Yesterday my team at Stallion Asset & I attended the Edelweiss Investor Day meet, and these are the 5 main take away’s from the meet
1)The Larger Trend in Financial Services Space – Financial Services in India are at the same stage as they were in the US in 1980 where it was 2.4 Trillion $ Economy (GDP) and China was at 2.4 Trillion in 2003.
India will be a 5 Trillion Dollar Economy i.e. it will double in the next 8 years. China took 5 years to double, US took 10 years to double from 2.4 to 5 trillion$. It is expected that when India Grows from 2.4 Trillion GDP to 5 Trillion Dollars, financial services will grow 5x in revenues and 6x in Profits.
Rashesh Shah mentioned that PSU Banks are growing at 3-4% which is about 70-75% of India’s Credit, whereas Private Banks are growing 18-20% and NBFC’s are growing at 22-25%. He sounded Optimistic that this trend will continue for the foreseeable future though he did believe that NBFC’s are scalable to 1,00,000 Crores AUM and post that it’s smarter to be a bank. Edelweiss has a Loan book of 42,000 Crores and being a NBFC for next 3-4 years is prudent for them.
2) Democratization of Credit in India – OMG FACT – The Top 45 Business houses in India are 50% of Nation’s banking debt even after nationalization of banks. The Top 20% of India is well banked and Opportunities are now on the lower ticket size retail lending (80% of Population). With Upsurge of MFI, SME Lending, consumer finance is the next big trend which are small ticket size loans with higher NIM spreads. Rashesh Sounded very positive on Retail Finance and he has walked the talk with retail Credit growing 46% in last 3 years. There are market rumours that Edelweiss may acquire Manappuram as Nandakumar’s 2nd Generation isn’t Interested in running the business. We believe this could be a marriage made in heaven as Manappuram would be immediately re-rated to 3.5-4x Book, and moats are very strong in gold finance business. Every NBFC and a few banks at some point have tried getting into gold finance but failed miserably.
3) My Chat with Siby Anthony (CEO of Edelweiss ARC) – He is also called the Mogul of turnarounds in India and very smart guy, obviously knows the distressed debt game really well. He is the person who has made edelweiss get 40-50% Market share in ARC in India. Rashesh Sounded very positive in India and Said about 20,000 Crores of fresh investments will be needed every year in Distress debt and the opportunity size is massive.
I knew ARC will be a big business, but why did Rashesh sell 20% of it so cheap at a valuation of just 2,500 crores to Canadian Pension is what i asked Siby Anthony? – He said we need the tap of money to be always open, Canadian pension has a lot of money, and we need a lot of investments, it made sense to us.
I wanted to understand the ARC business, and i asked a few questions on it and the ROE of the business, where he jokingly told me that unless he screw’s up very badly, he will make a ROE of 13% on it. If he works mediocre they are good to make 20-25% ROE in it, but if they get it right, they could make a killing.
I Asked him that if there are stock & sectors he could buy now, what would those be? Well the Answer of this Question was superb but lets say i cant disclose it here and keeping it for Clients of Stallion Asset.
4) Loss Given Default not NPA – Rashesh Shah gave a heads up of what he exactly thinks about the NPA Situations especially about banks. He Said i would rather have a 4% NPA in a Housing Finance Business rather than a 2% NPA in a Project finance Business. He Said, GNPA is not really the true assessment of the health of a bank and the strength of its balance sheet going forward. To truly estimate the potential financial hit the bank will take, Loss Given Default (LGD) is a more comprehensive and appropriate measure. LGD is the share of a loan that is lost when a borrower defaults. This will, of course, vary depending on the kind of loan and the extent of collateralisation.
He gave out Industry Numbers which got my eyes glittered as this is a new way of thinking about defaults.
This meant that if Some one Defaults 1000 crores in a Housing Finance book, the real loss would be just 150 crores and the rest would be recovered as there is collateral whereas on a project finance book if someone defaults worth 1000 crores, the loss would be 600 crores. We at Stallion Asset have decided to now go deeper in NPA profile of banks, probably there might be some bank which has high NPA but its actually due to its home finance or SME book which can get recovered but the markets are mispricing it.
5) Diversified NBFC will survive – Rashesh Shah has understood that the key for a sustainable NBFC is right capital allocation and risk management which can be done very smartly by diversification. Lets take an example of a only microfinance business like Ujjivan which had to lend even after demonetization, but if they had only 7% of their assets in Microfinance, they would have obviously stopped lending for some period like Arman Finance did. Mahindra & Mahindra finance was aggressively lending to the farm sector in 2012-2015 even though the farmers were defaulting because thats the only business they were in. Someday Interest Spreads in housing finance business will get squeezed as more and more Housing finance companies enter the market, but One product housing finance companies will have to continue to lend, just to survive. Edelweiss wants to create a 1,00,000 Crore loan book divided in 10 verticals so they can stop lending as risk increases, or increase lending in a vertical as opportunity increases. We believe a diversified NBFC is atleast 5x more safer than a concentrated one segment NBFC and deserves a higher valuation.
Conclusion – India is in a long term secular trend and Financials are expected to grow 5-6x faster than the country’s GDP Growth. We remain bullish on financials where there is a passionate management team, who is ready to go a extra mile for its stakeholders.
The above was written by Amit Jeswani, CFA, CMT (Founder of Stallionasset.com)
Disclosure – Amit Jeswani & Family may or may not hold the stocks discussed. Please use this education purpose only and Stallion Asset won’t be responsible for data.