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Edited Transcript of EDELWEISS.NSE earnings conference call or presentation 13-Nov-19 11:30am GMT

Q2 2020 Edelweiss Financial Services Ltd Earnings Call

Mumbai Dec 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Edelweiss Financial Services Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rashesh Chandrakant Shah

Edelweiss Financial Services Limited - Chairman, MD & CEO

* Subramanian Ranganathan

Edelweiss Financial Services Limited - CFO & President

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Conference Call Participants

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* Aditya Jain

Citigroup Inc, Research Division - Assistant VP & Senior Research Associate

* Avinash Singh

SBICAP Securities Ltd., Research Division - Lead Analyst

* Jignesh Shial

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Kshitiz C. Prasad

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Mahrukh Adajania

IDFC Securities Limited, Research Division - Director

* Renish Bhuva

ICICI Securities Limited, Research Division - Assistant VP

* Subramanian Iyer

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good evening, everyone. Thank you for joining our Q2 FY '20 results conference call. We have with us, Mr. Rashesh Shah, Chairman and CEO of the Edelweiss Group; Mr. Himanshu Kaji, Executive Director and Group COO; and Mr. S. Ranganathan, President and Chief Financial Officer.

During the discussions, we will be referring to the Q2 FY '20 investor presentation uploaded to the exchange and on our website. I would like to state that some of the statements in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. Please read the detailed disclaimers in our results documentation.

With that, I would now like to invite Mr. Rashesh Shah to begin the proceedings of the call.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [2]

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Thank you, Amiah, and hello, and good afternoon or good evening to all of you. Thanks a lot for being on this call. As usual, this is a very important opportunity for all of us to interact. And I have, over the years, enjoyed your questions, enjoyed your feedback. And I do hope that we have a very fruitful conversation in the next hour or so.

We announced the results yesterday. As you can see, and I don't think it bears the need to say that it's been an eventful quarter. I think the last 4 quarters in India have been eventful, and we do hope that we stop having eventful quarters going forward. But this was a quarter, especially when you compare Q2 '20 to Q2 '19, because Q2 '19 was still the growth quarter because only on the last few days of Q2 '19 is where the liquidity crunch and this entire upheaval started. So we are also comparing Q2 '20 to Q2 '19. But in this quarter, I think 4 or 5 things happened. We have been degrowing the balance sheet. We have been shrinking a little bit. We also have -- the cost of funding is still that transmission is not happening. So cost of funding still remains a bit elevated. But the good news is, there is enough funding available. But for us also, at this cost of funding, we don't want to grow very aggressively.

[Total] has been -- we continue to provide a lot more conservatively on our credit cost because we do think that, given the liquidity crunch that has been there, we should be more conservative in making sure we have more than enough provided. And the feedback we have got from long-term investors has been that it is always better to be conservative at this time and get some flowbacks in the future rather than try and optimize on credit cost at this time because the book is what it is. What we are finding is, as we've been saying again and again, the collateral cover is still healthy, but the cash flows of a lot of our customers on the wholesale side have become erratic, especially on real estate because -- and that is why we have launched the completion financing fund, which I'll speak about in a little bit.

So very eventful quarters. The good news on this quarter has been -- we continue to strengthen the balance sheet. Our customer assets continue to grow. So on that side, it's a little bit of degrowth on the balance sheet side, but some growth on the customer asset side. As a result of all this, obviously, P&L has taken a hit. I think this is -- and we've been saying it for the last almost a few quarters that the P&L will remain challenging. We do believe until March 2020, a growth in P&L earnings is not on the horizon because as you clean up, as you strengthen, as you don't grow very aggressively, and we have not cut costs. We have not laid off people because we do think that, in the long term, this is a temporary blip in the cycle. And especially in key areas like technology, retail, creative, wealth management, asset management, we have made sure that not only are we not cutting back, we continue to invest because we don't want to lose the momentum on that.

So as a result of that, you would have seen cost income ratios are also elevated. So this quarter, I think kind of all of those have been the factors which have resulted in a lower P&L. But on the other side, the balance sheet in this quarter has got stronger. And as we recently -- in the last quarter, we announced the capital raise from Kora, and we have said this was about $150 million target amount, $75 million will raise on Kora. We have announced the remaining $75 million with Sanaka Capital. And the good thing in this quarter has been, there has been a lot of investor interest in investing in this opportunity. Along with that, we also raised liquidity. Our liquidity position remains strong. We have also announced the last-mile real estate completion financing partnership along with Meritz, which we think, a, is very timely because that is a great opportunity because a lot of real estate projects are economically viable but have been suffering from last-mile financing. And we've been saying that but we also have been one of the early ones to be able to raise capital on that and bring it to fruition. Along with that, this also gives us a liquidity window because some of our current loans could also get transferred to this AIF that we have set up. So it also releases liquidity as has been required for us.

So I think on the balance sheet front, very happy. Things have got stronger though it has [mean] hit on the P&L side. We also reduced our margin funding and the loan against shares book because, as the environment has been more volatile, our customers, also, it is in their interests not to be very geared up at this point of time. And that is why you would have seen a little bit of degrowth on that side also.

Our focus on liquidity [wins]. We continue to remain in 365-day horizon planning window for liquidity. Before the crisis started, we used to be 180-days horizon planning, and we have changed our gears for the last 4 quarters, so to go from 180 days to 365 days. Our feeling is, until March, we'll remain in 365-day liquidity planning focus. The impact of that is that our, I think, liquidity holding costs will continue to remain elevated. Our focus on this will make sure -- will ensure that we have enough liquidity but will come with an earnings drag. So that will, I think, until March 2020, our current outlook is that we should remain in that mode.

This quarter has been an average one for ARC. As we have always said, ARC a good 3% to 4% normal ROA business. And when you have upside and carry income and resolution, we were expecting that still to happen in this quarter, in Q2, but that has not happened. But we do think ARC is a good steady business, which icing on the cake as and when the upside happens.

In this quarter, the alternative asset management business has become even stronger. We have had one of the busiest quarters on that count because what is happening in India is, as we are moving from only a growth hypothesis opportunity, we are also becoming very attractive yield and return hypothesis. And that is where a lot of these credit strategies are kicking in, including the last-mile funding platform that we announced with our partners from South Korea. So I think alternative asset management is the beneficiary of the dislocation in the market. And we do think that a lot of the wholesale credit, especially the wholesale credit that requires long term, patient and flexible capital is moving to an alternative asset management or fund management structure, and we have been pioneers in that. We are the leaders in that, and we have had a lot of interest from global funds who want to capitalize on this 14%, 15% because, again, even things like real estate, project financing is not a bad investment. It may have looked like a bad credit strategy in the last 20 years, but it is, on a risk-weighted point of view, a fabulous opportunity. But it requires patience, flexible and long-term capital, which the fund structure will provide.

We continue to remain excited with retail credit. This quarter, we have done a lot of co-origination partnerships. So we do think NBFCs will be a lot more scalable on specific SME retail opportunities as long as they partner with banks. And the earlier partnership with bank was borrowing from banks. We think that will continue, but the borrowing from banks has got expanded to securitization with banks, which has also been there, but the new thing has been the co-origination. So I think your -- or any NBFC or banking partnerships will now be a combination of these 3 things. You will be a borrower from the banks, as you have been. You will repackage and sell portfolios to banks as you've been doing, but you'll do a lot more of that. But you will also be a co-originator with the banks and will service those loans for them and earn a fee on that. And that, from a return-on-equity point of view, is a very attractive opportunity.

We continue to invest in the Wealth Management platform. Capital markets continues to be a strong opportunity. Our assets in clearing custody continue to grow and all these are more annuitized forms of capital market opportunities that we've been investing in. We also announced our partnership with Gallagher from USA on insurance brokering, which is one of the offerings on our advisory platform in our Advisory business because we ought to be offering all products to our customers [will] be it whether buying insurance, they're buying asset allocation solutions, all of that and obviously, ECM and DCM and those capabilities.

On the wholesale credit, our strategy continues to be the same. We are degrowing the book in 2 ways. One is organic degrowth and the other is like what we did with (inaudible) with Mertiz, and we will do a few more of those, is getting long-term flexible capital from foreign partners who can capitalize on this opportunity but not burden the [NBFCs]. So a lot of our -- and this, we have spoken to a lot of our stakeholders, including equity investors and with our credit providers like banks and the bondholders and everybody is very excited with that. Because as long as this -- the burden of this starts shifting from NBFC to the fund management platform, it is a great one. I think real estate, we have given some color on that. The real estate market is starting to improve. In fact, the crisis has been a good thing because new supply has come down. New projects are not getting launched. And actually, housing is starting to pick up. We're still not seeing price improvement, which is even not on the cards for the next 1 year, but we do think the volume offtake for projects which are moving along, which have a very high degree of completion, those projects are seeing sales offtake of a fairly decent manner, especially projects which are under INR 1 crores, INR 1.5 crores.

And in that context, the last-mile fund announced by the government is a great help. Our estimate is the total last-mile funding required for good, viable projects, which are about 5,000-odd projects, is approximately about INR 40,000 crores to INR 50,000 crores and the government-sponsored AIF is about INR 25,000 crores. Funds like ours and a few others will provide the balance. I think we also hope to be about INR 4,000 crores to INR 5,000 crores of last-mile funding on the fund management structure, which, also, a great opportunity for alternative asset management. So our alternative asset management, after this fund closure and all, we would have crossed $4 billion of AUM, which makes us and continues to keep us as the largest alternative asset manager in the country, home grown.

And along with that, technology investments continue. In fact, we do expect that our spending on technology has been high in this quarter. And that is one of the calls we made, that even if it is impacting earnings, we continue to invest in technology and there's lot of these coordinations on the outcome of that. And I think part of our cost income ratios will remain elevated for next 2 quarters because we will not grow as aggressively, but we continue to invest in retail, credit, technology and wealth management platforms to continue to build them, while we will see some -- not absence of growth on corporate credit or de-growth on corporate credit, which will bring the asset base down. And that is a stated policy. I think between now to March 2020, this will continue, though, I think environment is improving.

So lastly, a couple of words on the environment. We do think, August onwards, the environment has improved largely because of the equity infusion that government did in the banks largely because of the interested cut cycle that RBI has been on for the last 5, 6 months. Partly because of the liquidity surplus that the system is somewhere now between [INR 2 lakhs and INR 2.5 lakh crores] of liquidity surplus, which eventually will trickle down and a little bit of the -- create the cost of funding coming down is a result of that. I think liquidity has eased off. We are still a long way away from the normalcy, but it is starting to improve, August onwards. September and October have been good months, and we are seeing traction on that.

We are also seeing the foreign investors coming back. I think there is maybe a risk on -- mentality is coming back, which is good for India because we need the foreigners to start investing again in equity markets, which is also coming back. So I think we're seeing early green shoots on the horizon. This quarter is an important one, October, November, December. But I think India may have seen the worst in terms of GDP growth of 5% in Q1 and we'll wait for the Q2 numbers. But most economists think it will also not be a very exciting number. But we do think Q3, Q4 onwards, GDP growth should also start inching back. The extreme slowdown we have seen will start to reverse and maybe '21 should be a normalcy year and '22 onwards will be a growth year for India. But I think from now to getting to normalcy itself will be a big achievement because India has had one of the [seriousest] slowdowns, one of the biggest dislocations in the financial markets we have seen in the last 4 quarters.

So along with that, again, thank you, all of you, for being on this call, and I do look forward to your questions, your feedback, your observations. And I think this interaction is very important to us. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Renish Bhuva from ICICI Securities.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [2]

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Congratulations on a good set of numbers, especially given the current environment. Sir, a couple of questions. One is on the -- our AIF structure. So we think -- we are raising money on that platform continuously and successfully. But in terms of deployment this quarter, so hardly INR 3 million remains. So last quarter, we were around INR 9,700 crores. This quarter, we are at INR 10,000 crores. So can you share some insights on how do we drive a P&L out of it, let's say, from '21 onwards given we are continuously raising money on this and the kind of deployment pipeline you might have?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [3]

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So yes. Actually an excellent question. So usually, on this kind of AIF kind of credit strategies, it takes about 3 to 4 months to close a deal. And I must be honest, I think until April, May, there was not focus on doing more because, as you know, the environment was very uncertain and all. Until August, I think, things were uncertain about whether the slowdown is severe, how long will it last, will the credit culture get worse. All of those questions. But there, August onwards, we are seeing a very good pipeline that is in process. And we do think the -- our target has been to deploy about $1 billion to $1.5 billion every year, about between INR 7,000 to INR 10,000 crores every year. And if you see the current undeployed amount is about INR 10,000 crores because this, what we have raised as the last-mile completion financing, the $425 million, that, we don't need to find new deals to deploy that we can always also transfer part of our portfolio and use that money for last-mile funding. And there is a huge pipeline out there in our portfolio and other portfolios that we have seen. So I don't see a lot of deployment challenges on this $425 million.

On the balance, INR 10,000 crores, our target would be to deploy it over 4 quarters. I must say, we have started the deployment focus from July, August onward because until then, things look like -- we don't know how long the slowdown will be. But I think August onwards, the mood is starting to change and we are seeing quite a few opportunities, including distress with banks wanting to do 85/15 deals with ARC also. So we have actually a fairly good pipeline. And I do hope that Jan. onwards, we start showing deployment. Though, in the last 4 months also, we have closed about 4 deals across all these funds that we manage. So we have done deals you would have seen. We have also bidded for IL&FS roads and on infra AIF, and we have actually been awarded 3 roads out of that. We have -- there was in the news that [NG] Solar , we have been one of the bidders on that. We closed the Essel transmission project. We closed the (inaudible) as has been reported in the press. So I'm sharing that with you. So our average is to do about $1 billion to $1.5 billion and about 25 to 35 deals in a year, which is about 2, 3 deals a month. We have done about 5, 6 deals in the last 3, 4 months. So the pace has slowed down, but we do expect to pick up the pace from Jan onwards.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [4]

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And if you would sort of -- can just share the profitability metrics, how it works on, let's say, assuming $1 billion deployment on yearly basis?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [5]

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So what happens is when you deploy, you start earning fees. So on an average, let us say, the INR 10,000 crores undeployed amount, when we -- if you were to hypothetically deploy the whole thing, you would earn about INR 150 crores of fees. The good news on this is that because we have INR 20,000 crores [corpus], INR 10,000 crores is deployed, INR 10,000 crores is not deployed, the cost has already been incurred. So in a way, you will earn fees on deployed because, unlike private equity where you get fees on AUM, on private credit, which are the strategy, you get paid on deployment. So once you deploy the money, you start earning fees. So on INR 10,000 crores, the potential fee is INR 150 crores. Then the second thing comes in is, when you exit the old investments, you start getting carry on that. And usually, carry is also around 1.5%. The economics of private credit funds are 1.5% on deployment and another 1.5% on carry if you have made a 14%, 15% kind of a return, which is what all these credit strategies do. So you end up making about 3%, half and half. Half is fees and half is carry.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [6]

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But like -- so what will be the average tenure of these funds? Because I'm assuming carry income would be a little back ended, so...

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [7]

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Yes, it is always back ended. And usually, the average investment horizon in credit is about 3 to 4 years. While in private equity, it is about usually 5 to 7 years. So this is slightly shorter than private equity. And even the infrastructure e-fund that we have that has a 7-year investment horizon. So usually, you're in-to-out is -- it will be within 3 to 5 years.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [8]

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Got it. Got it, sir. And sir, so this is -- we talked on the revenue side. But I mean, in terms of the final profitability, what sort of basis points we make on, let's say, INR 100 of AIF, including everything, cost, carry income, everything?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [9]

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So the way it works is, on INR 100, you expect to make INR 3 of effectively fee, half as normal management fee and half as carry. Your cost -- on the first 1.5%, your cost income ratio is about 65%. So out of 1.5%, about 1% goes away as expenses, and 0.5% remains as your PBT. But again, as I said, this is on an entire amount. So if you have invested half the amount, your cost income ratio will be slightly higher. On carry, it is about 40% goes to the team and 60% comes to us.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [10]

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Okay. So 60% to the originators?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [11]

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To the -- to Edelweiss.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [12]

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Okay. And so...

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [13]

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So on the whole, if you have a 3% overall income, your cost income ratio should be 1.5%, and your -- what comes to the -- as a PBT should be another 1.5%. And if you take a tax of 25%. All of us are getting used to 25% tax from -- 25% tax now. So -- 25% as tax. You should make about 1.1% or 1.2% as you PAT to AUM ratio over the cycle. But as I said, this is slightly back-ended. We have started investing a lot of this money around '15, '16 onwards. So around '20, '21, onward, this will start getting in the carry also.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [14]

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Got it, sir. This is very, very helpful, sir. So last question. Ideally, please try to address including your strategy also. So last year, we had INR 1,000 crores PAT consol level. Of course, FY '20 would be a kind of a consolidation year. We are doing a lot of new things. But if we have to assume that the business will normalize in FY '21 onwards, so what sort of PAT do you assume on each of your verticals, which is like credit advisory and insurance?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [15]

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I think what we saw last year, FY '19, it should be like a base case because as you correctly said, FY '20, there have been 4, 5 datas on that. I think the data of credit cost. I think credit costs, both the nonrecognition of income as well as the provisioning and write-offs, have been an extra INR 500 crores over normal in this year. And all other, the cost of liquidity, cost of borrowing, plus the lower level of activity is another INR 300-odd crore for this year. So we would say about INR 800 crores is what I would call, at a pretax level, an exceptional fall, which can translate into EUR 500 crores, INR 600 crores of real fall. So I think the idea would be that once this normalcy happens, you should get back to that. And then our target has been about 20% growth. We see that possible in retail credit. I think our target in retail credit is actually 20% growth because we are really very small. So I think on that base, that growth is possible. Asset invent should grow at least 20% to 22%. Invent -- sorry, in asset, as I explained earlier, a lot of our income and profit have not yet come in because we have not deployed INR 10,000 crores and we have not started getting the carry income, which we expect also coming in from 2021 onwards. So I think some profitability from that coming in. So I would say '21 should be a normal profitability year. And '22 onwards should be growth. I don't think, all of us think, all NBFCs as well as financial services companies will go through a 30%, 35% growth in a hurry. But I think getting back to 20%, 22% growth should be possible after '21.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [16]

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Got it. So sir, '21, broadly would be a year where we'll see the '19 pattern from there onwards. So we'll try to achieve 20% plus kind of an earning growth rate on a sustainable basis?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [17]

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I would say yes.

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Operator [18]

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Your next question is from the line of Avinash Singh from SBICAP Securities.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [19]

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Yes. Two questions. First, if you can just help us understand sort of an out of structure. So now a lot of capital has come over the last 1 year and double in time. I mean, the CDPQ and then Kora and then this -- some other capital had come. And all these investments are in the form of CCPS. So I mean, what sort of a time line for the inflows of this investment and by what time it will mature and what will the typical dilution put, I mean, all these CCPS gets converted to equity sales. So I mean that will help us sort of model the estimates for the Edelweiss consol numbers. So that's the question one.

And second, if you can just throw some color on the progress in terms of a co-origination because I mean, you have signed agreement with 3, 4 public sector banks. So I mean, in terms of the technology integration and how has been the progress so far and which would be the aligns -- business segment aligns where you will see that, okay, this will do -- make a big difference. So these are my 2 questions.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [20]

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Yes, Avinash. Thanks a lot. I think, on the first one, we have effectively -- as you know, the strategy has been to independently capitalize the business verticals we have. So out of the INR 1,800 crores of capital from CDPQ raised for the credit vertical, INR 1,040 crores has already come in. And we will get 2 more tranches of INR 350 crores each over 2 years. So INR 350 crores in 2020 and INR 350 crores in '20 -- I mean, calendar 2020 and INR 350 crores in calendar 2021. These are all the CCPS carrying a coupon of about 9%, which is -- but also there's convertibles, which is linked to profit. So we think if the profits grow higher than 9%, it's actually more favorable from the valuation point of view. The conversion target that they have is 5 years from investment to be invested in 2019. So 2024 is the conversion date. Or if you want to do an IPO on the listing, then it can get preponed. So anytime between say, 2022 to 2024, should be the conversion on the credit vertical, which is good for us because this structure also gives us time because it will be based on the valuation and the earnings of '20 -- of the year of conversion, 2-year average of the year of conversion. Which is good for us because that allows us to take some degrowth in earnings now, recalibrate our strategy without having to worry about that. And that is how they also wanted. They wanted us to take 2, 3 years, even if there is a dip in earnings, as long as the earnings are recover by -- in the credit business, by 2022 and 2023. It won't affect our decision-making in that sense. So that is with them.

With Kora and with Sanaka, we have raised about $150 million approximately. Here also, the conversion date is March 2021 to March 2022, and even in between of that. And again, it is linked to profitability of that year, which is good for us because we don't want to link it to currently profitability because we know a, the environment is bad; but b, it also gives us room to take some short-term cleanup costs and just strengthen the balance sheet. And that is what our approach has been. Our idea has been the road has got [easy] for all of us. Until last year, the road was very smooth, easy, open, and we were all driving very happily. The road has got really bumpy and very uncertain. A lot of speed breakers on the road. So what we have done is slow down the car, make sure we get enough gas into the car, make sure we make the car transmission a little stronger. And we know that we have strong drivers. But a good driver on a road like this should only work when there is a strong car, enough fuel and you are driving carefully. All 3 are required, and that is what we've been doing.

This structure in both the deals for our Advisory business equity deals and for the Credit business equity is -- allows us to take a short term -- not a short-term horizon but a long-term horizon on our earnings outlook. I must also clarify, both of these are compulsorily convertible equity instruments. So this is equity enterprise [and that we think] cash converted can change. We think whatever ranges we are talking about, this should be in the range that we have indicated in the presentation. That in the credit business, CDPQ should have anywhere between 14% to say, 22% kind of equity in the company. And for both Kora and Sanaka, the valuation should be around INR 8,000 crore on an average. INR 8,000 crores [P-money] valuation for the advisory business. So this is what we are aiming for, and we hope to get there.

On the co-origination front, we -- and actually, I must also say more than these rounds of equity, in fact, INR 2,800 crores is a very robust equity raise and having done it from multiple investors has given us a lot of confidence and confidence for our stakeholders that we do have good, high-quality investors coming into our capital structure. But we also raised [AR] money like this partnership with this South Korean company. Even this gives us a lot of good quality, long-term capital. So one of the things we have done, whether we got money from CDPQ 3 years away to what we have got from Tokio Marine in the insurance business toward all these deals we have done now, we have shown that we can attract, bring in long-term, very patient capital for good high-quality opportunities in India. And these are India partners and capitalizing on that. And I think this is one big trend that we have demonstrated and we'll continue to build upon that. Because there's a huge amount of global capital wanting to come into India, and we want to be one of the partners in the areas where we have capabilities to be able to generalize and attract this capital.

On co-origination, a lot of the trial runs have been happening -- going on. We expect to disperse the first loans in the next 2 weeks from all these banks. With all these 4 banks, a lot of trial runs are going on because, ultimately, I think 80% of what -- what has to be done as we ironed out the last [20], from technology point of view, from an acceptance point of view, is very -- there is a lot of -- irons are being winkled out. I do think, between now to March, we will log in a few cases. But from a volume point of view, it won't be a great one, but it could be a great takeoff point after that for 2021 because the numbers that we are talking and what the banks are talking are very different. The banks have very high expectations. We -- our idea is that, on co-origination, if we can do about INR 10,000 crores in the next 18 months, that will mean only INR 2,000 crores on our balance sheet on the retail side, which is also not a lot of money on this. But INR 10,000 crores, a lot of banks are saying is -- I mean, the -- but each of the bank wants to do between INR 5,000 to INR 6,000 crores a year on this particular platform. So I think the bank's expectations are very high. We want to build them a platform that is very scalable. In order to building a platform, a lot of trial runs are going on. We've invested a lot in technology and manpower on this even in this quarter. So just to give you an idea, aside of all this, in the month of September, our headcount remained almost flat, but we hired 400 people. So we continue to hire to meet attrition and hire in the areas where we want. So we added about -- we hired about 400 people in the month of September. A lot of them are on technology and on retail credit, but largely targeted towards this coordination. We're also hiring people in insurance and other verticals where growth continues.

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Operator [21]

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(Operator Instructions) The next question is from the line of Jignesh Shial from Emkay Global.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [22]

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Yes. Just quickly, as you highlighted earlier that this last-mile funding one, you can even buy out the book from your -- I mean, the portfolio from your own existing books. Is my understanding correct that, that will further shrink down your NBFC portfolio? Or you'll be putting additional money into your existing projects that you are funding? If you can clarify [earlier].

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [23]

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So there's a last-mile funding deal, this $425 million. $300 million is from the Korean partner, $125 million is ours. So that will continue. Our $200 million to $300 million, and $300 million, which is theirs, we can sell part of the book there. If you want to release liquidity, there are already projects they've evaluated and approved that they want those. We also expect to allocate about $100 million out of the $300 million for last-mile funding of all these projects that we need. So in a way, it will take away the burden of this, but what you are saying is very correct. We want to shrink the wholesale book. But we will divert that capital to the retail book growth. So maybe for the next 4 quarters, our overall book may not grow, but the composition will continue to change from wholesale to retail.

So if you remember, our original plan was organically move, scale down wholesale and to build retail. Now we are doing both organically and structured reduction of wholesale because that is what gives comfort to a lot of our stakeholders. Plus, it gives a lot of stable, patient capital for these projects because a lot of these projects are very good, very economically viable. But a, they need last-mile funding. But b, they may also need slightly more long-term and flexible and patient capital to really do a project in the right manner. So this gives us room. We don't have to sell anything from our book. That is our choice. But it is part of the mandate. In fact, our idea is to take this $425 million up to $1 billion. So the faster we use up this fund, the faster we can raise additional money because there are a lot of investors interested.

In fact, ironically, the attraction of real estate in spite of all the [gloom doom] that has been going on in India, from a lot of overseas point of view, a lot of overseas investors are seeing this as a great opportunity to make about 15%, 16%, give last-mile funding. That is clear (inaudible) is very attractive. But it can't be done in an NBFC or a mutual fund format because of the ALM requirements. This is [largely allocation in] long-term capital, but that is available. But the good news is, as global leads have gone down, a lot of global investors have come and said this is very attractive. Because, even now, making 15%, 16% on a real estate project that is already 80% done is a fairly attractive opportunity. And there are not too many places in the world where you can make about 14%, 15% return even after factoring the rupee devaluation. But this is a great return for a lot of insurance companies and pension funds and [sorted bell] funds. And this is -- what is -- will be a degrowth for NBFCs, which is another part of the plan, we wanted to do it over the years, will become a big opportunity on the asset management. And this last-mile funding closures that we have done have demonstrated that we can get, even for a slightly concerned area like real estate, which has been, we have got some high-quality investors coming in, in the middle of this and saying, "Oh, this is a great opportunity, and we want to put in $425 million, eventually $1 billion into this asset class."

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [24]

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Understood. And number two, since you now -- this is exactly, if I remember it right, you have been highlighting since Q3 FY '19 call that you did that consolidation is bound to happen in real estate, liquidity is going to drive the [now] business. And now everything is going accurate. Now look, it's not something that Edelweiss is facing this issue. It will have to be a scheduled 3% disbursement or AUM for the corporate book and all (inaudible) housing. I think the issue is not only from the demand side as well. How we are seeing the demand itself is pretty sluggish. Do you see that revival coming up? That individuals coming and buying [flags] or corporates putting more money into real estate? From the demands that I'm asking. Do you see that...

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [25]

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So I think, if you see our investor presentation, we have added an appendix on real estate. There is a Slide 74, which shows that actually, after 2017, post demonetization, the real estate sales volume has been inching up. In fact, last 2 years, the sales volume growth, as per JLL data, is up 11% CAGR. So as I will keep on saying, sales is not a big issue. Pricing has also been flat. If you look at last, I think, 8 years, the pricing in real estate has been equal to inflation. So inflation-adjusted pricing has been flat. We have those charts and a lot of data on that.

I think the problem is, you correctly said, not just for real estate but for all corporate and wholesale, lending for the last 1 year. And we have seen that with banks also who have a wholesale book. You see what happens with wholesale, usually, about 35% to 40% of the wholesale book is usually, not only in India, all of the world, is refinance oriented. 60% of the book is paid out of the cash flows. That is how it works everywhere in the world. That the total wholesale book is [INR 100] for the economy, about INR 60 million paid out of cash flows, and INR 40 million will have to be refinanced. What has happened last 1 year, refinancing has completely come to a standstill, which has created the asset quality and cash flow issues which have been there.

Compared to that, on retail, the refinancing is not more than 10% or 12% globally. Because when you take a home loan, usually you will paid it out of your salary income every month. You are not looking at refinancing part of that over the next 3 years or 5 years. So usually, retail, SME loans are not -- have a much smaller component of refinancing. Wholesale loans have 25% to 40% element of refinancing, which is where the problem has happened. I think it's demand and supply problem also because, as the refinancing risk has come up, all of us will want to become careful because we don't want to get caught in the absence of refinancing, the whirlpool that we -- that has started. Hopefully, the whirlpool is starting to end. So that is the first part.

The demand is there. In fact, even today, the demand is not that it's come down. But I think like, for example, on last-mile funding, the demand for last-mile funding for good, economically-viable projects is about INR 40,000 to INR 50,000 crores. But nobody's stepping in because real estate is a tainted opportunity because everybody said, "Oh my God, you are giving funding to real estate." If you are a bank or an NPS, you are a mutual fund, you will get hammered by your distributors, by your -- the liability providers because this has become a bad opportunity. The market perception has been very binomial. If you see the slides after Slide 74 in our presentation, there is a difference between perception and data on the ground. But because of the perception, everybody has been careful, including us, because on the NBFC also doing these kind of deals, if the liquidity crunch continues not only you will have a problem, your borrowers are going to have a problem.

But even (inaudible) format, this is a great opportunity. So I think the demand is there. We are not seeing a scarcity of demand. Of course, there is not much demand for CapEx. But for example, a lot of infrastructure assets are up for sale. Like I mentioned, the IL&FS assets. There are a lot of highways, good roads available for sale. There are a lot of power plants up for sale. And all these are good operating cash flow, they are very -- execution of the greenfield project risk that is available.

So if you have a couple of billion dollars to invest today, you can invest -- you can't invest it overnight because each deal takes you 5 to 6 months. Like on the IL&FS road bidding, we've been working on this for 6 months. We spent 4 months of due diligence, then we submitted the bids. The bids were submitted 2 months ago. They just got approved last week. And in order to close this, there'll be an NCLD process and all that. We don't expect to close this before March 2020. So it takes time to deploy, but you can reap a good return on this.

So I think deployment opportunity for all forms of credit have been there, except that, on the supply side, we all become careful. And on the demand side, the kind of credit people want, it takes time to deploy.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [26]

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Since...

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [27]

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Yes. Hello?

(technical difficulty)

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Operator [28]

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We'll just move to the next question, from by the line of Aditya Jain from Citigroup.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [29]

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On the asset quality, in 1Q, you had guided towards some INR 650 crores to INR 750 crores to INR 800 crores of credit cost for the full year. Is that still the expectation? And also related to this, are we likely to see one more quarter of NPA recognition and then largely flatlining from there?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [30]

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Yes. To answer the second question is, yes, because as we said, with this last-mile funding coming in, the project is taking off and all that and I think overall liquidity situation improving, we think things getting worse for the economy as a whole are not on the horizon. On the first one, yes, we still continue to guide towards INR 750 crores, INR 800 crores. Our normal credit cost should be about INR 400 crores. On an average INR 30,000 crore book, INR 400 crores is about 1.3% credit cost. That INR 400 crores has gone to INR 800 crores because we will be at about 2.5% credit cost overall for the book as a whole. But I would say on the wholesale, I think the credit cost will be closer to 4%, 4.5%. And retail will be closer to about 150-odd basis points because a lot of retail is the loan against shares, ESOP funding book where there is not much credit cost, and the other is on the -- mortgage is where also credit cost is lower, so a large part of the credit cost is wholesale.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [31]

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Got it. And what is the reason behind the drop in coverage on Stage 3 loans from 47% to 39%?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [32]

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We have followed -- we've been following an ECL model. So it's very account by account. Because it's account specific, so there are a lot of loans where recoverability rates are very high. In fact, our expectation is that even on this Stage 3, the collateral cover is fairly good. So I think the end recoverability is fairly good when you do an NPV calculation. So I think increasingly, the current conclusion for you, for us, for everybody is we are still in the NPA and the PCR mode because NPA/PCR mode was the old norms which have been there, if that NPA has a formula-based provision coverage. Now with ECL, it's very account-to-account specific. So you will see swings from one quarter to another because if there is a high expected credit [loss] account which gets resolved, suddenly, your ECL will be lower, your what is called PCR will fall and will go up because I think we all have to get used to, auditors, analysts, all of us, to an ECL mode rather than a PCR mode.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [33]

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All right. So it's not that this is driven by a revision in assumption. It is more that the mix of the Stage 3 loans had changed.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [34]

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Yes. Absolutely, absolutely yes.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [35]

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All right. And lastly, on the co-origination, could you give us some flavor of the types of loans that are being originated for Edelweiss?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [36]

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Yes. The 4 partnerships we have signed are different product programs. So we have done SME secured loan, which is also equivalent of SME LAP. We have done SME business loans. We have done home loans under INR 50 lakhs with one bank. And we have done what is called the mid-market loans, which are between INR 1 crore to INR 20 crores with one bank. So I think it's from mid-market to secured SME, to unsecured or business SME to home loans. We are talking to some other banks for LAP and other programs also, i.e., to take a product program. And what we have done over the last 5, 6 months is gone to banks and said which area, which asset class, which product area you think we can help. We have these capabilities in all these areas. And then start to work on technology and overlapping the product program because the -- even the KYC loans of banks are not the same as ours. So it takes time to align all of that. But the idea is that it will be mainly SME and retail, but this itself is a large one. As you know, we don't do auto, we don't do 2-wheelers, we don't do [core] loans. So these are not in those areas. These are mainly home loan, SME, SME secured and LAP programs.

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Operator [37]

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The next question is from the line of Mahrukh Adajania from IDFC.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [38]

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Sir, I have 2 questions. Sir, my first question was that -- I mean in general, the bond market remains nervous about NBFCs. So what would be your message to bondholders? As in what would it take for you to have a rating upgrade?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [39]

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Well, I think at this time, I don't think we want to focus on rating upgrade and all that because I think that kind of volatility you don't want in your outlook. But I think the -- what you correctly said, I think India, if you look at NBFCs, we are dependent on the bank market and the bond market. A large part of the bond market was driven by mutual funds, which has got dislocated completely. And I think from both redemptions and all because I think mutual funds are also caught into a bind because a lot of their liquidity providers were also wholesale, corporate, treasuries and all who have got very nervous after IL&FS. So I think one is that the mutual fund industry has done great, has evolved a lot on the equity side. And that's why I think equity side of the mutual fund industry is very, very evolved, very, very stable. And that's why SIP and all have continued.

I think on the credit side, given the changes in the credit rating agencies and the trust that got broken on each and every one after the IL&FS crisis, thereafter, IL&FS said, everybody said we can't depend on anybody. So that is to be reestablished. I think the mutual fund credit, part of the mutual fund will have to -- will be -- get reinvented. And the conversation a lot of mutual funds and SEBI and all are having, there will be a rethink on that. There'll be a lot of smart credit analysts who will come over, the dependency on credit rating agencies as the only source of decision-making will come down.

So I think the bond markets have got dislocated. I would say the bond markets were at 100. They are at about 40 now because of the dislocation that has happened. The bank market is doing 100 a year ago. The bank market is back to about 70, 75. So overall, that is why NBFCs still face a liquidity crunch, and we have seen growth of NBFC assets for everybody come down.

I think the other thing I would tell the bondholders is look at liquidity, look at ALM, look at the track record. Governance part is very important because I think everybody thought that it's -- I think irrespective of your track record and governance that the credit rating was the only thing that really mattered. That has started to change, I think. And for us, governance has been the quality of partners we have attracted. As you've seen in the last 10 years, from Tokio Marine to CDPQ to Allianz to Gallagher to Meritz, we have attracted some of the best-quality global partners, including Kora and Sanaka and all as investors also. So we have focused on that as an endorsement. Even EdelGive, which is our foundation, if you see that slide, it has some of the best global partners on that part also.

So I think governance is important. But governance is not -- yes, I think it's very obvious if I state this, one of the reasons we have got a little bit more push in the last 1 year is because we are not a corporate house. We are not promoted by a corporate house. We are not a business house-promoted NBFC. And that has put an extra onus on us to prove ourselves, which I hope that we have done. But I would say that the dependency on parentage, the blind dependency on just following credit rating agent -- credit rating will change. People will use all of that as inputs, they are not invalid inputs, they are very important and valid inputs, but people will do a lot more value added on their own. And on that count, I would say for the bondholders, look at data, look at track record, look at quality, look at all of that.

And I do hope that the bond markets will normalize by March 2020. The bond markets have been scared. I think IL&FS was -- if you follow the economy, clearly, it was what was called the Hyman Minsky moment for the bond markets in India, and we are all living through that. It has happened in other markets in the world. So what we have gone through is not unusual from what has happened in other markets in the world. But we're able to come back [from all that].

In equity markets, I have seen us coming back after Harshad Mehta, Ketan Parekh crisis. I think the same thing will be true with bond markets. We will be stronger a year down the line, but it has been a painful year, and it will take another 1 year to repair. But the good news is the bank market is coming back to normalcy a lot quicker because of the capitalization of banks as well as the liquidity and the interest rate cut and all. And that has been good for NBFCs.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [40]

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Got it, sir. Sir, and my last question is that on the last-mile financing fund that you raised, so would that take care of all your near-term real estate financing issues?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [41]

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Yes. Again, I would not call them issues, they are needs because our portfolio needs completion financing. Now you can say the government had also launched a fund, a lot of our portfolio companies will also qualify for that. But our idea has been not to burden our balance sheet, not to burden our liquidity profile as a way of providing the last-mile funding and all, plus this -- so this gives us a chance to maybe sell some wholesale accounts and use that liquidity and capital to grow the retail book faster. As I said, we see a lot of opportunity in retail, and we have invested in that. So this gives us a lot of flexibility. It also allows us to build an AIF platform in a very specialized way for last-mile funding, which is very scalable. And it got endorsement because even government announced a INR 25,000 crores very similar opportunity platform.

So I think it's a need of the economy. It's an opportunity out there. So it does give us liquidity options. It does give us the credit mix option because we do want to bring down wholesale and increase retail in our credit mix as we go forward. The other good news is that we have a lot of other investors on the same kind of -- on a similar kind of platform who are excited. So -- and this is something we were doing. Last 3 years, we've been saying that wholesale will slowly and steadily shrink on the balance sheet, and retail will slowly and steadily grow in the balance sheet. That slow and steady has become a bit faster partly out of choice and partly out of the market environment.

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Operator [42]

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The next question is from the line of KC Prasad from Maybank.

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Kshitiz C. Prasad, Maybank Kim Eng Holdings Limited, Research Division - Analyst [43]

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A couple of questions. As far as credit cost is concerned and all that you see for the first half, which has gone up by -- to about INR 4,300 crores vis-à-vis INR 2,658 crores last -- in the first half of FY '19, and in your last call, you mentioned that almost INR 2,000 was -- a whole lot was from the wholesale book. So how much will you attribute, what percentage or a number, in the first half will be attributed to the credit cost from the wholesale book? That is my first question. And the second is that what is the collateral cover? Is it still at 1.8x? And my thought was that why is the tax rate still at 34%, 35% vis-à-vis the tax rate which was reduced to 25%? So these are my 3 questions.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [44]

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On the tax rate, our CFO, S. Ranganathan, will answer. On the collateral cover on this Stage 3 and other accounts, we are at 1.6. So as I said earlier, collateral cover gives you comfort. But as we all know in credit, collateral cover is only one of the ingredients. Cash flow is another ingredient, which has been very challenged in the last 1 year. On the credit cost, we expect to be at about INR 800 crores for this year in terms of credit cost and what I call explicit credit costs. There is an implicit credit cost in terms of derecognition of income on fewer costs because, under [NDS], now we even put something that is not an NPA, you can stop taking income into account. And that should be another INR 200 crores. So overall, it will be implicit of INR 200 crores and explicit of INR 800 crores. Out of the INR 800 crores explicit, almost 80% to 82% will be wholesale and about 18%, 20% of this will be allocated to retail.

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Subramanian Ranganathan, Edelweiss Financial Services Limited - CFO & President [45]

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Yes. Mr. Prasad, on the question of tax rate, I will draw your attention to the item #7 on our press release. While the tax rates -- the reduced tax rates have been given, there are certain conditions that are required to be completed. And we are looking at each at our entities, each of our subsidiaries, and we have time till the filing of return, that is November 2020, to adopt that option. However, for the purpose of accounting, we will take a decision in respect of all the companies till 31st of March 2020. But in certain number of companies, we have taken it selectively. However, they have not been very material.

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Operator [46]

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The next question is from the line of Subramanian Iyer from Morgan Stanley.

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Subramanian Iyer, Morgan Stanley, Research Division - Equity Analyst [47]

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So a few questions. So one is on the loan yields in the corporate book. So I think probably you referred to it in the previous question that there are implicit credit costs. So there was a sharp decline in loan yields in this quarter. So how should we think about loan yields going forward for the corporate book?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [48]

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I think it should broadly stabilize. Maybe it will go down by maybe another 100 basis points for the next 2 quarters and then start inching up again because, as I said, in [NDS], you have this advantage because you know what is to happen earlier where an account is -- you know that there is going to be some amount of stress in that account, but it is not yet an NPA. You keep on adding interest to that and pay tax on that. So I think by not taking income into account, even on a non-NPA basis, isn't a short -- is a good thing, though there is a short-term cost to that. So I think our current yield was approximately, overall in the interest book, average interest rates have gone to 14.6%. I would expect it to maybe fall by another about 40, 50 basis points up to March and then start inching up again because this will be the effect of the derecognition of income.

The other I would add, [Subra], is what is to happen going forward. A lot of our credit income will also come from co-origination and other fee income. So interestingly, especially for retail, SME book will also not be the key indicator, though it is not a problem for the next 4 quarters. But after that, we do expect that a lot of extra [ease] we will get, which will be from cross-sell and co-origination fees. And also, I think that yield equation to ROE equation will undergo a change, but I think we are 4 or 5 quarters away from that.

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Subramanian Iyer, Morgan Stanley, Research Division - Equity Analyst [49]

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And the other question was from the -- for the ARC business. So what kind of growth expectations should we build there and also how to think about capital employed in the business on an incremental basis? I mean are you having to contribute more capital now in the new business there? Or should we -- should one model about 15%?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [50]

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I think about 12% to 15% would be our target. We don't grow it a lot faster than that. And 10% to 15% is what we would target on that because opportunity is there. But the idea is not to grow that because, again, as I said, we want to keep ALM and other things in mind. So I think on our balance sheet, now the main focus area will be retail SME, on the retail and the ESOP financing book. So all these are great opportunities, and we would want to allocate more capital to those. ARC, if we can allocate about -- if we can grow by 12% to 15%, we'll be happy.

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Subramanian Iyer, Morgan Stanley, Research Division - Equity Analyst [51]

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All right. A question on the Wealth business. There was quite a bit of -- or there has been like quite a bit of decline in yields in the last few quarters. So I mean where do the -- where does it settle?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [52]

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I think the last couple of quarters, the decline in yield has been because we scaled back our ESOP funding book because ESOP funding book is also very -- if your funding is commercial paper, it's a great book. Currently, it is not being funded with commercial paper, so the spreads on that have got impacted. I think after March 2020 when commercial paper markets come back, we'll only use commercial paper for this kind of liquid credit books, as we have said in the past. So I think overall, our current package is what we'll look at on the wealth management, which is about 13 basis points. We think normal should be about 18 to 20 4 quarters from now.

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Subramanian Iyer, Morgan Stanley, Research Division - Equity Analyst [53]

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Got it. And last question on the last-mile financing fund. So your contribution of $125 million, what would be the source of funds? Is it EGIA's equity? Or I mean how will you be funding that?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [54]

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No. I think our $125 million, the transfer of the assets from our books. So assuming -- let us assume all $425 million, out of $425 million, we keep $100 million for last-mile funding. So we keep that. And $325 million, we transfer from our credit book, NBFC, to the fund. Then the credit book gets $325 million, out of which we'd invest back $125 million and gets $200 million of free liquidity. So think about -- our $125 million is not additional cash going on. We'll transfer $125 million worth of loans into that portfolio, and we can transfer more if we need additional liquidity.

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Operator [55]

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The next question is from the line of Jignesh Shial from Emkay Global.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [56]

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Yes. Sorry, I got disconnected last time. Just most of the questions have now already been answered. Just one last thing, since you discussed about IL&FS during the last question, there is additional INR 25,000 crores that has been allocated by the government recently for the CLSA structural debts and [Diwali and all]. Being a veteran, what's your sense over this? Do you think that this will be -- do you think this is a smooth process? Will it be quickly sorted out and all? Or do you think it is pretty longer process which might take a sizable amount of time just to sort out and all? And how financiers would get advantage out of this, if you can throw some light over this.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [57]

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So I think, first of all, as you've seen in some of the appendix we have given, the total credit book for the industry, banks and nonbanks put together, on the real estate project financing, is about INR 5-odd lakh crore -- 5 lakhs, 30,000 crores. We think, currently 5% of that is NPA, which is, say, about INR 25,000 crores is already NPA. Once -- this is another 10% needs last-mile funding, any stock for various -- because this 5 lakh, 30,000 crore also include [LIB] and commercial real estate and all. So if you do this estimate, about INR 40,000 crores, INR 50,000 crores of last-mile funding is required, out of which government has -- in this fund, has given INR 25,000 crores.

Now the good thing about last-mile funding is even if a fund approves to give a project of INR 100 crores, that INR 100 crores flows usually over 1 year. So you're giving only INR 10 crores every month because it is as per execution plan because you need money as you put more slabs and buy steel and cement and all that. So I think since the government is at INR 10,000 crores, the first thing they need to do is to close the INR 25,000 crores. I believe SBI will be about 10% of the funds. So they have indicated, they'll be INR 2,500 crore, LIC might be INR 4,000 crore or INR 5,000 crore. So I think the INR 15,000 crore to INR 20,000 crore in this fund will be quicker. Once we have that, they can continue to raise the balance money but also start deploying, so I expect the approval should come from next quarter onwards. Jan, Feb, March quarter, a lot of approvals will come.

And then disbursement usually is on a planned basis, which is also not needed. Actually, the entire INR 25,000 crores is not quickly required. I think it will get executed faster because government has appointed SBI as the fund manager for that, SBI Caps. SBI Caps has a lot of expertise in last-mile completing. They have been advisers for a lot of stock projects otherwise also. So they know how to evaluate a project, how to evaluate the cash flows. They do the discounting on that and all of that. So -- and a lot of these are going to be RERA-approved projects. So on the RERA-approved projects, our own experience has been due diligence is much easier because a lot of documents, land titles and all, are already cleared. So in a way, if this fund is only for RERA-approved projects, it can happen a lot faster. So on that count, I'm fairly positive on this getting disbursed. And this is more than enough, INR 25,000 crores.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [58]

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And does this change the overall perspective for the bond guys? I mean the debt market guys, their perspective towards the financiers, do you think that should be changing because of this? Because now, even the government is trying to help them out. So overall, the funding for the financiers, NBFC specifically, do you think that to ease because of this?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [59]

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I think it should ease. I think we've already seen the signs of that. See, what has happened is there was a panic after IL&FS, then things were normalizing. Then we had [Diwali] in June, so there was a second round of panic. But now that liquidity, surplus, interest rates have come down, most of the NBFCs have, I think, reasonable liquidity. What I call is most NBFCs, all of them, have enough essential liquidity but not enough growth liquidity. So I think now we have to only solve the growth liquidity challenge, and that is partly the partial credit guarantee scheme will solve -- partly will get solved with this last-mile funding, partly is getting solved because the bank financing has opened up because a lot of PCA banks have got capital in August from the government. So they also have been starting again. I think bond markets have been dislocated, but we are seeing the retail and the general bond markets still being reasonably more stable. It's the mutual fund bond market which has got highly dislocated, but we are seeing signs of repair on that also. So I think it was more a psychological shock, and people thought anything could happen. I would think on a conservative basis, I think March 2020 is where the bond market should also start getting impact.

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Operator [60]

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The next question is from the line of [Vivek Ramakrishnan] from [DSP Asset Management].

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Unidentified Analyst, [61]

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Congratulations on the fund raise. I have a series of questions. So what I thought I'll do is just ask the questions, you can pace the answer out because it's already been an hour. In the real estate and structured financing book, do you see a glide path in terms of the next few quarters? Can you guide in terms of how the book will come? I know immediately, there'll be a INR 2,100 crores, INR 2,200 crores, INR 2,300 crores of reduction for this new funding but a natural completion and so on. So that's question 1.

Question 2 is there's always been a theme in the market that there's been a shift in consolidation among developers, projects that [quit], developers are moving to better-quality developers. Are you seeing such a shift in your portfolio?

The third question, in terms of the retail and SME portfolio. The economy seems quite weak at this point of time. Do you see any potential areas have shifted as you grow it? What do you think would be the key mitigants? And I know because the amount of credit itself was low, you can underwrite -- extend an underwriting. But do you see any positives there?

And that again ties in with the next question, just on co-origination, which is fourth question. How is the ROE in co-origination? It seems to be an extremely good product when done successfully.

And the last question, sorry, would be on mortgage financing. You have a book of about INR 8,000 crores. Given the high cost of funding, would you see that, that will be more a sell-down strategy because you didn't mention -- I think you did mention [homelessness] and INR 50 lakh as part of co-origination. But would you be more selling down that portfolio because that would give you a better ROE?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [62]

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Sure. Thanks a lot, Vivek. I think I'll try and quickly answer these questions. I think you have asked some of the very important ones. So I think on the wholesale book, our glide path has been to have a half-life of 2 years. So if the current wholesale portfolio is about INR 15,000 crores, it should become INR 7,500 crores in 2 years and maybe about INR 3,000 crores in 3 years after that. We can do it a bit faster, INR 1,000 crores here and there. And organically also, this portfolio was coming down by about INR 2,000 crores every year. Instead of INR 2,000 crores, I think now it will be down by INR 3,000 crores to INR 4,000 crores every year is what our plan would be. So I think organic of about INR 2,000 crores, inorganic of another INR 1,500-odd crores every year for the next 3 years would be our target.

We can tweak it a little bit, but our idea is to reallocate the capital for the retail credit business on NBFC and reallocate the people for the asset management on the wholesale side. So a lot of our wholesale -- rather than running a small book on wholesale, we would rather have this team raise $1 billion, $2 billion fund and continue to do that, but not on NBFC, in the fund management format. And we are one of the few firms which have this capability or opportunity to switch. We can toggle on wholesale from an NBFC model, which we are now through an asset management model, which is where we want to be. So I think I would say our half-life in the next 2 years, you should see about INR 7,000 crores to INR 8,000 crores on the wholesale book coming down, both organically and inorganically.

I think developer consolidation has been happening at a project level. We ourselves have done about 10 of the projects where we have gotten a development partner. And usually, along with last-mile funding in some projects, you also make sure there is a change in developer because it's not just execution, it's also sales. And sometimes, a new developer also brings a lot of credibility for sales from a sales point of view. So I think that is going on. And usually, that will be the model for a lot of projects where the weaker developer or where the names are not good enough, they will become more the passive or the silent partner. And you will get a development manager or a developed partner will be a very high-quality name who will give a 10% fee for good, economically viable projects.

I think the problem earlier for getting a new developer was not economics but was more the cleanliness and the due diligence and all. Fortunately, if it is a project which is RERA-compliant, a large part of that risk is going away. I think all of us are underestimating how much impact that a RERA-approved project has on all these issues of due diligence and last-mile funding and change of developer because 80% of the boxes are -- a lot of information is available. A lot of credit is there in terms of ownership of land title and all. Currently, a lot of the problems we are seeing, whether it's those cases in Delhi, are all pre-RERA projects. So I think fortunately, after RERA, a lot of the dependency has improved, and we will see that in the coming years, we -- currently, we are not able to appreciate it as much. But you are absolutely right, consolidation and partnerships will happen.

I think on retail and SME, things are okay because this -- a lot of this got stress-tested after demonetization and GST. So the ones who have been able to be okay after GST and demonetization are still okay. The economy is not doing well, the working capital cycles have got elongated. The information we have is also improved, along with GST, our ability to get proactive, early warning signals has gone up. Collection analytics have gone up a lot because a lot of your asset quality on retail side is also a function of collections efficiency. And we have seen that. I think we have stepped up a lot in the last 1 year where your check bonds has gone up, but your NPA has not gone up because your collection efficiency has gone up. So I think with analytics and all, that is also helping the industry on the retail and SME side.

I think you are very right, I think co-origination is a very good, high-ROE product. It varies from product to product. But I would say it is very attractive, if you can get it right. But in order to get it right, a lot of hard work and technology investments have to go into that. And it requires focus. We already have a specialized team who are focusing only on co-originations partnership with banks because it takes 3 to 4 months to sign a bank partnership itself. So it requires a lot of allocation of resources and focus. And on the mortgages, you are right. I think we will do sell-down. We will also do a lot of funding with NSB because the spreads -- when you get NSB funding, ALM and spreads are a lot more healthy. And there are still pockets in mortgages where you can't build a large book but you can build INR 3,000 crores, INR 4,000 crores or INR 5,000 crore books of small-ticket home loans and all, self-employed LAP kind of products, which still do well.

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Operator [63]

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The next question is from the line of Renish Bhuva from ICICI Securities.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [64]

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So just a quick question on, again, on the retail plus the wholesale side. So our trade book ex [asset to construction] is close to INR 13,000 crores now. So what sort of loan book you foresee by the end of '20 and '21, including co-origination and run down on the wholesale side?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [65]

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So I think, for the next 4 quarters, our approach is the book overall size should remain the same. And as I said, wholesale should come down by about INR 3,000 crores to INR 4,000 crores, and this will increase retail by INR 3,000 crores to INR 4,000 crores. That is a good news because this doesn't put excessive pressure on liquidity because we are taking liquidity away from wholesale and putting it into retail. So we don't want to grow the asset side aggressively. But obviously, INR 4,000 crores of retail in 1 year is also not a bad number because with that INR 4,000 of our own book, we will do another INR 3,000 crores to INR 4,000 crores of third-party AUM via co-origination. So I think getting -- currently, our capacity is to do about INR 800 crores to INR 1,000 crores on retail side every month. So if you use even INR 10,000 crores of our capacity, our own book can grow by INR 4,000 crores, INR 5,000 crores, and the third-party can be INR 4,000 crores, INR 5,000 crores. So that's our target. But the growth of INR 4,000 crores, INR 5,000 crores, our book will also be offset by the reduction in the wholesale of INR 3,000 crores to INR 4,000 crores.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [66]

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Right. So just again, a follow-up on that. So even on retail side, our growth is actually -- there's a decline in the retail book also by 25% Y-o-Y. So when we say we'll replace those INR 4,000 crores of run down wholesale book, are we seeing any green shoots on the retail side? And are we all ready to grow from next quarter onwards? Or it will be a little back-ended towards the end of third and fourth quarter? So basically then, it will be FY '21 or within FY ['22].

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [67]

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Yes. So earlier, Renish, sorry, I was focused on SME and mortgages as retail. The degrowth in retail that you are seeing is mainly because of the ESOP financing and the loan against shares book, which, as I said, we will scale it up. There is a demand out there, and this capital that we have raised in the Wealth Management business will give us enough capitalization. We will scale it up a lot faster if the commercial paper market comes back to normalcy in the next 2, 3 quarters. So that is a very tactical scale-up that will be there. On the ESOP financing and loan again shares, yes, we can easily, in 4 or 5 months, add about INR 4,000 crores or INR 5,000 crores. We can do INR 1,000 crores a month on that book if we have good quality funding via commercial paper market and we have some reasonably good balance sheet size, which we will have after this capital raise. So I'm excluding the loan against shares and the ESOP financing from the retail book.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [68]

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Okay. Okay. But on a blended basis, would you like to guide anything?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [69]

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No. I think definitely, as I said, part of this is tactical, part of this is INR 1,000 crores here and there. But I think broadly, as I said, in SME and retail, we would like to add about INR 4,000 crores in the next 1 year.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [70]

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Next 1 year. Okay. Right. And then sir, last question from my side. On the each of the vertical: wholesale credit, retail credit plus wealth and the asset separately, what will be Edel's stake post a full dilution of CDPQ and Kora and other partners?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [71]

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So as I said earlier, in the credit business, the CDPQ stake of where and when it gets converted after 5 years will be an EBIT between 14%, 15% to 21%, 22% in that range, depending on our profitability, ROE, PAT in that year. So it will be in that range on the credit side. On the...

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [72]

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Credit you mean is only retail and wholesale, right, ex ARC.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [73]

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NBFC, yes. Basically, they have invested in the NBFC finance, and they would have invested INR 1,800 crores in that business for which they will have anywhere between 14%, 15% to 21%, 22% as at the conversion time. On the advisory side, we're expecting the pre-money valuation to be about INR 8,000 crores. So assuming we raise about INR 1,000 crores, it will be INR 1,000 crores upon -- in the INR 9,000 crores, so about approximately 11%, 12% stake. And we will have about 80 -- about 85% to 88% stake or on somewhere between 85% and 90% will be ours, and about 10% to 15% will be with the investors in the advisory business.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [74]

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But sir, in Edelweiss, I think some part is already owned by employees and some other entities. So what will be the actual Edel stake?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [75]

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No. Currently, in the EGIA, we're -- which is the advisory leg, ECL Finance is the business -- is the entity for credit. EGIA, Edelweiss Global Investment Advisers, is the entity for credit -- for advisory business. There are no employee ownership in that. We will give ESOPs in that to our employees of EGIA in that in the future. So currently, as per current structure, whatever investors have invested, INR 1,000 crores after they invest should give them about 10% to 15% equity in that business.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [76]

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Right, sir. And on the ARC side?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [77]

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ARC, we are currently 60%. That has been steady. And it will remain that. And if we are buying more stake in that, we will announce it. So we own 60% of ARC, and we will own about 85% to 90% of EGIA after full conversion.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [78]

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Right. And around 80% in credit business, around I am saying.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [79]

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Yes. Yes.

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Operator [80]

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We have to conclude the call now. You may please contact Edelweiss IR team for additional information. Over to the management for any closing comments.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [81]

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Yes. Again, thanks a lot. I think a lot of these questions have been very interesting, and I really enjoy interacting with all of you. So thank you for taking the time out. We obviously are available for any specific information that you need. Our team members are in touch with you, and I do look forward to interacting with you. And we hope that India in the coming year is back on the growth path. Thank you once again.