हिंदी – Edelweiss Financial Services Analysis ( Mohnish Pabrai stock)


Hello investors , my name is Sagar and in this video we will talk about Edelweiss Financial services we will talk about their business model , financials and valuations Lets start with the management. Mr. Rashesh Shah co-founded Edelweiss with Venkat Ramaswamy in 1996 They wanted an iconic name like Apple for the company but at the end, they settled on a flower known for its hardiness Prior to founding Edelweiss, Rashesh worked with ICICI. He used to analyze many IT and Pharma companies such as Infosys. This helped him understand how to build an organization and he used the same principles to build Edelweiss. He started this company with 30 Lakhs of saving and he got 20 Lakhs more from his house mortgage. The rest came from Mr. Venkat Ramaswamy and other investors. When they started their business , they realized their competitors had more access to cash. In order to thrive , they started with the advisory business I will talk more about this when I explain their business model The advantage of advisory business is that it’s not so capital intensive and you can have good profit margins Once they started earning profits , they decided to enter the credit business ( loans ) and after that , they started their insurance business. This is not profitable yet. Let’s start with the business model. They operate in 3 segments : Credit ( loans ) , Advisory ( such as Asset management ) and Insurance let’s start with the credit section. As you can see there are many segments. At the right, you can see the contribution they have to their profits You will realize that none of the segments contribute more than 25 – 28 % to their profits. This shows how well diversified they are Let’s start with the first segment , retail mortgage. This is for home owners and home buyers. They are growing at a very rapid pace and they expect to see huge growth in the future as well Below that we have LAS , SME and Agri and others LAS stands for loan against shares. This is used for promoter funding with listed or unlisted securities SME stands for small medium enterprise. There are many enterprises with a very good business model in India but they are unable to grow due to deficit of cash Lastly , we have Agri loans . As you may already know , agriculture works in different seasons. So , if a farmer needs a loan to increase his crop production in a good season , Edelweiss can help him Now , we have structures collateralized credit. This is for Promoters and Corporates for their special capital needs in the form of Structured loans Then , they have wholesale mortgage. This is for developers. This can be for construction cost or the completion of the project As you know , that is a very capital intensive business model and they will only earn their money once they sell these properties. Lastly , we have distressed credit. They are market leaders in this segment. So , what do they do here ? Many times, many companies aren’t able to pay back their loans. Even though they have a good business model , there are some issues which affect their earnings and profitability In that case, Edelweiss can help you . Maybe , they just need some professional advice to improve their business. Or maybe, they just need some more cash to improve their business and they will be able to repay back their loans Edelweiss is very good in this segment because they are able to spot companies which only need a little bit of help to improve their business As you may have already noticed , their credit segments contributes the majority of their profits. Let’s talk about their second business , advisory. They are one of the leading companies in this segment. The first one is Wealth management. This segment is for wealthy people which have a very big amount to invest. They help them invest in many sectors such as real estate , currencies and stock market. They earn by charging a fee for their service. On the right , we have asset management. Many people think of only mutual funds in asset management. While this is one of their segments , it’s not the only one. One example is alternative asset management. Alternative asset management invests in places such as private debt or private companies Below that ,we have capital markets. They are one of the market leaders in this segment Capital Markets has many types of businesses but I will give you one example. One example is investment banking. So, for example , they can help many corporations in structuring their acquisitions If I own any corporation and I would like to sell some of my business segments , Edelweiss can help me find a buyer. If I want to grow my business, they can help me make some acquisitions as well Now , we have BMU and others. BMU stands for Balance sheet management unit. as you may already know , these companies don’t have their own capital to lend to their clients. First they have to borrow this money BMU keeps checking how they are borrowing and lending this money in order to stay profitable Lastly , there is one segment without images and that is their Insurance business. They offer life and general Insurance. They aren’t profitable at the moment but they expect to be in 2021 – 2022. Life Insurance is a joint venture between Edelweiss and Tokio Marine Holdings Inc ( one of the largest insurance companies in Japan ) Now we know their business model but how can we analyze this company ? As you can see , their business model is very big let’s take a look at each segment so I can explain you the most important points. Let’s start with the Insurance segment as it’s the smallest. In order to be successful in the insurance business , you just need one factor :discipline Imagine we open our insurance company and we start selling our insurance The money we collect is known as premiums If we start giving insurance to everyone without discipline in the future , we will have to pay many claims and that will be a very big expense for the company If you aren’t disciplined and you start giving insurance to everybody , it will hurt you in the future if you give the insurance carefully , you won;t have so many claims in the future and you will make lots of money Now you might be asking , how do they make money ? Imagine I own an insurance company and I give you one insurance the money I will receive is known as premium. I will invest this amount in stocks or bonds to get a good interest rate. Of course , there will always be some claims but as I am very disciplined , the expenses should be small and I should be earning a lot with the interest on the premiums You might have seen how Mr. Warren Buffett is so good with investing this money The second segment is advisory . They are one of the market leaders and they have been doing this for a very long time There are two main points in this segment. The first one is track record. Imagine I open my Wealth management company and you want me to invest that money for you The first question you will ask me is my track record If I tell you that I have only two years of track record , you won’t give me the money to manage because you can’t judge my performance You would like to see at least 5 to 10 years of track record. This is one of the advantages of Edelweiss as they have been doing this for a very long time The second point is customer service. These people pay a fee for this service so they expect a very good customer service as well Let’s talk about the last segment , which is credit. There are two metrics I like to see in this segment. Firstly , we want to see how well do they give their loans. Imagine I own a bank and I give loans to many people If I start giving loans to people who won’t be able to repay me back , I won’t make any profit That’s why , we need to see how well are they giving these loans. For that , we check the net NPA. NPA stands for non-performing assets Non – performing as the name explains , means that we don’t earn much from these loans . The loans are the assets of this company in the credit segment. The company had net NPA of 0.78 %. I took this number from the recent quarter. I like this number to be below 1 %. The second metric I like to see is return on assets. So what does this mean and what’s a good number ? This company has ROA of 2.8 % . I took this number from their recent quarter Good Indian Banks have ROA of around 2.5 – 2.5 % Anything above 2 or 2.5 % is a very good number. Let me explain what this means The loans of the credit segment are their assets. This metric helps us understand how much can they earn when they give these loans You need to understand how the credit business works. They earn money with these loans . So , if they give loans but they aren’t able to achieve good returns , they won’t perform well Many times , you will see ROA of 0.4 – 0.5 % . These are very low numbers. You want this number to be at least 1.5 – 2 % Let’s talk about their financials. I always explain the cash flow statement and business model but in this case I won’t This is because these companies have to borrow money to lend it to their clients So , when we see their balance sheet and cash flows , we will see high amounts of debt especially if we compare this to a normal company but this is not bad as their business model is built on borrowing and lending, Let’s take a look at their income statement so I can show you their earnings Let’s start with their revenues and I will show you the last four year figures to show you their growth As you can see, in 2015 they earned 3894 crores , then 5268 crores , 6618 and lastly 8618 crores You can see how they are growing at a very fast rate. Let’s take a look at their profits In 2015 , they posted a profit of 328 crores , then 414 crores , 609 crores and lastly 890 crores We can see that their profits are also increasing rapidly and lastly we have their profit margins The have been increasing their profit margins as well . They start with 8.4 %, then 7.8%, 9% and 10 % This helps us understand that the company is growing but they are also focusing on their profits Let’s talk about their valuations. As I showed you in the income statement , they have been growing at a very fast rate they are market leaders in many of the segments they operate in So , if they can still grow at 20 – 30 % in the future , this company is not so expensive I won’t invest simply because I like retail finance segment more I already own one retail finance company and that’s because their past record is very nice as there are many customers but this company doesn’t seem expensive if they are able to grow 20 – 30 % don’t forget to click the like button if you like this video

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