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Edited Transcript of EDELWEISS.NSE earnings conference call or presentation 15-May-19 9:30am GMT

Q4 2019 Edelweiss Financial Services Ltd Earnings Call

Mumbai Jun 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Edelweiss Financial Services Ltd earnings conference call or presentation Wednesday, May 15, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rashesh Chandrakant Shah

Edelweiss Financial Services Limited - Chairman & CEO

* Salil Bawa

Edelweiss Financial Services Limited - Senior VP of Stakeholder Relations

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Conference Call Participants

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* Anitha Rangan

HSBC Asset Management (India) Private Limited - VP of Fixed Income

* 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

* Renish Bhuva

ICICI Securities Limited, Research Division - Assistant VP

* Umang Shah

HSBC, Research Division - Analyst of Financials

* Viral Shah

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Edelweiss Financial Services Limited Q4 and FY '19 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Salil Bawa from Edelweiss Stakeholder Relations team. Thank you, and over to you, sir.

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Salil Bawa, Edelweiss Financial Services Limited - Senior VP of Stakeholder Relations [2]

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Good afternoon, everyone. Thank you for joining us for FY '19 results conference call of Edelweiss Financial Services Limited. We have with us Rashesh, Chairman and CEO, Edelweiss Group; Mr. Himanshu Kaji, Executive Director and Group COO; Mr. Ranganathan, President and Chief Financial Officer; Ms. Ramya Rajagopalan, Executive Vice President, Corporate Development.

Before we begin, 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. A detailed statement in this regard is available on the results documents shared with you earlier. During the discussions, we will be referring to the Q4 FY '19 investor presentation uploaded to the exchange and also on our website.

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

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

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Thank you, Salil, and good afternoon to all of you, and thanks for being on this call. I can see some of the names. A lot of you have been with us for many, many quarters, so good to have all of you once again with us at the end of another quarter -- another year.

We announced the results in the Board meeting yesterday, and we've also put out the investor presentation after that. I hope you have had a chance to go through it. The highlights are that for FY 2019, we have clocked total revenues of INR 10,886 crores, which is a 22% growth; and we had profit after tax of INR 995 crores, slightly short of INR 1,000 crores, but almost there, which is a growth of 15% over the earlier year.

Friends, as you know, the more important parameter has always been the profit after tax, excluding insurance, because insurance is a separately capitalized infringe vehicle where our partners have invested capital there. So the key important operating parameter is PAT excluding insurance, which is INR 1,193 crores, which is a growth of 18% over last year. So as I said, we have given a lot of the other information in the presentation and the addendum, which contains the outlook for FY 2020 to '22, because a lot of you have been also wanting us to give some color on what our plans are for the next 3 years.

As you would have seen, it's been steady performance. Obviously, we all know there were significant market headwinds in the second half largely because of the liquidity crunch in the market. I think the good news is now we have a retail credit book and corporate credit book almost equal. We had intended to achieve this by FY '20, where our retail and corporate are about equal in size. We have achieved this a year in advance. Also about half of our profits for this year have come from what we call the non-NBFC businesses. So if you look at the Retail and Corporate Credit that is the NBFC business; and the other half is our ARC, Asset Management, Wealth Management, Capital Markets and all of those businesses, BMU. Collectively, they are about 50% of our total profits. So it's a fairly good spread.

The ex-insurance ROA is about 2.4% and ROE is 17.5%, which is a slight come down, but we've maintained ROA. ROE has come down because the gearing has come down significantly for us, and we'll talk about that. It was also a very good year for recoveries on the ARC business. In the distressed credit, we have recoveries of close to $1 billion, INR 7,000 crores for this year, which is a significant achievement. Because now what we had invested and 3 years ago -- right, we've always said that recoveries in ARC are a 3- to 5-year cycle. And that is coming of age. So that will be a good thing over the next 2 years. We expect to see significant recoveries in our ARC business.

The other good news is the Wealth Management assets have crossed INR 1 trillion, 100 -- over 1 lakh crore assets are there. And in our Asset Management, we have raised more than $1 billion in our funds in this year. Even our Insurance business continues to grow and is one of the strongest growing businesses in the industry.

As we look at this year, which has been a fairly eventful year to say the least, there are few things we have experienced, understood and has got reinforced in our belief. And I just want to share that before we open up for the Q&A.

We have found that there'll always be a few quarters every 4, 5 years. In fact, in Edelweiss, we say that 4, 5 quarters every 4, 5 years you should be prepared for the environment becoming very challenging. And it could be -- anything can be a catalyst. This time it was -- IL&FS was the catalyst, but it could be -- anything can be a catalyst. But every 4, 5 years, there will be 4, 5 quarters, which will challenge you. And the idea is to have a business where you are very resilient in these quarters -- in these 4, 5 quarters. And I think we have been able to withstand that and become stronger. And we want to build a business model that continues to be resilient. We don't think that this kind of quarter will not come again. They will come. They will come unannounced, and it is at that time that we should be prepared.

Also a lot of you have been talking to us about NBFCs promoted by corporate house, versus NBFCs which are more professionally owned and managed. We are obviously a professionally owned and managed NBFC, not part of any business house. And as with everything else, there are advantages and disadvantages of that. We have obviously worked towards building on the advantages that our professional structure that gives us that we are a first-generation professionally managed financial services company with a large NBFC in that.

A few of the advantages we have is it makes us capital efficient because we don't take capital for granted. We have -- our own history has been that we started with INR 1 crore of equity capital, which has now grown to close to INR 10,000 crores of equity capital. Also allows you to create a more democratic ownership-oriented culture, which we've been able to create over the years. And even today, almost 47% of the equity is owned by the internal management team, which is also fairly broadly owned. So allows you to create a very different kind of culture, also makes you more conscious of liquidity issues, makes you more conscious of being capital-efficient. So all these are the advantages we have, and we want to continue to capitalize on that.

The other thing we have built is we are a diversified business model, and this last few months have reinforced that. As I've said more than 50% of our profits come from non-NBFC activities. And what we have learned over the years is that any point of time, some parts of the business will have concerns and we'll have environmental challenges; while there'll be others, which at the same time we'll be prospering and growing. And we want our investors and our stakeholders to be cognizant of that. That at any point in time the wide range of businesses we have, there will be concerns on a few of that, but there will be also good things happening on the others. And idea is to keep a very holistic view on that.

In our diversified business model, we also have some additional upside. Our ARC carry income, which we think over the next couple of years will start coming of age and which is also not insignificant for our size. Even in the alternative asset management business, as we're building on this credit funds, they also have a carry component in that. And over the next 2, 3, 4 years as we start exiting the investment we are making in credit also, we will start getting carry income from that. So there is a lot of potential embedded carry income that will come on that.

Our fee and commission business, if you look at our Asset Management, Wealth Management and Capital Market business, these 3 businesses have made almost INR 300 crores of profit after tax for this year, which is the same as it was -- almost the same as it was last year. So making a INR 75 crore, INR 80 crore profit after tax in agency businesses, even that is not insignificant. And all these other businesses, which are not dependent on capital and liquidity environments. So that is also one of the other strengths we have over and above the other businesses we have.

As you would have seen in the investor presentation in the last 6 months, we have raised almost INR 7,800 crores of long-term funding, which ironically is more than what we raised in the first half. We raised about INR 7,300 crores in the first half. If you see Slide 14 in the investor presentation, we have raised more long-term money in second half of last year than the first half contrary to the popular perception of liquidity being very tight. It has been slightly more expensive. We have paid almost 100 basis point higher cost than what we paid earlier in the first half. But we've been able to raise -- and almost half of this, close to INR 4,000 crore is what we have raised from retail investors.

So our retail franchise has been strong, and we are confident that every month we will raise about INR 300 crores to INR 400 crores from retail investors on an ongoing basis. And out of the other half, almost half has come from banks and half has come from the mutual funds. So overall, I think the funding environment though challenging is not completely closed, and we do expect that in the next 3, 4 months hopefully it should improve.

Along with this INR 7,800 crores of long-term funds that we raised, the borrowings that we raised last quarter, we also announced a INR 1,800 crore equity raise from CDPQ in our NBFC business, out of which I'm happy to report that the first tranche of INR 1,000 crores has already come in last week, and the balance INR 400 crores plus INR 400 crores will come at the end of year 1 and year 2 going forward. So with this, our credit business has enough capitalization available for growth for the next 3 to 4 years ahead of us. So we have made sure that we have enough capital for growth if and when it comes back.

Along with that, we also have closed a $1.3 billion stressed (sic) [distressed] credit fund in this half, and we also launched a $1 billion structured credit fund, which we hope to close in the coming years. So Asset Management, Wealth management businesses have done well. Our credit business has raised equity. And overall, I think in spite of the funding environment, the balance sheet has got stronger.

We will continue to have a very countercyclical approach. So quite a few of you have also asked us about our approach to the NBFC opportunity and all. I'm happy to report that we continue to invest in SME and the big market corporate credit opportunities. We're seeing that there's a large market emerging, which is above SME and below the large corporates where you need amounts of INR 10 crores, INR 20 crores to INR 40 crores, INR 50 crores kind of business loans to mid-market corporates is also emerging. And this space also is something we've been building upon. And we hope to grow that.

Along with that, being our -- being more focused on capital efficiency, we have invested a lot of effort in the last 6 months on co-origination and securitization. And this is also -- hopefully give us a fair amount of fee income. Because one of the learnings we have -- last 5, 6 months I think there has been some structural changes to the NBFC business model, and some will be cyclical, which will come back as things become normal.

So one of the structural changes we see is that NBFCs will hold a little bit more liquidity cushion than they were holding earlier, which we have also been doing. And we think that will now become structural. Along with that, I mean I would also think that even the Reserve Bank and the other creditors will insist on holding liquidity. Maybe some kind of an NCR norm for NBFCs should also start emerging at the end of this. And that will be a good thing. That should be a structural change that will be very positive for the industry.

And as you can see from our investor presentation, Slide 41, we have a liquidity cushion out there, which is our own NCR. So we have always been focused on maintaining an NCR, though it is not currently mandatory for NBFCs. Along with that, I think people will be more conscious of gearing and will keep gearing at a conservative level. As you can see, our current gearing ratio is about 4.4, which is as of 31st March, after this capital infusion that we -- investment that we've got in NBFC, we expect this to be equivalent of under 4, 3.9. So at this gearing, we remain fairly comfortable, but we think industry will also be more conservative of gearing going forward.

And the third structural change that will happen is NBFCs will be more focused on fee income, whether it is through cross-sell, whether it is through insurance attachments, whether it is through origination and other models. But I think NBFCs will move away from just the brute force of growing the balance sheet to using capital more consciously, but also building some kind of fee stream revenue to improve ROE going forward. This -- I think all these changes are something we would truly welcome because we think that we make the NBFC model even stronger, and we'll allow it to grow. NBFCs continue to be about 25% to 30% of the incremental credit that is there, and we don't see that changing as we go along.

So finally, I think the last quarter and the last half has reinforced a few things for us. It has underscored once again that liquidity management is a very important part of NBFC management. We always believed that, but it has got reinforced. Things like being conservative on gearing has also been part of that. You would've seen in our slide that we have an internal gap of 6 on Slide 15. And we have always -- every time we have gone closer to 5.5, we have raised equity and brought down the gearing. And I think that has also been reinforced as a belief in the last few months.

And thirdly, I think a diversified model has also been another belief that we have always held, which has got reinforced in the last few months. We'll continue to hear concerns on asset quality, and we'll talk about it in the Q&A more. And we want to continue to be focused on that. And in the outlook for FY '20 to '22, we have indicated that we expect the first half of this year to still be more controlled, more calibrated from a growth point of view. And it is for the second half onwards as environment and liquidity and given the political -- the elections will be over, the new government and the new budget will be out there. We do expect that from the second half of this year, growth should be resumed and we are very well-capitalized for that as we go along.

We have also made some structural changes. We have simplified our organization structure. And as we've been talking to you, we do think that scalability and simplification go hand-in-hand. And over the last couple of years, we have made a lot of attempt to simplify. Even the investor presentation we have, we have tried to simplify it from the complex structure we used to have earlier. And we would continue to be focused on that. We have also simplified our internal structure, number of entities. We have closed or merged 20 group entities in the last 2 years. We have identified another 23 to be rationalized in the next year. So we will have -- target to have 32 entities by FY '22. We were close to 75 entities a couple of years ago. So coming down from 75 entities to 32 entities is a significant part of the simplification process that we have.

We also structured our internal org structure in 3 businesses: credit business, advisory business and insurance business. And we have the leadership in place. We have the capitalization strategy in place for that. And we continue to be bullish on growth. And between now to 2022, we hope that the credit business continues to grow as things come back to normal. And we will continue to focus on growing the Retail Credit. So currently in our NBFC business, half is wholesale and half is retail. We expect it to be 2/3 or more as retail and the balance wholesale by 2022.

And our other businesses should continue to grow, and we should have embedded value breakeven in insurance by 2022. We also diversified our source of funding, and retail has become a very important part. Retail is now 23% of our source of funding. And our retail franchise has been one highlight in the last year for us, and we'll continue to grow that and invest in that. And by 2022, we are hoping to have close to 30% of our borrowing coming from retail investors.

So along with that, friends, thank you once again for being on this call. And we will now open it up for Q&A.

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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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Sir, congrats on a great set of numbers in a very challenging period. Sir, a couple of questions from my side. One is a little clarification on the interest income part. So in this Q4, our interest income in absolute terms actually declined from around INR 1,670 crores to INR 1,500 crores. So what is the reason for this absolute decline in the interest income part?

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

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I think one is, as you see, our wholesale book has degrowed a little bit because when we got repayments, we have not reinvested that. And retail has grown, and the yields on retail are slightly lower than the yields on wholesale. Though, as you can see, our NIMs are still being maintained. And the other factor is in the last quarter, in our ARC business, we got the income from ARC on the Binani transaction. So there was a carry income of almost, I think, INR 80 crores -- INR 70 crore to INR 80 crore, which came as our share.

The gross income was INR 120 crores on the Binani exit. In our ARC, we get normal income and then we get carry income. So in Q3, we had got the Binani carry income also. So when you add both this factor, the portfolio mix changed from wholesale, retail and the Binani income, that should explain away the change.

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

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So basically carry income is generally a part of the interest income, is it, on the retail?

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

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It comes as part of that. Part of that will come as -- also can come as fee income. But in our ARC income, we show it as a split income.

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

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Okay. Just to follow up on that again, sir. So basically, if I understood correctly, the yield on the blended book must have declined, right, sir, because of the mix change?

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

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There's a slight change. But as I said, we focus more on the NIMs. So if you look at our NIM, it's still 7.1% overall on the credit book as combined. And that continues to be that. And we also have given you the split on Slide 22 between all the 3 books, what is our NIMs across the 3 books.

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

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Right. Also, basically, why I'm asking is because given our outlook, the first half '20 would be slightly muted in terms of the credit growth. And we are sitting pretty high borrowing book as of now. So do we expect margins to decline or we'll be able to pass it down the -- if there is a negative carry on the borrowing side? How do you see this scenario on our P&L?

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

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So I think it's an important question. We have seen our cost of funding on an average grow by about 100 basis point in H2 versus H1. And in a way, it is very ironical because H2 is when RBI has cut rates. So your repo rate has come down, the average funding cost depending on player to player has gone up. Our own experience has been an increase in cost of almost about 100 basis point in H2 has gone up. 100 basis point increase in cost of incremental borrowing translates to about 35 basis point on average cost of funding because only about 1/3 of your resources are getting repriced. Because in all about 2/3 of our borrowing is also more than one year.

So in any year, about 1/3 of our borrowing will get repriced. So if you pay 100 basis point higher cost on new borrowing, your average cost of funding should grow by about 35 basis points. Out of that, I think about 20-ish we've been able to pass it on to our customers. We also repriced some of the assets and the loans we have, and we are continuously evaluating given the market conditions and competitive expectations.

We continue to try and see whether there is any repricing opportunity available. We've already passed on almost about 20 basis point out of the 35 basis point change in funding on the asset side. And out of the -- we have in the second half experienced about 10 to 12 basis point reduction in spread that we are absorbing in our calculations. So if you see, our NIMs also have fallen 7.2%, 7.3% on the pure credit business to around 7.1% now.

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

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Right. So is this right to assume that there will be further follow-up, let's say, 15 to 20 basis point because of this 15 basis point gap, which we still have on the balance sheet on this right side?

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

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No. I think it's already happened. So I think, as I said, our idea would be to keep our NIMs on the credit business between 7% to 7.5% and overall for Edelweiss between 7.5% to 8%. And we are confident. Our current credit NIM is about 7.1%, which is you will see on Slide 17 of our presentation. We expect to stay above 7% going forward. So it might fluctuate by 10 basis point here and there, but we think the last part of the change we have already absorbed.

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

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Yes, yes. Okay. Got it. Got it, sir. Sir, secondly, again on the small clarification. So in this quarter, there is a dividend income of around INR 200 crore versus -- it was like negligible in Q3. So what's the nature of this dividend income, and how sustainable is this?

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

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See, this is part of our treasury activity that we do -- we keep some of our funds in cash, which are arbitrage and all that. We have some in the arbitrage mutual funds also with a lot of mutual funds. And every year fourth quarter, we have seen that there is a dividend income that comes in. But as you know, that is actually part of yield only. When you invest in arbitrage fund, whether you get returns on dividend or you get it as capital appreciation, it is actually the same only. So every year, you will see in fourth quarter we'll have dividend income, but you should consider that as part of the overall yield only.

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

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Okay. Okay. So basically, I mean this will be linked to our BMU division? I mean this is a treasury management income, right, sir?

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

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Yes, yes. Absolutely. Because, as you know, we hold quite a bit of liquidity on hand, and we try to deploy that liquidity as efficiently as we can. So rather than keeping it in fixed deposit in the bank, if you can put some of that in arbitrage funds and you are getting good risk, I mean that's for post-tax returns. We also evaluate that.

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

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Okay. Okay. Yes. So sir, now -- I can ask more questions, sir? Or should I wait in the queue?

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

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Yes. I think there are quite a few others. If you can add your name, we will also come back to you again.

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Operator [18]

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We'll take the next question from the line of Anitha Rangan from HSBC Asset Management.

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Anitha Rangan, HSBC Asset Management (India) Private Limited - VP of Fixed Income [19]

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Just I wanted to check on a couple of questions. First on the margin side. So with the shift to retail going forward, will we see actually like a blended margin coming down because your -- obviously your corporate margins, as you pointed out in the Slide 22, is on the higher side and significantly it's 2.7% versus 1.2%. That's my first question. The second question is on the developer side, are you seeing like -- what's your experience here and how you are hand-holding your developers in this kind of liquidity, I'm sure? They must also be facing some kind of liquidity stress in their -- from their alternate borrowing sources. So what is the situation and how you're seeing this, if you can help with that?

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

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So I think first on the retail, you're very right. When the wholesale/retail mix undergoes a change, the yields on retail are slightly lower than wholesale. But as you can see, our cost/income ratio in retail is much higher because we made investments in opening branches and recruited salespeople and all of that. So we do expect that our cost/income ratio on retail, which is currently at 50% by 2022 should moderate down to 30% or so. So I think part of the efficiency we'll get in the cost/income ratio. Part of it is we expect the cost of funds also to come down because retail, we have a lot of other sources of borrowing.

So as now that our out of the book retail has become -- is going to become more than 50% currently, we're almost 50-50 between retail and wholesale, we do expect -- like even today our housing finance subsidiary is actually borrowing at about 50 to 70 basis point lower than the NBFC subsidiary because NBFC historically was more senior than wholesale business. So I think between cost of funds and cost/income ratio. Thirdly on the retail side, we're also doing -- we have not done securitization up until now in a big way. So we will also from this year onward as I said in my opening remarks, do more co-origination and securitization, which will also improve the margins for the retail business. So retail business currently operating as a 12% ROE. We think we'll get to about 15%, 16% ROE on the retail side. Wholesale is currently at about 18% ROE. So there might be slight change. But overall, we don't see a significant change as the percentage gradually grows in that.

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Anitha Rangan, HSBC Asset Management (India) Private Limited - VP of Fixed Income [21]

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And on the developer segment, what are you going to see?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [22]

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Yes. On the developer segment as we have shown, our book, we have it across almost 160-odd projects that are there. On the developer, we have 162 projects. Almost 85% of this are going as on a BAU basis, business as usual. Construction activities going on. Projects are underway. Sales are happening. The good news is in last 5, 6 months, home sales if you look at any data cut, have not slowed down. So home sales are robust, especially in under INR 1 crore, where our focus is. On the below INR 1 crore category, there is no slowdown in home sales. So it's actually very ironical that we have seen auto sales come off in the last 6 months, but home sales are still fairly robust.

Out of this 162 projects, we do expect that about a few will need some additional funding either from other funders who are providing last mile funding and all, but not more than 10 to 12 projects will fall in that category. And another 10 to 12 might be showing a little bit of slowdown on sales and all that. So out of 160 projects, we are still -- and that ratio has been consistent over last 10 years. So we are not seeing any change in that ratio. And out of 160 project, 20 projects always -- you are always under watch. Not that they will become stressed, but you are -- about 15% of your portfolio is always going to be somewhere sales are slow, somewhere exhibition is slow, somewhere some last mile funding is required.

But even in projects where last mile funding is required, the amounts are usually between INR 10 crores, INR 20 crores to INR 1,800 crore. Very few projects have a funding gap of more than INR 40 crore, INR 50 crore on an average. So on that basis, there is enough of those projects funding available by other funds. There are a lot of private credit funds internationally who have been doing that. Recently, in fact, our own stressed credit fund did a deal along with 1 large international fund for last mile funding for some other real estate project. So we are happy to be comfortable with that, that some funding will be available for those 8, 10 projects which are there.

So overall, I think as long as home sales are strong, we don't see a major concern in this though I think this liquidity crunch obviously is getting tighter and tighter not just for the real estate sector, but for the economy as a whole. And that has its own reason for concern because we are seeing slowdown and other things happening. So we do remain concerned at a macroeconomic level because of the slowdown that has been underway for the last 5, 6 months. On real estate, fortunately, that has not been our experience plus what we're seeing for the industry any current significant change on that.

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Anitha Rangan, HSBC Asset Management (India) Private Limited - VP of Fixed Income [23]

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And what traction are you seeing via the AIF route? Last quarter you mentioned that you might take some -- because your overall mortgage book actually has gone up versus the last quarter. So just trying to understand either repayments have slowed down or disbursements itself have picked up. How is the scene?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [24]

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Are you talking about AIF or you are talking about...

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Anitha Rangan, HSBC Asset Management (India) Private Limited - VP of Fixed Income [25]

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First is the AIF route. I mean because -- the reason why I'm asking is the overall wholesale mortgage book has actually grown versus the last quarter. So that's why I'm just trying to understand if there's any traction via the AIF route.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [26]

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So see, we have taken a policy decision wherever we have committed projects and the projects are onstream and all. We will not hold back disbursement as committed earlier. And as you know, we have funds out there and we are now co-invest with the funds. So there are some projects that are funded, given a commitment, and we have to meet our co-invest requirement.

So those we are continuing. So we are not -- but we're also getting repayments against that. So there's a lot of project repayments are also coming. So we are not seeing -- our idea is not to grow the book much. I think our current idea is that we double the book in the next 3 to 4 years, but keep wholesale constant and basically triple the retail part of the portfolio so that we become 70% retail, 30% wholesale in 3 years' time. So we continue to remain focused on that.

On AIF, we're seeing a lot of interest both from international investors and Indian investors because of its yield. In fact, the last quarter was a record with the mutual funds and the NBFC is that a lot of these good risk return opportunities, which are high yield where you're getting 14%, 15%, 16% returns, but are increasingly will not be undertaken by maybe mutual funds and by NBFCs, will slowly and steadily go into AIFs. And there is a lot of high net worth and family office and international investors like insurance companies and pension funds who are keen to put funds into a private credit structure where they can get 14%, 15%, 16% return. So we think the good outcome of the last quarter upheaval that we have had is that the private credit funds and AIFs will start taking off.

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Operator [27]

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(Operator Instructions) The 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 [28]

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Two questions. One regarding your FY '22 outlook. So you are sort of indicating that you will double your credit book in the next 3 years. So here if I see that like now 3 years, practically it becomes 2.5 because first half you are indicating is going to a slow growth. Now if we were to see that okay, you are going to double your credit book, at the same time you are expecting this 50-50 to go from current 50-50 to go to 2:1 retail to corporate. That virtually indicating that corporate book is not going to grow, whereas that retail is going to grow at say 30 -- anywhere between 30% to 40%. So just want to understand that, okay, what will be driving this sort of a noncorporate book growth, particularly in an environment when there are sort of a lot of, I would say, competition is increasing, a lot of NBFC focusing on certain pockets of retail and banks also back focusing there. So that is question number one that, okay, how this growth -- how and where this growth is coming in the retail side that will take this mix along with a strong growth in overall book, question one?

Second particularly when you are looking to go from wholesale to retail, at the same time you are also expecting that your cost/income ratio to improve. So again if you can just throw some light on that because typically if you are moving towards retail side generally, your cost/income ratio tends to inflate. So some thoughts on. These are my 2 questions.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [29]

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So you are absolutely correct. I think we will not grow the wholesale book. We will grow the retail book. That is for the next 3 years. That is our current expectation. So current 50-50 should become 70-30 in the next 3 years. When we say wholesale will not grow, we will be getting repayments every quarter in the wholesale book, and we will be reinvesting that alongside our fund strategies to keep it flat. So that is what we had announced, and we'll continue to do that.

On the retail side, we expect half the retail book will end up becoming mortgages and other half will be the nonmortgage. So if you look at our current mortgage book that we have, it's about closer to INR 9,000 crore. And as you can see on the INR 9,000 crore, we have been doing Small Ticket Home Loans and LAP and all. We see the demand fairly strong for that. We don't see any issues on growth of that because India still remains a credit-starved market on the whole. So -- and we have invested quite a bit of opening branches and sales capacity and all that for that.

The other growth area is SME. The third is going to be what we call the big markets out there. And the fourth is our ESOP funding, margin funding, which is currently a INR 4,000 crore book. When we look at the opportunity out there with our HNI customers and wealth customers, we think that can grow over INR 10,000 crore. So each of this books we have -- and then, lastly, our agri book, which is very small. There also we see at least INR 2,000 crore to INR 3,000 crore opportunity. So when we add up all this over the next 3 years, we do see the market opportunity. As you currently said, competition will be there. But in India, competition has always been there. So as the banks are scaling up, maybe NBFC is also slowing down a little bit on the margin.

So overall, because of our size, because we are still fairly small -- only having INR 9,000 crore mortgage book is very small from an opportunity point of view. We do think in India credit demand is growing at 14% to 15% a year, and credit supply is only growing at 12% to 13% a year. So there still remains a 2 to 3 percentage gap between potential demand and supply of credit in India. And that will continue because of the capitalization of PSU banks and all those other needs that are there.

So we -- the other thing, which is also related to the cost/income ratio is that in the last 2 years we've made significant investment in opening sales capacity and branch and all of that for this strategies. So now as we start implementing on that, that cost/income ratio should come down because, usually, in a lot of these retail businesses, investment is upfront and your scale comes afterwards. Along with that, we remain open to buying portfolios from other NBFCs and housing finance companies also. And we do think that at least up to about INR 2,000 crores to INR 3,000 crores a year we should get portfolio buying opportunities also. We've been talking to a lot of smaller NBFCs and others. And as you know, we have capital sources as well. So once the liquidity situation stabilizes in the next 3, 4 months, we will also be looking at portfolio buyout, which is inorganic growth. It won't be a big part of our strategy. But I think doing INR 2,000 crores to INR 3,000 crores of portfolio buys a year will also be a good way of scaling up retail business and optimizing on the cost/income ratio.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [30]

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Okay. Just a quick follow-up. On the wholesale side, is it the strategy that, okay, you are sort of deliberately shrinking this structured finance book? So what sort of -- within that, of course, mortgage will be relatively -- on the wholesale mortgage, it will be relatively stickier. I mean even if you are not doing the new that sort of a book will remain stable. But on the structured finance, what's your strategy? I mean are you deliberately just running this book down? And where do we see sort of this book, say, in FY '20?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [31]

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So Avinash, we remain committed to our old approach, which is that our own balance sheet on this part, the wholesale book, both the corporate book and the real estate book will stay flat while the overall book keeps on growing. So the percentage of this comes down. We still remain very optimistic on the structured credit opportunities. So as I said, we are on the road to raise a $1 billion structured credit fund from international investors, and we see a good opportunity, a good interest in that. In fact, the changes of the mutual fund and NBFCs that are happening currently will actually give more opportunity to our fund.

We do think a lot of this high-yield credit will eventually increasingly move from an NBFC mutual fund structure to a private credited fund structure, and that is where -- we also remain committed to that. That's why last 3, 4 years, we have raised this fund so that incrementally, we can capture this opportunity in the fund structure. And the reason for it being as the fund structure is a lot of these strategies don't have significant credit losses. There might be NPAs, but not eventual loss because the loss given ratios are very good in collateralized credit. And in fact, across the industry last 25 years, the loss given default on this kind of strategies have been very low.

So -- but it can result in NPA, which for the mutual fund or NBFC can be a challenge. So hence a privately funded vehicle like a credit fund is ideally suited because they don't have an ALM issue, and they will not have a NPA issue. So the strategies remain good from a risk/reward point of view. The liability structuring of that will move away from NBFC banks increasing -- NBFC banks and mutual fund increasingly towards private credited fund. So we remain -- and we have built the skill set and the capability to capitalize on opportunities. We think the more efficient way to capitalize this will be in a fund structure rather than an NBFC structure. We have been saying that for last 3 years. So even the last 5, 6 months what has happened only reinforces our hypothesis earlier.

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Operator [32]

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The next question is from the line of Viral Shah from Crédit Suisse.

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Viral Shah, Crédit Suisse AG, Research Division - Research Analyst [33]

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I have 2 questions. So one is on the ARC side. So if you could help us with how is the deal pipeline looking in ARC? So we see that the ARC AUM has actually grown this quarter after the resolution of Binani in last quarter. So how should we -- one look at in terms of international business as well as the resolutions going ahead?

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

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So on ARC, we remain optimistic because I think the pipeline is there. So I think next 3 years we'll see significant activity both on recoveries of the old deals, which were 3 years and 4 years old now and the new pipeline because the banks still continue to have a lot of NPAs.

The good news is that most of the NPAs of banks have been quantified. The provisioning cycle is also almost over. Only the last maybe a year or 18 months of provisioning is left. So banks have already provided against it, but somebody still needs to restructure, resolve and recover out of these NPAs where we are experts on that. So we do see that banks being available more and more to sell these NPAs, especially those assets where the collateral quality is good, the underlying asset is good.

The promoters are stretched or broken. And there is a consortium of 8, 10, 15 banks so that each bank is a small part of that. And in those kind of cases, we are seeing banks are happy to sell and let the ARC aggregate the debt and basically do the recovery part of it. So in this year, our existing book from '18 to '19 has gone up by about INR 1,300 crores -- about INR 1,200 crores in spite of the Binani recovery. And I think this pattern will continue. We hope to grow this book by about -- net about INR 1,000 crores a year. So we will get recoveries, we'll deploy, and overall the book should grow by hopefully INR 1,000 crores a year as we go along which is that we see that opportunity for the next few years because the NPAs are still there in the banks. Those NPAs have been identified, quantified and provided against.

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Viral Shah, Crédit Suisse AG, Research Division - Research Analyst [35]

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Right. And the second question that I had was on the recoveries part. So under the IBC, certain recoveries have been delayed. So what is your view on that and how soon one expect the big recovery of the Essar Steel?

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

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Yes. I think I would say all of us are reading the same newspapers, so I would guess your guess will be as good as mine. But I feel -- I mean if I may just give a personal opinion, don't attach too much weightage to that. I do think Essar Steel should get resolved in the next 3 months to 4 months because we are getting to the endgame stage.

But you are right, I think recoveries have taken slightly longer. But it is also because of this uncertainty. It is also acting as an entry barrier because a lot of these global funds and others wanted to very aggressively enter the Indian market. They are not able to build a business model around that because there is already some kind of price risk when you buy stressed assets from banks. But there is also a time risk and your ability to do a structure and calculate the payoff given the price risk and the time risk requires a lot of skill set and a lot of execution capacity.

So like, for example, in our distressed-credit team, we have more than 140 people in our team. So all this Essar Steel kind of examples also shows that you need a large army. It's not a dealmaking business only that you have 5 people who go out and do some interesting deals. You have an army of people because there are court cases going on, there are new things you want to acquire, you are evaluating that, you are evaluating small, small deals because you might do one deal.

Like Essar Steel, I remember the first deal we did from HDFC bank, which was about INR 400 crores where we had invested only INR 27 crores of our own money. That was a first deal. But because we did that first deal, we evaluated and understood Essar Steel asset value, time risk, price risk on that very well. And because we did that, eventually we acquired Essar Steel from Axis Bank, ICICI Bank, J&K Bank, Federal Bank, IOB and various other banks. So this is that kind of a model where you need an army, you need an ability.

Thirdly, given that a lot of our assets are in 85-15, when time risk gets extended, when time delays happen, you still earn money on your -- you still earn money as a management fee. So as you know, this is called LPGP model. The more time it takes you, LP returns come down, but your GP returns goes up. So in a way, they both offset each other. And we've been able to build a business model around that. But ability to calculate this structure around this is also becoming an entry barrier for best competition.

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Viral Shah, Crédit Suisse AG, Research Division - Research Analyst [37]

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Right. Thank you, sir, for that. And one more question I had was basically on your credit book. You mentioned that even within agri segment you continue to see opportunity. What was the reason for a sharp 30% Q-o-Q decline in the agri and rural finance book?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [38]

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So see, agri book is a very -- it is a seasonal book. It's a very short cycle book. It comes and goes because usually it's not within 3, 4, 5, 6 months because when the crop comes is where people need the loan to buy the goods and store them. But usually, an agri loan will not extend more than 5, 6 months because the goods will be consumed. Because agri is a consumption commodity. So these are called short-cycle credit books, and it will vary on a quarter-to-quarter basis. But overall, we see this as increasingly becoming a large opportunity. And we have been in investment phase in that.

We have done a lot of IT investment, back-end structuring and all that. And now we have tied up with banks, and we do see a lot of opportunity in co-origination with banks because a lot of this can fall in the PCA. It's taken a lot of work from technology and other point of view. But this will always be a fluctuating book, which is good news because this is not a permanent book. This will not stay all the time because as the crop comes, the loans go up and then it slowly comes down and then until the fresh crops comes to the market.

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Operator [39]

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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 [40]

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First of all, I must admire the way overall borrowing profile has changed and more diversification has happened, whereby the [entry] portion has significantly improved Y-o-Y. So I mean just again coming back to the same thing that -- you have been explaining it earlier as well. Now since you're moving towards more of a retail -- that works a retail mortgage because it's a longer tenure month. You are now increasing your portion of banks and retail significantly as well as your entry portions as well. So what kind of strategy you're building around for the borrowing spot further now? Will it be more of a -- when you're synchronized, which I have an understanding, which will be part of it as mortgages rises. But any further color on it? As well as that $1 billion structured fund that you raised whereby the risk appetite has been now shifting towards the other guys rather than banks and NBFCs. Some more color on it because -- if you can just give some more color on it that would be little bit more helpful for us.

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

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So first, you're absolutely correct that you would have seen from our slide that we have been reducing dependency on commercial paper long before the crisis also happened. So between March '17 to March '18, we had almost brought down the commercial paper from 25% of total borrowing to only 14% of total borrowing. It is now down to 2%. Commercial paper has a cost advantage, but given the volatility and the uncertainty around that, there is a lot of hidden implicit cost in that. So when you add up all of that, like even if 10% of your borrowing is commercial paper and you get a 150 basis point advantage on that, that only translate to about 15 basis point on overall cost of funding. So it's not a significant change for us. We've gone from 14% of commercial borrowing and total borrowing to 2%. So that 10% has added a little bit of cost. As I said, 20, 30, 40 basis points of cost increase has happened with us, and we have already absorbed and passed on part of that.

But what is the good news, if you can see on Slide 43, almost 80 -- 88% of our -- actually, close to 93%, sorry, of our borrowing is between NCDs and bank loans. And this has been, I think, the biggest change in the strength which we have achieved.

I should also highlight that if you see FY '18 also, it was still almost close to 80%. So we were almost 80%. We have gone to more than 90%. So we had never been highly reliant on non-NCD, non-bank borrowing because both NCD and bank borrowings are tenured on a long-term basis and comes from very stable source of funds.

Even Slide 44, if you see, retail is now 23% of our borrowing. We are saying that by 2022, we want to take it to 30%. We are seeing a lot of traction from our retail investors, the Edelweiss franchise, that is there with the retail investors. The retail distribution that we have we have built over the years, is helping us a lot. As you will remember in December also, in the middle of the crisis, we had raised INR 1,000 crore purely retail bond issue and that had come from really retail investors. So they stood by us. We have also raised this INR 1,800 crores of equity.

So I think both on long-term borrowing as well as on equity raising in the last 6 months, we have shown significant strength and capability which has strengthened our balance sheet. So we do think that going forward, we will increase -- banks will remain around 40%, 45%. I think retail should go up to 30%, maybe hopefully higher than 30% also.

So that dependency on mutual fund should come down. Not really the reason. I think mutual fund is a good source, an important source of funding for you. But given the volatility of their own flows of in and out and given the structural changes happening in credit side of the mutual fund for the next year or 2, it will take time to stabilize. And in that time, I think we have already switched very quickly.

One of the good things about Edelweiss is that we are fairly adaptable and we are quick to change. So when this crisis also started, we quickly started looking at equity raise to center the balance sheet. I'm happy to say that maybe the only, as far as I know, NBFCs that has raised a large amount of money in the last 6, 7 months. And we have raised it from very credible investors. We have raised it in a very structured way. And it has helped us bring our gearing down. And the same thing we have done on the borrowing.

Our retail borrowing, bank borrowing and the fact that we raised INR 7,800 crores in the second half of long-term money, it just feels not bad because our total borrowings are only INR 45,000 crores and we have raised -- if you can raise INR 7,000 crores in a half year -- INR 7,500 crores in half year, that's almost about INR 15,000 crores on an annualized basis, which is about 1/3 of your borrowing. So as I said about 1/3 of our borrowing needs to be renewed every year, and we have showed that even in a challenging environment like H2.

I must say that in the last 33 years of Edelweiss, there have been challenging quarters from a liquidity point of view, and this last 5, 6 months have been as challenging as any other period we have seen. I'm happy that in this also we raised money, we strengthened the balance sheet and we also changed the profile with a lot of retail and bank borrowing on our -- in our borrowing mix.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [42]

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Very useful, sir. Now secondly, since a little premature or a little early for me to ask this. But just getting a sense of this. Now you've been talking about retail would be incrementally will become 60%, 65% sort of portion of your book. Now there are a couple of products that you have mentioned is obviously mortgage and SME. Any more line of lending products that is there in the pipeline? Not now, but at least 12 months, 24 months down the line that will probably be products that otherwise would be keen entering into? Or any thoughts over this? Or these are the only 2, 3 products where you will be focusing on for the next -- your vision '22 plan?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [43]

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Currently, you see the sizes of the books we have. As I said, the home loan book is not even INR 10,000 crores. There is enough headroom for growth only in that category. The same thing on SME is about INR 4,000-odd crore book. There is a lot of headroom for growth. Even the ESOP financing book where we are the leaders, we can see doubling the book from here. So I think given that in this business as we have -- we are constantly evaluating adjacent markets and products and all, we'll always be experimenting. But as of now, I would expect the next couple of years we'll stick to this because there's enough headroom for growth in this itself.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [44]

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Okay. Okay. Makes sense. Now coming to your development of finance book. Sorry. I'm taking the liberty of asking you 1 or 2 more questions. But now coming to your development of finance book, obviously, 162 projects, if I'm not wrong, 85 projects -- 85% of the projects are doing fine. Now there will be definitely -- there are ups and downs in many particular sectors. Here, the balance of the 15% you are being now almost like a veteran in this industry have been knowing in and out about the development of finance book. What's your sense over this balance 15% of the book that [Edelweiss has?] Or industry in general if we say that is this happening.

Are we gearing up for done -- I mean providing for this an incremental provision is coming up on our books or are we seeing that the resolutions are likely to come up or there will be very less casualties would be done on whatever distressed is getting built up? Because that is the book where major of the concerns is getting built up. Not the entire book, but the 10%, 15% sort of a book. So what's your view what -- how this is going to shape up in the next 12 months? Or is Edelweiss preparing for building up a cyclical provision? You already have a 122% sort of a coverage if I'm not wrong. 115% sort of a coverage already. So are you planning to build up a little further coverage on this or what's your view of this development of finance book for next 12 months?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [45]

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I'm happy you asked this question. I think all these are very important questions, and I think as analysts, as investors, as stakeholders I think it is always constantly good to shake the tree and see how things are shaping up. So I would like to just give you 4, 5 clarifications. And again, a lot of this is our assessment of the market and the environment.

First is we don't call it developer funding book because we don't fund developer. We call it real estate project funding because we fund housing projects. We -- in short in Edelweiss, we always say don't fund developers, fund projects. Because projects are same, developers can change, they can change. Like in another context, Essar Steel is a great asset. Though the company become NPA, the asset -- the project itself was always there.

In India, we always say that there are no stressed assets, there are only stressed promoters. Because assets are good. In fact, to call Essar Steel a stressed asset is not true because what we've seen people are willing to pay INR 40,000 crore, INR 45,000 crore to take over that. So in India, assets don't get stressed very easily, promoters get stressed very easily. And the same thing applies to real estate where a lot of the projects if you analyze it well will not get stressed. But developers will get stressed. And hence, you want to avoid lending to developers not -- and you don't want to take that risk. So I think that is the first clarification I would say.

The second is this 10% to 15% accounts under watch always. It is part of the model. This has been true for the last 20 years for the industry. This has been true for last 12 years for us also. So this ratio has not changed in the last 5, 6 months. And not all accounts, which are under watch where either sales are behind target or construction is behind target or there is some cash flow mismatch creeping up on you. The good news is that an average real estate project is between -- the total cost of funding is between INR 400 crores to INR 500 crores, out of which the loan usually is INR 100 crores to INR 200 crores maximum. And if there is a gap in funding -- the gap in funding, as I said earlier, is not more than INR 40 crores, INR 50 crores. So these are not -- unlike a steel project or a power project which are INR 3,000 crores, INR 4,000 crores, INR 5,000 crores, INR 8,000 crores, there is no -- an average real estate housing project is about 300 apartments of about INR 60 lakhs to INR 80 lakhs each apartment. So that if you calculate, it will be about INR 200 crores, INR 300 crores. Maximum will be INR 500 crores. I have not seen too many projects beyond INR 1,000 crores in real estate. So even if INR 1,000 crore project average rule of thumb is, the project financing will be 20%, 25%. So that will be INR 200 crores, INR 250 crores will be the average funding on that. And if there's any gap in that project will be -- it will never exceed INR 100 crores. This is at the upper end.

So in a way, these problems are not hard to solve because it has a funding gap of INR 30 crores, INR 40 crores, INR 50 crores. This has happened in the past also in the last 20 years.

The third is if we look at even the last 20 years, the loss of these projects has been very little. So we have already classified some projects as NPA. We also provided against that. But even in those, we expect the loss given default will be lower than what we have provided. So as we go along, as we resolve that or complete those projects or sell those assets, we will be crawling back something and providing going forward. So our idea is that, overall, we will be cognizant. We will remain conservative as the projects -- if you are to call them NPA and provide for that, we are always prepared for that, and we'll be open with our investors and stakeholders on that.

If you ask me for the industry as a whole, so let me give you our perspective on the industry. The total industry is about INR 500,000 crores. The INR 500,000 crore is this total real estate financing -- project financing between housing, commercial, LRD project funding, construction financing, whatever you call it. The total is about INR 500,000 crore. Half is with banks and half is with NBFCs and HFCs. So that is how broadly the industry is split.

As I said, our own portfolio of about INR 10,000 crore is about spread over 160 projects. I think total this INR 500,000 crores will be a few 1,000 projects out there. And the industry, we are about -- 2% market share is what we have. So I would think the whole industry is about between 5,000 to 8,000 projects going on in India as a whole if you just extrapolate that. Even if you take 10% of that is under watch and all that, that would mean about -- say between 600 to 800 projects. My estimate is that out of the INR 500,000 crores, these project will constitute about INR 20,000 crores to INR 30,000 crores from an exposure point of view. And if there is -- if this also become stressed, NPA -- if this becomes NPA also, I think the loss given default on this will be at best 20%.

So if I look at on INR 500,000 crores, INR 30,000 crores, incrementally also. Though there is -- I think part of NPA already provided for by everybody. I think INR 30,000 crore, 20% loss given default, about INR 6,000 crores could be the potential write-off or provisioning that the industry has to do. Maybe double that, INR 12,000 crore is what will be required over the next 2 years.

So I think if you do the numbers. It's not very significant that will really affect the industry as compared to what happened in bank NPAs. So bank NPAs were about INR 1,300,000 crore, and the total loss of that was about INR 700,000 crores. So in the last 5 years, banks have provided close to INR 500,000 crores to INR 550,000 crores for those NPAs. Compared to that, this might be INR 20,000 crore, INR 30,000 crore stress, if at all, all this comes true. Though I think as economy is improving, this may not also come true.

So this is our assessment. Again, I think you can do your own assessment and numbers and aggregate it. But I think, if at all, the provisioning required for the next 2 years will be about INR 5,000 crores to INR 10,000 crores, I think industry level as a whole. And we always believe that we are 2% to 3% of the industry. So according to that, we have everything we've been providing. So if you've seen in the past we've provided during the last 12 years, we have recovered more -- always 100%. We have never had to take an actual loss. But we continue to provide because idea is to provide and then as you recover, that should flow back to you.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [46]

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Understood. And just lastly, the CDPQ transaction of INR 1,800 crores, just reconfirming. So INR 1,000 crores you said has already been received in this particular month. And INR 400 crores will be received in next financial year, each '21 and '22. Is my understanding correct?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [47]

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Yes. Because we have structured it in a way that we don't need so much capital straight away because as you can see, our gearing has already fallen below [4]. So our idea is that we stagger it so that it comes in as the growth is also coming in. So current structure is INR 1,000 crores is coming now. And again, I'm giving it to you in Indian rupees. The deal actually is $150 million came in now, another $50 million at the end of year 1, and another $50 million at the end of year 2. If rupee falls, the amount will go up, which will also not be a bad thing. But we do hope the rupee doesn't fall much.

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Jignesh Shial, Emkay Global Financial Services Ltd., Research Division - Research Analyst [48]

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You are -- so your -- the stake which has been sold in ECL Finance, that also will be transferred partly? Or how does it work?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [49]

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So they are investing in ECL Finance. So ECL Finance was 100% subsidiary of Edelweiss. And they are investing in ECL Finance. ECL Finance will become our credit business -- the main company of the credit business. Underneath ECL Finance, we will have the housing finance. So the Edelweiss housing finance that will become a subsidiary of ECL Finance as part of this deal. So between ECL Finance and its 100% subsidiary Edelweiss housing finance that will constitute our entire credit business. The corporate and retail credit business will be housed in this structure and CDPQs investing in ECL Finance for fresh equity. We have not sold any stake to them as a secondary structure.

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Operator [50]

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

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Kshitiz C. Prasad, Maybank Kim Eng Holdings Limited, Research Division - Analyst [51]

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Kshitiz here. Just a couple of strategic questions. How do you see these alternative assets businesses stemming? You have shown tremendous growth over the last couple of years. And even if I see the growth this year has been fully good and even seemingly bullish. So which are the target segments? Is it -- you have global investors or a lot of Indians are also looking at this sort of high-yield returns. So any kind of strategic thoughts on that? And do you think that your -- second question is when you're saying that you will double your retail book, is it that by 2022, the balance sheet size, too, will double from the current INR 64,000 crores to about INR 120,000 crores or so? So if you can show some light on this.

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

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So I think on the second one, we are not looking at balance sheet size. We are looking at credit book size. So I think credit book size, we should double. As I said, current credit book is about 50% retail, 50% wholesale. If we triple the retail part and keep the wholesale constant, we become 75%, 25%. That's broadly a very crude calculation. But that is our intention on that part.

On the first question you asked it's an important one. The alternative Asset Management business is becoming very interesting, and we think alternatives are growing -- alternative Asset Management corpus is growing at twice the phase of the mutual fund corpus. Currently, if you look at total Asset Management in India, about 10% is alternative and the other 90% is mutual fund. But all over the world in the last 20 years, alternatives have grown very well.

Within alternatives there are various categories. There is something called private equity, there is real estate, there is credit -- private credit, there is hedge funds. We are largely focused on private credit as a key strategy. We are the leaders in that. As you know, India, there are a lot of private equity funds. We are not going into private equity as an alternative category. We are focused on private credit. We are not into PMS also in a big way, which is also another equity alternative. So I think there are a lot of categories in alternative Asset Management. Where we are focused on is in private credit.

Our hypothesis on private credit it is that increasingly the market, which is below 10% will become like a bond market. Your 10% to 13%, 14% market will remain a bank loan market, and anything more than 14% will need more bespoke solutions. Like currently, we are seeing what is happening between mutual funds and the borrowing by [Z] promoters and others. All those are what we call bespoke credit solutions, where you do structuring, you manage collateral, all of that. Increasingly, this will not be conducive to any publicly funded vehicle like in NBFC or -- in a large way. On the margin, you can always have. But in a large way, I think this kind of credit strategies which are usually 14% and above -- between 14% to 20% which requires collateral management, which requires customized solutions, which requires structuring, all of that, will increasingly go into credit funds. And we are seeing a lot of appetite also. Investors are interested because of what, a 5-year, 8-year kind of a fund life if you can get a yield of 14%, 15%. A lot of Indian high net worth investors, family offices, a lot of international investors are also keen because it's great risk reward. As I said, usually in this strategy, your ultimate credit loss may not be there. You might have stress and delinquencies like Essar Steel.

Essar Steel became NPA for bank, but ultimately banks recover money. So in Essar Steel kind of deals were done in a credit fund, which is what we've done in a stressed credit fund. You're not holding power in that. You don't have ALM pressure, you don't have NPA pressure. You can easily eke out and basically wait out to get an optimal outcome.

So I think alternative assets funds are -- increasingly, there will be a demand for INR 1,00,000 crore to INR 1,50,000 crore every year between $1 trillion to $1.5 trillion every year. As I said, we are currently doing at the rate of about $1 billion a year, which is only INR 7,000 crores. We think the market appetite for private credit alternative funds, AIFs, international fund will be at least INR 100,000 crores. So if you have INR 100,000 crores of opportunity in the market, if there is investor appetite for this high-yield returns, if you can create platform structures of that, it requires a lot of work because unlike private equity, private credit needs a lot of investment. You need lawyers, you need risk managers, you need to collect interest every month, you need to do collateral valuation. It's a lot of combination of Indian Army. While private equity is a commando business, private credit is an army business. So if you can build an army, there is a lot of opportunity on both side, demand and supply in this.

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Operator [53]

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The next question is from the line of Umang Shah from HSBC.

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Umang Shah, HSBC, Research Division - Analyst of Financials [54]

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I just wanted to know if you could give some color on the alternative assets business. What would be the definition or the mandate of the distressed credit fund? I mean is it any sector agnostic fund or how's it?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [55]

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Yes. I think it is fairly sector-agnostic, though we have overall caps in the fund that we will not exceed x percent of the fund in a particular sector just from a prudent portfolio management point of view. It's not a sector-focused fund because what we've seen, what we've learned in stressed credit in 10 years -- we have in this business for 10 years in a way helping out recover money from other people like this in a way. What we have learned is this sector is not important as asset.

In the steel sector, there could be a great asset and there could be a fairly bad asset. And we've seen that. In some steel, NPAs people have recovered only $0.30 on $1. On stump steel asset, people have recovered $0.100 on $1. Like our own example, on the Binani Cement deal, we'll cover more than $0.100 on $1 on a cement NPA. But there are other cement NPAs where you won't even recover $0.20 on $1 because it depends on whether you have limestone mines, whether -- what is the state of the plant, where you are based, which part of the country. All of that. So usually, the sector -- I have seen power plants, which are unviable and have to be completed written off to power plants, which are very viable if the financial restructuring can be done and additional capital can be provided.

So I think asset-specific strategy is more viable. So you do 2 things. One is understand what is the real capability of that asset to produce cash flow in the future, and how to price it. The same power project at $0.40 on $1 is a great opportunity, but at $0.70 on $1, the risk return may not meet your requirement. So I think pricing and asset-specific understanding. So we have actually built a docket of almost 100 assets in India where we have understanding of what are the nuances of that asset, what is the risk return, where you have oil linkage problem, where you have maybe some plants are located in the Naxalites-infested areas. So you have all the other issues around that.

So it's very important to be understanding asset by asset. And we have, over the last 8 years, built almost 100 assets capability, and we have an understanding on that. So those assets, if any bank wants to sell, we can quickly get there and you will know go, no-go as well as a pricing indication on that.

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Umang Shah, HSBC, Research Division - Analyst of Financials [56]

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Sure, sure. And just to understand -- so let's say, for example, within that -- so within the overall INR 25,000-odd crores of fund that we have, we have a cut between infrastructure, real estate. But is it possible that let's say if you have a real estate or infra stressed asset, it will get classified under the distressed category? Or will it still get classified within real estate or infra, so to say?

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

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No. I think real estate credit fund will do project financing for the other state. So that is not a distressed. So that -- you will not do any distressed opportunities also. You will do them as well -- all these what are called performing credit opportunities. So our structured debt fund and real estate credit funds are performing credit funds, they are not distressed. A distressed credit fund might buy a loan from somebody in a real estate sector where there is project that has got stuck and become NPAs. They can buy those loans and complete the project. So distressed will do mainly loans, which are already stressed or distressed. While structured debt and real estate will do performing credit.

Infrastructure is a yield fund where we buy operating assets and get a yield. It's almost like an inventory kind of a structure. So each of these are different strategies. Infrastructure yield fund, we'll have yields between 11% to 14%. Structured debt, we have yield of between 13% to 16%. Real estate, we have yield of 16% to 18%. And distressed will have yield of 18% to 20%.

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Umang Shah, HSBC, Research Division - Analyst of Financials [58]

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Right. Okay, okay. Fair. That's really very good. And what proportion of this AUM would be eligible under co-invest? Or what would be our co-invest commitment out of this INR 25,000-odd crores?

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

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So each of the strategy varies. We have upgraded -- I mean co-invested each of them. So there are -- it varies between 5% to 30%, depending on strategy and others. So it can be anywhere between 5% to 30% across these funds.

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Umang Shah, HSBC, Research Division - Analyst of Financials [60]

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Okay. So fair to assume that blended -- on a INR 25,000-odd crore portfolio, we might have a blended 10%, 15% sort of a co-investment commitment?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [61]

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Yes. But I should point out, out of this INR 25,000 crores, about 1/4 of that is our PMS and the multi-strategy fund, which is not credit, and there is no co-invest commitment on that. Out of the other, almost about INR 18,000 crores, half is already invested. So half has been done, the other half has to be invested now.

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Umang Shah, HSBC, Research Division - Analyst of Financials [62]

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Okay. All right. And just one last question. We have kind of maintained INR 10,000-odd crores of liquidity on our balance sheet. Just wanted your outlook for FY '20. Do we expect this number to go up, fall down or just sustain through the year?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [63]

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I think INR 10,000 crores is actually more than enough. As you can see, our total borrowing is only about INR 45,000 crores. So INR 10,000 crore is what we call available liquidity, both overnight liquidity plus liquidity that we can -- by liquidating our treasury and other assets, we can quickly raise liquidity against that. I think INR 10,000 crores is actually more than adequate. In fact, this INR 10,000 crores is hurting us. Normal conditions I would like to keep this at about INR 5,000 crores to INR 6,000 crores. So we are about INR 3,000 crore to INR 4,000 crore excess of what we should be. And that INR 3,000 crore to INR 4,000 crore excess at a -- if you take a 3% drag on that, that is costing us about INR 100 crores to INR 125 crores a year.

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Operator [64]

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We will take the last question from the line of Renish Bhuva from ICICI Securities.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [65]

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Just to follow up on the last question. So I understand that we are incrementally focusing more on the AIF sector for the wholesale lending. So if you can just throw some light in terms of how it will move P&L per se from the AIF book. So let's say if we have INR 25,000 crore of outstanding AIF as of now, what kind of income we must be booking on it and under which line item? I think that would be really, really helpful.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [66]

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So the income on that comes in your Asset Management column because that is -- usually in credit funds, you get a fee of between 1.5% to 2% every year, and about 1/2 of that or 3/4 of that goes off as expenses. So you can see that from the management fee, you make a little bit of profit that comes in -- that is reflected in the asset management part of it. Usually, you can carry, which is approximately 100 to 125 basis point per year, and your exit is at the end of 4 years. So as and when you start exiting, you should get another 4% to 5% as a carry income. So you are accruing carry every year. We are not taking into account, so it won't come in the P&L. You will only get carry when you exit or only on realizes.

But from an embedded value point of view, as obviously these credit strategies are there, you are potentially going to earn that money in 3 to 4 years on this credit strategy. So on an average, you make about between 1.5% to 2% SDs, another 1 to 1.25 per year of carry, which comes cumulatively at the end of the -- at the exit time.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [67]

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Right. So carry income, again, it would be -- largely include the underlying, and then we believe carry at the end of the exit?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [68]

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Absolutely. And usually, if you get on 14%, 15% of gross yield, then you will get a carry of 100 basis point. If you can get about 17%, 18%, you get 150 basis point of carry. This is broadly. This is how carry is -- as above a certain threshold what you make, you get 20% of that. So usually, your threshold is 8%. Again, this varies from fund to fund. Anything you make above 8%, you get 20% of that. So you make 18% in your stressed credit fund, and if your threshold is there, then of the extra 10%, you will get 2%. And your share of the carry. But that only comes when you exit.

So usually, a lot of this we expect the funds we are building now, post '21, '22, a lot of that carry income will come between now to '21, '22. We are hoping that the ARC carry income will come. So for the next 2, 3 years, we should get some ARC carry income, and after that, the asset management carry income should start coming in.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [69]

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Sir, just this last small verification on the management fee side again. So this 1.5% to 2% of the management fees would be on the deployed fund, right?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [70]

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Yes. In credit, that is how it works. Unlike private equity where you earn fees on committed money, in credit you earn only on deployed money. Yes. So currently, as I said, half the money is deployed, half is undeployed. So as we deploy that also, then all those fees start coming in.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [71]

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Okay. And sir, what's the pipeline -- I mean what is the expected time line where you feel that half of the money will get deployed?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [72]

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Yes. I think they are deploying at a rate of about INR 6,000 crores to INR 7,000 crores a year across all these strategies. So we expect to be able to deploy about $1 billion, as I said earlier. You want to raise a $1 billion and deploy a $1 billion across credit strategies every year.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [73]

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Right. And sir, just the last question, a very small question. Sir, post this -- equity infusion on the CDPQ and the ECL Finance, which used to be 100% subsidiary. So what will be the Edelweiss holding post the infusion -- I mean after dilution?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [74]

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It's a convertible structure based on the base plan that we have agreed with them. We expect them to hold between 14%, 15%, up to 17%, 18% of the company. Somewhere in that range, it will fall at the end of 3 years.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [75]

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So you said company ECL Finance, right, not Edelweiss Holding?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman & CEO [76]

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Yes. So they will end up holding between 14%, 15% to 17%, 18% of ECL Finance at the end of 3 or 4 years when they convert. For the INR 1,800 crores that they invest, it will be anywhere between 13%, 14% to 17%, 18%.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [77]

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And sir, what's the FY '19 net worth under ECL Finance, ex the CDPQ investment?

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Unidentified Company Representative [78]

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It's around INR 3,000 crores.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [79]

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Around INR 3,000 crores. Okay.

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Operator [80]

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Thank you. That was the last question. I now hand the conference over to the management for their closing comments.

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

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Okay. Thank you very much.

As with all other quarters we've had, this has been very interactive and very -- a lot of insightful questions from all of you. So once again, thank you, and I do hope to see you again at the end of Q1. Bye.

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Operator [82]

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Thank you very much. Ladies and

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