Edelweiss’ planned new avatar triggers a surge in investor interest. Is it for real?

In September 2018, as the world marked a decade since Lehman Brothers’ collapse and the ensuing global financial crisis, a new storm was quietly building—not in Wall Street but in India. This time, it was India’s own financial sector facing a severe test.

India's leading infrastructure company, Infrastructure Leasing & Financial Services (IL&FS), defaulted on its payment obligations on 14 September 2018. The debt, which totalled over ₹1 lakh crore, led to a widespread liquidity crisis, later named the “NBFC crisis."

The crisis’ impact rippled across India’s financial landscape, hitting banks, NBFCs, and mutual funds hard. NBFCs bore the brunt, with several facing insolvency while others narrowly survived. Among the hardest-hit was DHFL, a major housing finance company that ultimately went bankrupt.

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On the other hand, companies like LIC Housing Finance, PNB Housing Finance, and Sammaan Capital (formerly Indiabulls Housing Finance) managed to weather the storm. However, the damage to their stock prices was severe—some have yet to recover to their pre-crisis highs, underscoring the lasting impact of the crisis.

Another conglomerate, Edelweiss, was also affected. Its share price crashed more than 75%, from ₹311 in June 2018 to ₹75 by October 2019. However, it survived the onslaught.

For more such analysis, read Profit Pulse.

After years of consolidation, its share price has recently seen increased traction. It shot up over 100% from ₹60 to ₹140 between August and September in CY24. What is the reason?

EFSL is reducing debt and aiming to unlock the value of its subsidiaries by listing them.

What happened to EFSL during the NBFC Crisis?

EFSL's business focused on wholesale lending, contributing 49% to its credit business in Q1FY18. The retail book and distressed credit contributed to the balance of 34% and 17%, respectively.

However, following the NBFC crisis, liquidity crunch, economic slowdown, and risk aversion among financiers adversely impacted wholesale lending. Real estate loan defaults also rose during this period. Moreover, its net debt ballooned to ₹40,000 crores in FY19.

Despite efforts to bounce back from the crisis, the pandemic further strained the company’s balance sheet. Rising credit costs led to higher provisions, and a retreat from its wholesale segment caused revenue and profit growth to turn negative.

As a result, the company’s share price plummeted by over 90%, falling from a high of ₹311 in 2018 to near rock-bottom levels by 2020.

In mid-2020, Edelweiss took a bold step to exit wholesale lending, marking a major shift in its business strategy. This overhaul aimed to focus on retail credit and asset and wealth management, transitioning the firm from a balance-sheet-heavy to an asset-light model while also targeting debt reduction. So far, execution on this strategy has shown promising results.

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Today, Edelweiss is a well-diversified financial powerhouse with seven core businesses under its umbrella. Key contributors to its earnings include Alternate Asset Management (EAAA), Mutual Funds (EAML), Asset Reconstruction (EARC), and its NBFC arm. The group also spans housing finance, general insurance, and life insurance, underscoring its wide footprint in India’s financial sector.

It has pioneered the alternate asset management industry, with its assets under management (AUM) growing more than 50 times from ₹1,000 crores in FY10 to ₹54,700 crores in FY24.

The AUM of its mutual fund business grew 18 times in the last seven years, from ₹7,000 crores to ₹1,27,000 crores. It is now ranked 13th largest AMC, up from 26th in 2017.

As planned, its net debt has been reduced by 67% to ₹13,090 crores in the last five years. In the previous two years, it has reduced its wholesale credit book by 60% to ₹4,150 crores in FY24.

Moreover, it discontinued the wholesale lending segment now and pivoted to an asset-light business, focusing on companies that don't require heavy borrowings.

In fact, its business has grown multifold since the restructuring it initiated in 2020, and every business segment is firing on all cylinders.

Mint reported that as Edelweiss’ business gathered steam, regulatory hurdles emerged. In mid-2024, the Reserve Bank of India (RBI) imposed restrictions on its lending arm, ECL Finance, and Asset Reconstruction Company, EARC, citing significant supervisory concerns. This regulatory action sent shockwaves through the market, leading to a 17% plunge in Edelweiss' share price on May 29.

So, what changed that it rose over 100% in just 2 months?

The sudden surge came after management's strong guidance during the Q1FY25 earnings call in August. Management reiterated its focus on growing its business segments and reducing debt further. It also aims to enter a new business by March 2025.

Moreover, it aims to make every segment an independent, standalone business with separate management. This will enable it to list its subsidiaries and unlock shareholder value.

Edelweiss Group Founder Rashesh Shah has said the group may launch an IPO of its mutual fund arm (EAML) and alternative asset business (EAAAL) in 2026, each at a valuation of over ₹8,400 crore.

In fact, it has begun preparations to list EAAA at a valuation of ₹15,000 crore. It is expected to sell a 10-20% stake for ₹1,500-2000 crore. The IPO papers will be filed in a few months.

The proceeds from all the stake sales are expected to reduce debt at the parent level. It has planned a debt reduction of ₹6,000 crore by FY25 and hopes to bring the debt down to ₹3,000 crore in the next one year.

It also plans to list its housing finance company (Nido Home Finance), EARC, and NBFC arm (ECL and Edelweiss Retail Finance). The insurance arms, Zuno General Insurance and Edelweiss Life Insurance will be listed post profitability, which is expected in the next 18 months. All other businesses are already profitable.

Last year, it demerged and listed its wealth management business, Nuvama Wealth. Its stock price has already generated a 190% return in the last one year, unlocking shareholders' value.

Also read: Edelweiss looks to list all firms and enter new business

In fact, it recently sold 6.2% of its 14% stake in Nuvama for ₹1,481 crore. As per CNBC TV18, it plans to use the money to repay debt and sell the remaining stake to reduce further debt.

Then, mutual funds made a big-bang entry.

Amid significant plans, it caught the eye of institutional investors. As per reports, the Abu Dhabi Investment Authority bought a 0.37% stake, and Ashoka India Equity Investment Trust purchased a 0.06% stake at ₹124 per share.

Moreover, India Acorn ICav bought a 0.56% stake, and Whiteoak Emerging Markets Equity Fund purchased a 0.02% stake.

The share of mutual funds was a mere 0.08% until the June quarter, but now that buying has picked up, it has increased to 0.21% as of 2QFY25.

 

What about valuation?

Given its diversified business, comparing it with listed peers is challenging. Hence, I have compared it with its 10-year average valuation.

It is currently trading at a price-to-equity (PE) valuation of 22.7x, 51% higher than the 10-year average PE of 16x. Its current price-to-book (PB) valuation of 2.1 is also 44% higher than the 10-year average PB of 1.4. But, one needs to consider that the company was under stress during much of this period.

Its return on assets is just 1.2%, while return on capital employed (ROCE) and return on equity (ROE) are also low at 11.5% and 7.3%, respectively.

One way of looking at the valuation could be that low profitability and the recent sharp rise of 100% in just two months have made it expensive. However, its businesses are performing well. All except the insurance arms are growing in profitability, too.

Since the group has already exited its wholesale book, it aims to further reduce debt and bring profitability to its insurance arms, which could lead to better profitability.

It also seeks to pivot more toward a fee-based business. If that happens, annuity-type companies attracts a much higher valuation than it is currently trading at.

Moreover, its plan to list all seven companies in the next 3-4 years, like Nuvama, can unlock shareholders' value. However, it is a cyclical business linked to capital market activities, which makes it vulnerable to any industry slowdown.

In summary, the revamped, streamlined Edelweiss presents a compelling story that could attract increased investor interest. For those keen on tracking a promising transformation, adding this stock to your watchlist could be worthwhile to see how the company’s transition unfolds.

 

Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was unavailable have we used an alternate but widely used and accepted source of information.  

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.

Disclosure: The writer does not hold the stocks discussed in this article.