march FY23 I think they will look to demerger or ipo this business in 2 years as carry income starts coming

For life insurance business
Current EV is 1550cr so to be conservative ×2.5 3800-3900cr 66% of edelweiss – 2500cr
It’s been 10+ years and only 2 Bancassurance partners fincare and CSB banks they really need more partners according to their investor relation they have focus to keep balance between profitability and growth
VNB margins and protection products to decide the valuations
Should focus on to create trustable brand and touchpoints

For general insurance
It is 1200 to 1500 cr business
In future they will partner with some other insurer as every general insurance company has done
it has started in 2018 but just 1 year before go digit have started their GP is 5200cr for FY 22 and edelweiss GP is if we go by current quarter GP 117cr so 117×4 468cr we can see insurance needs lot of capital to scale …in the news go digit ipo can come at a valuation of 30000 to 35000 cr at ×6 GP market leader ICICI Gl trades around ×3.7 edelweiss management should use the nbfc capital in insurance businesses and asset management to scale and ring fence their businesses they can create more value in this businesses credit business is not good option

For wealth management business – its approx valuation
March fy 23 demerger estimated 2200cr equity by then so 30% to public shareholders 14% to edelweiss group 56% promoter …2200cr -30% = 660cr ×4 p/b= 2600cr …in my opinion every shareholder can get 1 share for 6 to 8 EFSL (at face value 10rs of EFSL)
I think new management has start to make business predictable focus on recurring revenues like distribution income and management fees we can see scaling up like IIFL wealth as earlier PAT suddenly down due to market and shareholders were not aware why bcz of limited disclosures wealth management should do PAT 400cr not combine with securities business like IIFL WEALTH AND IIFL SECURITIES PAT is different

Housing finance 800cr equity 1>1.5 ×p/b can’t say much

Conclusion
Sometimes it feels like management is not aggressive and focus to scale insurance business as last bank partnership was done in 2019 Bancassurance gives presence can not be dependent on agents and digital and top insurers have started to sell direct leveraging their brands
Limited concalls, limited information guidance, disclosures for a company with 5 different businesses give some discomfort as investors are unaware what going to happen next quarter eg wealth management ( unaware of revenue mix and profit mix)
NBFC capital will be use for debt reduction suddenly FY 22 standalone balance sheet there is a debt
Management goes for growth but quality of growth and earnings are poor
Opportunity cost for reducing the wholesale book like they can use the capital to scale insurance business like go digit (feeling jealous 30000cr valuation?) edelweiss also should scale to this but needs capital
Can management think to demerge the credit business? Imo market can reward this decision
Guys share your views
tracking from 1 year