Edelweiss Financial Services Limited (EDELWEISS) Earnings Call Transcript & Summary

Okay, sir. That's helpful. Sir, secondly, in your life insurance business, around 80% of premiums contributed by par and nonpar products, what is your view on the future evaluation of the product landscape? And how are you thinking of aligning your medium-term product strategy accordingly?

So our focus is on what we call savings product because we do believe that -- so there is an opportunity in things like unit-linked products and all, the margins are much better in the savings product. We also come from a very focused investment approach and earning a good return on investment on the corpus that has been there. So our whole idea is that par and non-par is going to remain the focus area. I think we would like to keep about 70%, 75% of our focus -- our AUM in power and non-par. We do have ULIP and terminal, but those are not really very focused in high-growth areas. We do want to also focus on annuities and pension as we go along because those are also good savings products. So our view is that the insurance industry in India get us to a small need for risk, but a large need for savings to be converted into good long-term investments. So our focus is on that. The reason we are not very gung on ULIP is because the margins are low. And ULIP is also -- I mean, that need is also being catered by through the mutual fund industry. while the long-term savings need is one where people really look to insurance. So there is a focus that has been our focus, and we have done pretty well. We have renovated a lot on the par and non-par products.

Next question comes from the line of [indiscernible] PL Capital.

Am I audible?

Yes, you are. Please go ahead.

Sir, could you give us more details on the transaction with Carlyle, what is the current status of the transaction?

So the -- I think all the agreements are signed, everything has been done. We have applied for final approvals from RBI and HB the process is on. We have got a lot of clearances and we should be able to close that deal in the next 3 to 4 weeks. As you remember, the control of the transaction is that Carlyle will buy a portion from us in this as a secondary purchase that they will invest another INR 750 crores into the company now and they won't invest another INR 750 crores into the company in 18 months. So they will put in INR 1,500 crores into the company. They'll pay about INR 630-odd crores to us to buy out the stake. Right now, after the first tranche, we will be 45%, they will own 51%. After the second tranche, they will own 74, we will end up owning 26%.

Understood, sir. And like you have seen initial terms of growth in NBFC business with MSME disbursement, tripling year-on-year AUM doubling and asset coding significantly. However, profitability has remained broadly stable. So as the portfolio continues to season, when do you expect this operating momentum to translate into stronger earnings. Also if you can please share the outlet for the business and in [indiscernible] FY '27.

So ECL Finance, we had pivoted to focus more on MSME but to be honest with you, until last year, our focus was in reducing the wholesale book, which is a very happily reported, we are now down to only INR 600 crores on the wholesale side of the business. So now we have a lot of elbow room for growing MSME. We hired a new Managing Director, Ajay Khurana, about a year ago, and he is building out a strong MSME business for us. As you can see, the disbursements have grown almost tripled on a Y-o-Y basis. We are currently planning for the INR 2,000 crore disbursement for year FY '27 to just give you competitive figures, average for the last 3 years was about INR 300 crores to INR 500 crores per year. We are currently looking at about INR 2,000 crores disbursement for this year. But we're also opening branches, strengthening the product portfolio we have. So I think the next 2 years, we will see some uptick in the profit after tax, but our focus is on growing branches growing AUM, growing disbursement. And once we get to say AUM of about INR 4,000 crore to INR 5,000 crores, which is about a couple of years away. [indiscernible] is where we will really start seeing real ROE and profitability in this business. We have a fair amount of capital in this business. We have INR 2,000 crores of equity. But as you can see, the current borrowing is pretty small. We are geared around confines to 1 only, which in NBFC business is very low, hard to really make good profits if you're geared only 1:1. But I think we have a lot of headroom for growth. We have quite a bit of equity. We have a strong management team. and the product range and the size we are in, we are -- we are still a very small player in MSME. So we have enough space for growth.

Next question comes from the line of Rajesh Ganesh Kumar with GMF.

Am I audible?

Yes.

I have 3 questions. I'll quickly ask -- the first question comes from the line of the equity no and the SIF FIF book. So equity AUM recently coast has crossed INR 100 crore and the SIP book has reached close to about INR 700 crores. Now the question that comes from a mind is whether -- these were because solely because of fresh inflows or age driven by MTM and also as the franchisees continue to scale, what are the long-term aspirations that the business has over the next 3 to 5 years? And as AMCs have gradually expanded their product horizon beyond mutual funds and they have stepped into adjacent businesses such as MS, AI and NPLs, how do you think about broadening the product book over the next 3- to 5-year time horizon?

So to answer your first question, I think we are very excited when equity AUM has crossed INR 1 lakh crore. Out there, I think our target has been to raise -- to get net new money. As you know, equity markets, NTM growth has been fairly subdued in the last 1 year. I mean it changes quarter-to-quarter. But on a year-to-year basis, there has not been much MTM growth because equity markets are flat. So I think they are adding about [indiscernible] -- currently at the current run rate, we are adding about INR 1,000, INR 20,000 crores of new equity money every year. That is our current run rate that we are maintaining. So I would say, conservatively, INR 150,000 crores addition of new equity money every year is the current expectation that we will maintain. And if you look at first quarter, that is what we have maintained also. Along with that, our will happen if it happens for the industry as a whole. I think SIS has been a good product. We were able to innovate quite a bit on that. But our focus is on client needs. So if the client need can be served on the retail fund platform, on the SI platform, we will do that. We already have an AIF business in EAAA in any case. But if there is equity AIS to be done, we will also explore that. We have no really focus on product side, we are very focused on the client needs. So if there is a client need, we basically evaluate only 2 things. Is there a client need? And have we got an ability to innovate or cater to the client need in a strong manner. If we have that, then whether it's AI, whether it's PMS or whether it's SIS or whether in ritual fund, we'll explore all of that. A mutual fund will largely remain focused on listed market and alternatives, we are largely focused AAAs largely focused on the private markets.

Thank you this was really helpful. Speaking of EAAA, the last phrase value ended the answer in the recent business update, which has been filed for EAAA, there is a mention about the asset operating and management platform, Sekura which honestly seems like a great competitive edge. Could you throw some light on what Sekura platform actually is? And how does it compare with similar platforms which are offered by other market participants?

Yes, I'm happy you're asking that. I think it's a good -- an excellent question. Amit, do you want to elaborate on that?

Sure. So Sekura is our dedicated asset operating and management platform. This is a capability we have built over a decade. It has got people who are actually having domain knowledge and expertise in their respective areas. So the team members on the energy side would have been hired from an organization that you would have done almost 20 years of work only on building renewable energy and working on renewable energy. Similarly on the transport side, you will have people who would have done only roads -- and this is nearly 60 member team now having capabilities across the asset classes that we own and operate. These are engineers, domain knowledge, fixed sports, which are in-house and provide us across the portfolio access. It also helps us in diligencing the assets even at the start of the investing process in a much more efficient and clean manner. It also helps us in adding what we think is the additional alpha, which comes from improvement in processes, systems, using the right materials, ensuring that our operation costs are controlled. So these are very focused business people. They supplement the investment team, which is generating the returns and doing the transactions. But this is at the heart of the asset management -- we have a fully automated, what I would say, our center or a control center where we analyze rarely a terabyte of data on a very regular basis which allows us to improve our operations. In the recent past, we have started using AI also on that data to ensure that we try and optimize even on how we generate electricity in some of our solar plants, to allow for higher revenues. So all of this, this is very operational. It allows adding small bits to actually create a massive impact. So this is one of the most things we are proud of and that has been built over a period of time. We do think it is a moat in this business. And this is something which global platforms have done in multiple other geographies. But in India, I think this is one of the most unique offerings that are sitting inside the EAAA platform.

And I would just add that, as Amit said, I think large players like Brookfield and Blackstone also build their own platforms, the operating platforms, a lot of the Indian asset managers are either outsourced or their partner and there are good outsourcing companies available. You can outsource the asset management, you can partner with big an operating partner. But we have decided to do this in-house because as Amit said, it gives us the advantage at the due reason stage, it gives us on efficiency on operating management advantage, and it gives us a lot more control because when you own a road for 20 years, when you own a renewable plant for 25, 30 years, it's actually very good not to be dependent on outsiders for operating and managing and controlling that asset.

Understood. Sets is a great initiative, and I'm sure Sekura will continue to do very well. One last question before I get back in the queue is, has the life insurance business taken the path on to achieving its breakeven this year? And how do you see the next 3, 4 quarters planning out keep through any light on that? I think that will be all from my end.

Can you repeat that? Sorry, can you repeat that?

The life insurance business, my question is whether the life insurance business is on the path to achieving its breakeven this year. And with respect to the life insurance business, how do you see the next 3 quarters planning out the [indiscernible]

Yes. I think we are on path to for the year as a whole, not just in the fourth quarter. So the fourth quarter will be a much easier one but we are on path for that. We have focused a lot on our productivity, efficiency, branch productivity, all of that. So I think the way we are on this current part, we remain confident of achieving breakeven in that business.

Next question comes from the line of Ashar washuka with Maximal Capital.

I have 2 questions. So one is on UA wherein you mean, I think the participant mentioned that the yields have actually moved up from 2% to almost 3% -- and you also mentioned that there can be some lumpiness because of this carry income. So what is the expected steady state yield for the revenues as well as path for EAAA. That is the first question.

So I think we should look at the FY '26 number, which is the 2.5 -- 2.45% income yield on the and the PAT yield is 0.68%. We think these businesses over the long period have a very steady-state yields on the income and on the PAT side. The quarterly numbers might look a little because the AUM that you create is an average of the opening and the closing of each of those years. So I would say that the total income of yield of 2.45 and the PAT yield of 0.68 is more reflective of how NFPA yield for this business would look like. But these are pretty steady-state yields for these businesses.

Understood. And secondly, Rashesh, I had one sort of observation. So as we are looking to sort of unlock the day through various investor induction as well as through IPO. At some point of time, the holding company discount that we will have to suffer with would become very substantial. It would probably become maybe 30%, 40%, 50% of our market cap itself. So how purpose on that -- and that we have done a demerger and now they are in progress for something worse. How do we think contributes? Because now you have corporate net debt of INR 5,700 crores. So till that point when it is paid in that point, everything is fine because the EV conversion to equity value will happen greatly. But after this is paid down substantially, this holding company discount will come into picture in a big way. So if you can give some thought process and color on that?

So we are pretty clear that we are not a holding company. We are an investment company. And as an investment company, there are a lot of options we have tally, you are asking how do you narrow the discount between intrinsic value and the market value. As you know, a couple of years ago, we did the demerger with Nuvama and what we distributed to the [indiscernible] shareholders in the Nuvama demerger is, I think, worth today more than $1 billion. So there are many ways of unlocking value and narrowing the discount between intrinsic value and the market value. And if you look at the discount in India, I think, for a lot of investment company, holding companies, the discount is anywhere from 10% to 50%. Then I think you correctly said 50 is very high. But unlike others, we are not a holding company. So we don't need to hold stock forever in the underlying companies. And we showed Nuvama that we can demerge and distribute and unlock value in that way also. We will have a lot of options. I mean how to unlock value. And the good news is that we are on at a primary level, we are shareholders. As you know, Edelweiss has a very strong ESOP culture, as you will see in the annual report also, a lot of our senior management, even at EFS, the holding company level quite a bit of ESOP. So I think equity price finally is the right value is important for us. See, we have basically 2 objectives after we reduce the competent. One is to grow the value in the underlying business. That is and will remain the primary #1 focus how do we continue to build value via growth in the underlying business that, as you would have seen, continues and we remain very, very focused on that. After that, the second objective is after we have built that value and we continue to build a value, how do we unlock it? How do we make sure all the shareholders of Edelweiss also enjoy and participate in that value via market price or via distributions. And on that, we have quite a few options. And as we get there. So I think next 1 year, our focus will still be on stabilizing corporate debt. and continue to grow the business because we do believe that growing the business is a harder work. I think unlocking the value, there is a lot of optionality renewable in that.

Understood. And if I can ask one more, I think we had some property of which you had mentioned around INR 1,500-odd crores. So is there any specific reason why we are sort of waiting to sort of unlock or reduce our corporate debt by sale of those properties?

No. So I think, as we said, our current corporate debt is about INR 5,700 Out of that, when we closed the neo transaction and the EAAA IPO, we expect that our corporate debt will come down below INR 4,000 crores. I think our property and investments, we can sustain about 2,500 to 3,000 of our property is worth INR 1,500 where even if you do a sale and leaseback, we'll have a 8%, 9% cost. Currently, we are borrowing at about 10% cost. So there is not much saving in taking the property of the books and paying the lease rental on that. So I think up to INR 2,000, INR 2,500 crores, INR 3,000 crores debt, we don't really want to bother and we are getting comfortable if it is against property and investments that we have in terms of our funds and all that. So I think from 5.7%, our current target is how do we get to -- we will get to under INR 4,000 crores pretty quickly and then once we get to INR 3,000 crores is where we say that now it is earmarked against property and investments. And now we can be more strategic about it. But we have -- all the underlying businesses are here, as we said, with the IPO of EAAA and all. And after that, other businesses also we own 100% of Zuno. We own 85% of AMC, we own 83%, 84% of ARC. All these are good powerful, strong businesses, where there is a fair amount of interest from investors, either in the private market or through IPO that we can exclude. So I think our idea would be this, as I said, a triangulation of reducing corporate debt first, growing the underlying value in the business is first and then looking at unlocking value and making sure the market price and the shareholders enjoy the real underlying value as close to the real value as possible. So I think these 3, as we have said, continues to remain our focus area. Of this, if you ask me, I would continue to growing the value of the underlying business is the most important because that is forever. And continues to grow and is financial engineering at a particular point of time.

Thank you Mr. Gupta, please rejoin the queue for more questions. Due to time constraints, we take the last question from the line of Rishab Chokhani Vital.

Hello. Am I audible?

Yes, please go ahead.

Sir, there are 2 questions. So you are in the process of listing your alternative asset. So can you give a brief color on the industry and what is the market size and how the growth trends have been for your 4 years? And can you compare it with developed markets like the U.S. or growth trajectory you see going forward? And second question is on content debt. So your debt declined to INR 5,700 crores. You mentioned that you will go below INR 2,000 crores. So I -- so and what level we can -- and what will contribute that debt reduction from where the cash move will come? And what percentage of promoting you want to inch drives Yes, that's it.

Okay. And I'll ask Amit to first answer on EAAA.

Sure. So as I said, asset arrangement, especially the alternatives also scales up as the economy goes to a larger level. The penetration in India is hardly 3.5% of GDP. While in the U.S., it is nearly 27% of the GDP. So there is both broadening and the deepening of the market that is expected in India. Currently, as we see, the alternative AUM is projected to move from INR 166 billion to nearly almost INR 276 billion in India, which is what we have mentioned. But within that, the focus that we have is on the income and yield category and that category is expected to grow faster. And that is going to expect it to grow at nearly 18% CAGR at an industry level. And we do think that there are significant macro drivers both in terms of the rise in private wealth, where the HNI and the UHNI population is expected to grow. The wealth management penetration in the family office is also expected to grow, which will in turn allow them to look for products with superior risk-adjusted returns with income and yield, and that will allow for the growth of the industry and [indiscernible] took play is a significant player in the industry and all these tailwinds will help. And this is currently not considering all the capital that potentially domestic institutions will also look to put as they start getting more comfortable with this asset class. So again, in U.S. the U.S. economy in the last 20 years from 2005 to 2025 moved nearly 2.5x. The AUM of Blackstone move almost 25x in the same period. The AUM of KKR moved, and these are all public data, so the [indiscernible] there moved also more than 30x. So the industry is, again, as I said, it's a flywheel industry where vintage and track record and client repeatability makes a lot of difference and that will allow most of the industry to grow, and we do think that we will be beneficiaries of the tailwind.

And I would just add that what we have seen in alternatives is because there is -- basically alternative is ultimately a trade-off between higher return with some kind of illiquidity because you are in closed-ended funds, you are in private markets. And as you would have seen over the last 30 years in the U.S., a lot of the large insurance companies and pension funds and endowments, slowly and the same thing is happening with HNMI and the ultra HNI industry in India. It is timing will happen with institutional investors in India where you will trade off some amount of your portfolio, maybe 3%, 4%, 5% of the portfolio into liquid assets in AIF and all, which will give you a higher yield because if you've got a 3% to 5% pickup in yield over a strategy that has a 4, 5, 6 years, then a lot of people are now allocating capital more and more to this, especially in India, it is currently ultra HNI but eventually, we think insurance companies and others will also come insurance and pension funds and all. And along with that, I think the awareness and SEBI has done a fabulous amount of work on that. And in HNI, there are actually 2 markets. One is a growth market, which is mainly private equity and the other is the field market, which is mainly infra and private credit and all of that. So I think private equity has grown. Now e-market is also growing and a lot of insurance companies and pension fund people who don't want [indiscernible] volatility actually are more interested in income and yield strategies, and that is where EAAA is focused on. We have seen this market, how it has grown in the U.S. over the last 30 years and we do think there are some similarities with the Indian market opportunity in that sense. On the corporate debt side, as I said, from 5,700 , we'll get to under 4,000 by the end of this year. We have some investments that we can sell and keep on getting money. We have investment in our funds, and we have investment in some wholesale assets that we had, which will not get liquidated. So about INR 500 crores to INR 1,000 crores, we do expect will come from there also. We're also starting to get dividend income from underlying companies as mutual fund and EAAA and ARC are profitable and throwing out free cash. As you can just add up, these 3 businesses have a free cash flow of between INR 600 crores to INR 800 crores per year. So on that basis, also that cash that we throw out as dividend also helps us reduce our corporate debt. So I think our idea is reckon to 4,000 then inch it back [indiscernible] then regroup and decide whether that should remain a priority or we should then focus on unlocking or using that money for more distribution to shareholders, distributes, spinoffs, demergers. I can look at all of those options also.

Thank you very much. We will take that as a last question. I would now like to hand the conference back to Ms. Priyadeep Chopra for closing comments.

Thank you, Andrew, and thank you all for your time today. We truly appreciate you taking the time out and joining us. Please do write in to us at delves Investor Relations for any other questions or feedback that you may have for us. Thank you, Rashesh. Always a joy to listening to you, and thank you, Amit. Very insightful to have you on the call today. Thank you all. Have a great day ahead. Bye-bye.

Thank you very much. Ladies and gentlemen, on behalf of Edelweiss Financial Services, that concludes this conference. Thank you for joining us. You may now disconnect your lines.