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Edited Transcript of EDELWEISS.NSE earnings conference call or presentation 14-Aug-19 10:00am GMT

Q1 2020 Edelweiss Financial Services Ltd Earnings Call

Mumbai Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Edelweiss Financial Services Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ramya Rajagopalan

Edelweiss Financial Services Limited - EVP of Corporate Development

* Rashesh Chandrakant Shah

Edelweiss Financial Services Limited - Chairman, MD & CEO

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Conference Call Participants

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* Aditya Jain

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

* Anitha Rangan

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

* Renish Bhuva

ICICI Securities Limited, Research Division - Assistant VP

* Sachit Khera;Smart Equities;Analyst

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

* Subramanian Iyer

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and a very warm welcome to the Edelweiss Financial Services Limited Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to the Edelweiss Financial management team. Thank you, and over to you.

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Ramya Rajagopalan, Edelweiss Financial Services Limited - EVP of Corporate Development [2]

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Good afternoon, everyone. Thank you for joining us for our Q1 FY '20 Results Conference Call. We have with us Mr. Rashesh Shah, Chairman and CEO of the Edelweiss Group; Mr. Himanshu Kaji, Executive Director and REIT Group COO on the Call; Mr. Rujan Panjwani, Executive Director; and Mr. S. Ranganathan, President and Chief Financial Officer. During the discussion, we will be referring to the Q1 FY '20 Investor Presentation uploaded to the exchange and on our website. I would like to state that some of the statements in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. Please read the detailed disclaimers in our result documentation. With that, I would now like to invite Mr. Rashesh Shah to begin the proceedings of the call.

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

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Thank you, Ramya, and good afternoon to all of you. First of all, thanks to all of you for being on this call once again for this quarterly call. You would have got a chance to see the results that we announced a few hours ago and the announcement that we've made in the investment in our advisory business.

First of all, I think it goes without saying, this has been a difficult quarter. The last few quarters in India, because of various things that we all read about in the papers and experiencing every day, and it's not been easy for this quarter, especially because of elections and post-election sentiment and overall slowdown. Because what happened in this quarter is the problem that was very lingering for a few quarters of our liquidity and NBFCs actually become an economy-wide issue. We have seen slowdown in demand across the board. We have seen risk aversion. We have seen people moving more on standstill. So it is a difficult quarter it goes without saying. Our profits have come down. And if you see the numbers, large part, almost the entire all-in profit is due to increased credit cost. Credit costs have gone down in this quarter around almost INR 121-odd crores. Our average, credit cost should be INR 100 crores to INR 125 crores per quarter until the last quarter. Now I think for this quarter, it has gone to about INR 250 crores. And we think for the next quarter or so, this will remain that and then come back to normal, and I will speak about it as I speak about environment and outlook going forward.

I think our approach is that we have always told investors that what we see and what we will try and communicate. And after the last 3 quarters of liquidity crunch, first couple of quarters was okay. But now we are starting to see some cash flow related stress in asset quality. Good news is that a lot of this stress is not reflected in commercial values. Commercial values are still slightly stable. Our average collateral coverage still remains at 1.8x the loan book. So stress is coming because cash flows have become very tight in the last quarters, and become exceptionally more tight than they were even last year. So as a result of that, we have decided to very proactively provide, and just ensure that we grapple with the environment. We can't change the environment, but we are grappling with the environment. And our current outlook is that this year will be a consolidation clean-up year for the industry as a whole, but I'm hoping that after March 2020, growth will come back for various reasons, and we'll speak about that.

So again, to recap, what are we doing in the environment? First of all, goes without saying, we are managing liquidity. As you would have seen from our addendum presentation, we have reduced commercial paper to almost 0, very, very small amount of commercial paper we have. We have diversified our borrowings and make sure that we are more tenured or longer-term borrowing or a longer-term performance have gone up. So we have made sure that our liquidity availability on that is also intact. And in spite of the liquidity constraint in the environment, we have ensured through various measures to keep our liquidity on an even keel, and we continue to monitor liquidity looking at 365-day horizon and we will continue to do that. Once things stabilize, we'll bring down the 365-day horizon to 180 days, as we were a year before the crises.

We used to maintain a 180-day horizon liquidity before the liquidity crises started. Since it started, we have moved it to 365, and I'm happy to say that we currently continue to manage it out -- in that framework.

Second thing that we are doing is, managing asset quality. There's a huge focus, especially ensuring projects that completed we'll see -- we are seeing that pricing is still stable in real estate alone. So key risk is projects not getting completed, either because of lack of cash flow or lack of execution capability. So we continue to be focused on that. As we spoke last time also, we have about 160-odd projects in our portfolio, out of which around 30, 35 is where there is some over site intervention and focus required. And we are really actively executing that. We have a committee that I chair that ensures that we look at project by project, which are all either becoming sticky or can become account at the watch. And ensure that those projects keep on moving forward, either by helping them raise last-mile funding, helping them changing developer, doing a set of other things to make sure that asset quality is maintained.

Along with that, whenever there is stickiness and all we have proactively stepped up our credit cost, as you would have seen, the fall in profit for this quarter has been because of the increase in credit cost. Our profits of last quarter to this quarter has fallen by approximately INR 100 crore impact and our credit cost is round about INR 150 crores. So on an after-tax basis, the impact of credit cost on target about INR 100 crores. So that has been now the real impact. We are also ensuring that we maintained a strong balance sheet. In this quarter, we raised -- we got equity in our credit business. As you know, we had announced equity raised in our credit business of $250 million, INR 1,800 crores from CDPQ. Happy to say that the first tranche of debt, which is INR 1,040 crores, came into the -- our NBFC in May of this year. So we have capitalized our NBFC. With that, also happy that we have announced today equity raised in our Advisory business. As you know, we have 3 businesses, Credit Advisory and Insurance. And today, we have just announced that Kora management, which is a very leading debt-oriented global financial services company investor, they have been an investor in Edelweiss Holding Company for a long time, and they have now agreed to invest up to $125 million in Edelweiss and our advisory business. So we already announced that. We are also planning to raise about $200 million in our advisory business. So Kora is the anchor investor. Along with Kora, we are talking to a few more investors and we're hoping that in next 8 to 12 weeks, we should be able to close this round, at the end of which, each of our businesses will be fairly independently categorized.

Our credit business will have its own investor and its own capital structure. Advisory business will have its own structure of capital availability as the insurance business already has that. So that allows us to make sure that each of these 3 businesses can continue their growth track going forward. With this capital raise in this quarter, our gearing has already come down to 3.7. So about a year ago, we were at about 5.2, but 5.2 has -- our gearing has come down to 3.7. With this capital raise and a few other things we are doing, we are expecting our gearing by the end of the year, it should be around 3.2 to 3.3x, which will be one of the most conservative gearing in the industry. What it does is though in the short-term, it does bring down our profitability and ROE because of the low gearing.

If you look beyond March 2020, this allows us to have a better headroom for growth. We do think that growth will come back for this year, the first half is going to be challenging. Second half will be more consolidation and recovery. And then post March 2020, FY '21 onwards, we think growth will come back. And at that time, if you have enough equity, a lot of headroom for growth, you will be able to capitalize on that.

As we would have seen in the presentation, we are adding our diversified model that actually helps us a lot in this quarter also. And Slide 14 highlights that our Wealth Management assets are in the business and capital markets have contributed to almost 21% of the profits, ARC has contributed to more than 45% of the profits. So overall, I think our profits on our noncredit business, essentially even retail credit has done well. It's been the corporate credit where we have stepped up the credit cost and taken the hit on profits as a result of that. So if there is one area, which accounts for the falling profit, it's in credit costs in the corporate credit book, which, friends, as you all know, for the last few quarters has been an area of concern and watch. And as we always said that when the -- when we start seeing any early signs of stress, we'll proactively provide. The good news is that our, what we call, pre-credit cost, PBD, for last year was about INR 2,530 crores for the year. This year, first quarter is INR 537 crores, which on an annualized basis comes to INR 2,100 crores. So our pre-credit cost, PBT is robust enough to take some extra hit due to credit cost without impacting the balance sheet or without impacting anything else. The only impact has been, earnings for the year, which, as we said, in FY '20, if you can take some pain in the P&L and strengthen the balance sheet and keep yourself ready for growth post March 2020, that would be a good outcome in this environment. So I think pre-credit cost or all our cost income ratios and everything else you spend is stable -- except for credit costs, everything is very stable. And we do feel that credit cost is a passing phase because we have to go through this pain given the environment and what has happened over the last 3 quarters. We do think that it may continue for a quarter or 2, but post March 2020, things should come back to normalcy on credit cost and with coming back on growth, things should look better. Our Asset Management, Wealth Management, ARC business continue to grow. So the diversified model even in this quarter has been underscored very well at Asset Management, Wealth Management, even insurance had a good quarter.

On retail credit, we continue to grow in a very small way, keeping liquidity in check. Our corporate credit, as our old plan has been that we slowly, slowly scale back this book on our NBFC and business in our Asset Management format, and a lot of actions we have taken and we are taking will help us go towards that objective.

In terms of outlook, I've stated, I think FY '20 will be a tough year for India on the whole. We're seeing it. I think in my 30-year career, this is one of the toughest phases that I've seen for a -- from economic slowdown, global headwinds, liquidity, risk aversion, all of those have come together. But history has also showed us that this doesn't last for long. It looks very intense and very painful when it is there and we are at that point as of now. I do think, by the end of first half, this sentiment and environment should bottom out. We should crawl back to normal in the second half and go back to growth. And is has partly happening because RBI has been cutting rates, liquidity has been eased off. And this started off in February, and we have seen that it takes about 5 to 6 months after the rate cuts and the liquidity injection to start. And for its effect to be felt on the economy. So if this started from February, within August, September onwards, things will bottom out and should start improving.

But the next few quarters are very important, and you will keep a close watch on the economy. I'm also hoping that government has been very cognizant of this, and they have promised to take some action either a stimulus package or start spending on projects from governments own coffers also. But I do expect and hope that government will also take some action.

What will happen, of course, October is the basis that we'll also take into account because October last year onwards is when the slowdown started. So even the Y-o-Y growth numbers will start looking slightly better and a combination of all the liquidity, rate cut, government action as well as base effect should start getting back some of the animal spirits that we are hoping for.

I also think that -- I think, by March 2020, real estates are also bottomed out. We are starting to see early signs of good projects, having good demand. Pricing is also starting to destabilized. The current problem in the industry of real estate is the projects, which are stuck, projects, which are not able to go forward either because of lack of execution or lack of funding. So -- but the good news in that is the projects, which get stuck, are not inventory that is available so that will also induce supply in the market, along with the fact that for last 1 year, no new projects have been launched in a significant way. So the scale back of supply that we've been waiting for last 4, 5 years has started to happen. And I do hope that by March 2020 onwards, the demand/supply equation in housing starts becoming more positive and that should improve either pricing and sales volumes also. So I think still the next 3 quarters, some pain will be there, but hopefully, things will start improving.

I'm also happy to announce that we have raised equity in our advisory business. This is a start of getting an outside investor and putting independent governance in that business, what we call EGIA, which is Edelweiss Global Investment Advisers. This business comprises of our ART business, our Asset Management business, our Wealth Management business and our Capital Market business. So these 4 businesses account for more than about 50% of the profits on housing in EGIA and having an investor like Kora to be the anchor investor and hope that some other investors with whom we are in conversation, we'll close this. It will also allow us to strengthen and showcase this business as a stand-alone independent vertical for growth for us.

We are planning to raise about $200 million in this business. $75 million is the anchor investment from Kora, which can increase, but we want to keep it at $75 million and keep headroom for other investors to also come in. It will take us another 4, 5 months to put the structure in place with all the businesses folding under Edelweiss Global Investment Advisers. And by December, we hope the structuring should be over. Kora investment is a convertible structure as you would have seen in the release that we have given, and we had -- we have an expected midpoint of the conversion at INR 8,000 crores, which is going to be equal to 10x PE of 2021, the (inaudible) of the business in 2021. This business in this quarter had very close to INR 160 crores of pre-minority PAT and close to INR 130 crores of post-minority PAT. So even annualized of that, it is a INR 500 crores, INR 600 crore PAT business now. We are hoping that in the next couple of years, it should be INR 800 crores, INR 900 crores PAT, so 10x of PAT, we'll convert at about INR 8,000 crores is the midpoint. There is obviously a 20% up and down on that, which is all we've kept to align investors' interest in our interest. We do feel this is a fair structure convertible, which allows investors to have also some protection. And for us also, we have some upside. It is a convertible structure, but a compulsorily equity convertibles of business equity, and it will help us in strengthening the balance sheet as we go forward. So friends, with that, I don't want to spend more time. I want to leave up other time for Q&A.

Thank you, once again for being on this call. And again, as we keep on communicating to our stakeholders, we are doing everything we can to benefit right away so, in this climate, in this tough environment, we end up being the organization of balance sheet, end up becoming stronger and do look forward to growth post March '19-'20 onwards, because India has always been a growth story, and whenever we have increases like that, it has seemed very depressing when the phase is going on. But if you look across the valley, there is a fair amount of optimism that has always been there from growth point of view in India and I still continue to believe that, that growth is ahead of us, we just have to navigate, the next 3 quarters, which can be a bit more trying and maybe some turbulence out there. But we have already seen turbulence for last few quarters. So the next 3 quarters may not be much more tougher than those. So thank you once again for that, and we will 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 Sachit Khera from Smart Equities.

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Sachit Khera;Smart Equities;Analyst, [2]

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I had a quick question regarding your insurance -- the investment -- the bond investment under insurance book. Actually, I wanted to confirm if there were any bonds of DHFL or Reliance Capital or any of the capital groups some insurance books? And if so, what is the provisioning that the insurance business has taken already?

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

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Historically, we have always been hesitant to talk about individual accounts because I think it shows up in the results alone. I would say that we will have some investments -- our insurance business is very small. And whatever is there as far as the loans we would have provided, not only for any company group alone, but as whatever is the mark-to-market. It has gone through the P&L. We have provided that on a very conservative basis, and we will continue to do that. The numbers will not be large because we are a very small insurance company. So it can be INR 10 crores, INR 20 crores, INR 30 crores here and there, if we have to provide even going forward. So they are not large numbers. But again, we have always maintained that we don't talk about individual accounts. We talk about it at a portfolio level.

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Sachit Khera;Smart Equities;Analyst, [4]

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Okay. And also, I wanted to know about the stress level in your Stage 2 book, because I was looking at the annual report and there was a lot of movement from Stage 1 to Stage 2. And considering that, obviously, you talked about stress in the real estate sector, but also in your SME sector, do you see any chances of major slippages coming from the Stage 2 book overall going forward?

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

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Since the Stage 1, Stage 2 keeps on going up and down, I should say that across the board, Stage 1 and Stage 2, not only for us, but for everybody, are going up. We are monitoring it very closely, but the buckets keep on shifting especially on the wholesale side and Stage 2 can get normal value there, because the interest payment and cash flows are delayed by 20, 30, 40 days here and there. But I would say that overall, you should expect a little bit of change in Stage 2, Stage 3, but our current Stage 2 that we have is equal to volume of Stage 2 a year ago. The numbers are the same, broadly of Stage 2. Now what is Stage 2 a year ago before all this started in between, they may have gone up in one quarter and come down in another quarter. Overall, as I said, we are anticipating a little bit of increased steps largely related to cash flows because we are seeing that cash flows are getting very challenged for everybody, for all customers and every day. And as a result of that, we are proactively stepping up our credit cost. We do expect our credit cost, which is to be in the range of about INR 100 crores to INR 125 crores a quarter, for this quarter has been INR 250 crores. We -- I think it will remain that for the next quarter or so. And this year, we may have credit cost of between INR 700 crores to INR 800 crores, but that should be all. We have done all the stress testing. We have looked at all the accounts. We are not seeing any increase in stress from what was estimated 1, 2, 3 quarters ago, it's the same estimate 1, 2 or 3 quarters ago, which has now been resulted in stress. The good news is that this has been going on for 3 quarters. So you know what is there, and it can be 10%, 20% up and down, but not a lot more than that.

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Sachit Khera;Smart Equities;Analyst, [6]

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Okay. Okay. And can I ask one more, if that's okay?

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

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Yes.

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Sachit Khera;Smart Equities;Analyst, [8]

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So regarding the -- I'm not very familiar with your Wealth and Asset Management business. So I wanted to ask you beneficiary in the mutual fund distribution business, does Edelweiss get impacted in any significant way regarding the commission long tail; that were made the regulation change?

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

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It does impact partially on the Wealth Management business, but our mutual fund distribution income as part of Wealth Management top line is very small. We are much stronger in distribution of bonds, which has become a very profitable activity right now and everybody is trying to raise bonds in structured products, in alternate funds, in equity broking, all of those are much larger sources of income than the mutual fund distribution. If you look at all the mutual fund distributors, we are relatively smaller as compared to other wealth managers also. So in fact -- obviously, it's there, but it's very, very minor for us in the Wealth Management business.

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Operator [10]

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

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [11]

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Sir, I've got couple of questions. One is on the provisioning part, which is like INR 250 crores this quarter. So if you could just break up this provision between wholesale and retail book?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [12]

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So I don't have the exact breakup in front of me, but I would say out of INR 250 crores to INR 200 crores maybe wholesale, broadly. It is largely on the wholesale side.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [13]

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Okay. And so broadly, again, within wholesale they're largely towards the real estate book? Or it would be, let's say, between...

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [14]

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(inaudible) Both (inaudible). It's actually (inaudible) we treat it as one common book, now as (inaudible) call it corporate credit, so it will be across the 2 of them.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [15]

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Right. So sir, broadly when you're guiding for a INR 700 crore, INR 800 crore kind of a provision for this year. So it is fair to assume that we have done, let's say, account-by-account analysis of our exposures, or let's say, top 20, top 10 exposures. And we are pretty confident of maintain this guidance for the rest of the year?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [16]

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Yes, we have [indiscernible confident, it has taken a lot of time and effort. But yes, it is not just a broad percentage of book number, it is account-by-account bottom up calculation. And as I said, there might be 10% here and there because that is very unexpected in the environment. But all the stress testing and the calculations we have done, this seems to be a good estimate.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [17]

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Right. Okay. So sir, now moving on to my next question is on the wealth business. So in this quarter, particularly, our revenue is down 20% Y-o-Y despite our (inaudible), up 11%. So it, in fact, a very sharp decline in the yield to U.S. So what explains this?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [18]

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Largely, activity. As you know, April was a slow month, and then even June because of the environment and couple of credit events that happened, a lot of activity has come down. This quarter was much more muted activity across the board, even in capital markets, brokerage volumes, all of that was about 10%, 20% lower across the board. The good news is, in the advisory this is more cyclical. The way Advisory business has always worked for the last 10 years, whether it's capital markets, wealth management, asset management. Within a year, there is 1 great quarter, 1 bad quarter and 2 average quarters. And that is how it has always been across the last many years. Because this is the kind of, what I call, quarterly volatility in the advisory, strong capital markets related businesses, but it's not structured, it's more cyclical. And already, we have seen some activity coming back in this month. So overall, I think if you were to see capital markets, IPOs, everything has been muted in the last quarter. So it's just activity led, there is no other change.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [19]

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Sir, last question on the OpEx side. So this quarter, we have seen a 20% sequential decline in the OpEx. So #1 is, what explains that? And the next question, which is a follow-up to that is that in PBT, we have maintained something about making more investment towards technology and processes. So I'm just wondering, despite our cost-to-income at 50%, and in a couple of quarters back, we have talked about the operating leverage, then why we are making again investment on the technology or processes?

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

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See, I think what's happening is financial services, and especially as you go in more and more retail, like, whether it's retail value management, whether it's retail credit, technology is becoming not only important from scale and growth point of view, but also from a cost efficiency point of view. So costs have come down because we have some operating average, like when you say, you look at wealth management and other activities, when the top line comes you're already you're some part of compensation also gets carried, but it's better an operating leverage that you have a little bit in the business that allows you to manage that the shape (technical difficulty) the top line on the advisory businesses. All businesses, I think the reason OpEx has come down also because our headcount is getting more calibrated, and we are using technology to more and more become efficient. And so the way you should look at is technology investments are replacing people investments. So you will -- your headcount or your people costs will come down, your tech costs will go up. And in the long term, that is more scalable, more efficient for all financial services, and will ultimately improve your cost income ratio. And more importantly, customer experience also. So I think entire financial services indefinitely will be in this transition, where if your tech cost is X and your people cost is Y, your people costs from Y will come down, but your tech cost from X will go up.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [21]

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Right. Sir, sorry, just the last question. So in the retail and wholesale finance business. After the adjusting for CDPQs entire investment, what will be your holding in these [2] business?

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

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In the credit business because they are invested in one holistic credit business, everything is that only wholesale credit and retail credit. (inaudible) convertible structure, they will own anywhere between 14% to 18% as per the conversion formula that we have agreed depending on the profit and ROA at the time of conversion.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [23]

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Right. And this is purely, sorry entirely in the ECL Finance?

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

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Yes, it is in the credit business in ECL, yes.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [25]

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Okay. I thought about the wealth side. I mean, let's say, if we have to assume that Kora again will be [commutative] or predefined formulas, and -- then what will be our share in developed business going ahead?

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

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So assuming we do the complete round of $200 million that we want to do Kora (inaudible) invests $75 million, we're talking to other people for the balance amounts. And I know $200 million will be about INR, 1,400 crores. And as I said, our conversion (inaudible) about -- expected is about INR 8,000 crores. It's a convertible structure. But INR 8,000 crores is the -- middle point is that INR 10,000 crores (inaudible) will be cap on that. So at INR 8,000 crore, you may calculate INR 1,500 will be slightly under 20%, about 17%, 18% is what we will own. So in both of businesses end up owning at least 80 plus percentage equity after both these capital raises.

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Renish Bhuva, ICICI Securities Limited, Research Division - Assistant VP [27]

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And so they are -- okay. So the wealth, the Global Advisory will include a wealth, capital market, ARC and asset management, right?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [28]

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Yes, yes.

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Operator [29]

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The next question is from the line of Shubhranshu Mishra from BOB Capital Markets.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [30]

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My first question is with respect to your corporate credit. So out of the 162 projects in wholesale markets, I want a little more flavor, how much are under construction? And how many of them would be in MMR? And how many of them would be in NCR? And how many of them would come up (inaudible) or get cleared in FY '20? That's my first question.

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

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So I think broadly MMR and NCR should be about 2/3 of the portfolio broadly. But again, in MMR also it's more outskirts of Mumbai rather than the Island city of Mumbai. So on 80% of the inventory is below INR 1 crore and where the apartment value is below INR 1 crore, which is a fast-moving item. And what was the second question, sorry?

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [32]

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How many of them are under construction?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [33]

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Largely of that. Because Mishra, project launch, so they're all under construction, at various stages of construction, but all of them are post approval, 100% of the projects are (inaudible) compliant, largely housing, and almost an 80%, 85%, the sales have already started.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [34]

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Right. And out of these 162 projects, how many would come up for OC in fiscal '20?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [35]

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I don't have that number off hand. But I don’t know, a lot of this works on partial OC and (inaudible), but I would say, at least, about 1/3 of them will be OC in this year, and another maybe 1/3 will be OC -- actually, quite a few of them, they already have OC by now. But of the ones with broader OC, my guesstimate would be about 1/3 will be OC in this calendar -- in this fiscal year. And another 1/3 will be in '21, '22.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [36]

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Right, sure. And my next question was with respect to your wealth management assets under advice, the market movement here is negative INR 2,000 crores versus your asset management, where your movement -- market movement is barely INR 15 crores. So how do I read into your wealth finance, had there been some write-down? What -- how do I read this negative INR 2,000 crores of wealth management asset management (inaudible)?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [37]

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Negative INR 2,000 crores is the fall in market value. So when you say market movement, it's like if you're holding equity shares and the equity prices come down, the market movement has reduced the value of your (technical difficulty)

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [38]

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So it's largely related to market movement equity price, right?

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Operator [39]

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Subhranshu, just one moment. It seems the management line has disconnected. I'll just join them back. We have the line for the management reconnected. Subhranshu, if you can please repeat your question.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [40]

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My simple question is that if I look at the market movement as a percentage of opening AUM for wealth management versus market movement as a percentage of opening AUM in asset management, both of them are drastically different. So what -- how do I read the -- both the numbers? What is...

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

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So the way to look at market, market movement is -- this is just the impact of the market change. So for example, if you are best management customer awards. And you have equity stock of INR 100 with us and that because just the market came down, the INR 100 became INR 85, there will be a market movement of minus INR 15. So the way we look at asset management and wealth management is you look at 2 factors, what is the net new money, the new clients or the existing clients with (inaudible) with you. That is called the net new money. And the existing (inaudible) you had, existing asset (inaudible) you have, has the impact of changing the market movement, which is more the actually part of it is what you can pull it in the net market movement.

So the way to look at investment management is, we had [INR 1,006,000] crores of AUA at the start of the quarter. On that compass, the market movement, other equity markets or currency or whatever other market changes that have happened, that would have resulted in a reduction of AUA by INR 2,000 crores. But we have also brought in INR 2,600 crores of new clients who are coming to this. In an upfront market, the market movement can be positive also. But this quarter, obviously, I know most of the asset classes have come down in value. The same thing is in the asset management. But asset management business is a different business, wealth management is a different business. So in asset management, the [compass], we have about INR 37,000 crores have we not got any new money? This same INR 37,000 crores would have fallen by INR 15 crores just because of the change in indices and the market value in this quarter.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [42]

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Okay, sure. And you gave a credit cost guidance of INR 700 crores to INR 800 crores, is that a correct number?

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

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Yes.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [44]

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And out of this, what would be additional provision that you would be doing over the regulations?

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

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We are -- actually, now we're only in India's calculation. So India, there is no calculated provision. It is your estimate of expected credit loss. In India you can credit ECL. Or you mark down your impairment, you take it on your portfolio. So this is -- now we have all moved to an ECL model where the auditors have to agree to saying this is the expected credit loss after looking at collateral values and expected time to liquidation and recoveries and all that. So there is no calculated formula any more.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [46]

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So it's all as per ECL and there is no additional provision above the ECL calculations? That's correct?

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

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No. The way it works is you calculate ECL in that way. So if you want to be conservative, you calculate ECL in a conservative. If you want to calculate ECL in more optimistic, you do that. There is generally, nowadays, no provisions for doing an additional provision of our ECL. And even if you do that, your ability to use that in the future gets very impaired. So most of the auditors and everybody wants to say, here, you will be conservative, (inaudible) 10% more than (inaudible). But then you also got ECL.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [48]

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Sure, sir. Can you just tell me what would be the change in the PDM, LGD estimates for this calculation?

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

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It's actually account-by-account. I mean, obviously, Stage 1, Stage 2 is a standard one.

I have you -- it's actually -- there is a (inaudible) run for wholesale real estate from (inaudible) for wholesale real estate, advanced project is different, early stage project is different, structure is different. So our Stage 3 PDs is always 100%, right. Stage 2 PD is average of about, I think, about 55% to 60% of the wholesale book, and close to 80% in the SME book and close to 10%, 20% of other commercialized book. So as I said, this is very book-by-book. So we have some 18 categories in that. So I'm not able to give you an average. But I think Stage 1, our LGD is usually between, for wholesale book is about 20%. For Stage 2, also it is about 25%. And for Stage 3, it is 26%, 27%.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [50]

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And how have they changed from third quarter '19? That would be my last question.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [51]

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I think it inched upped a little bit by maybe 2, 3 percentage points. And I said, at the moment, though, it's not the change in PD and LGD, it is has been (inaudible) the movement that has happened between Stage 1, Stage 2.

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Operator [52]

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The next question is from the line of Anitha Rangan from HSBC.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited - VP of Fixed Income [53]

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I have a few questions here. So the first thing is on the liquidity front, in your Q4, you have given some details as to your overall liquidity was [10,100], which is now [8,800]. Also that in Q1 you mentioned that your bank lines was at [2,300] now, it is reduced [2,500]. So one, why is the bank line reduced? And two, have your overnight liquidity also reduced? I think what used to call as SBs, used to be like INR 3,000 crores in fact was INR 2,600 crores (inaudible) INR 2,600 crores includes the bank line as well? Just wanted some clarity there.

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

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So I think the bank lines will keep on going up and down depending on how the -- our utilization strategy also on that. There are pros and cons of keeping bank lines unutilized versus utilized. Our current tendency is to use them, so that at least there similarly used from bank to bank. Because even the bank lines are over 8 or 10 banks. So the overnight liquidity now we actually made it very fungible because just keeping overnight liquidity mutual funds, especially liquid funds is what we use to keep. And at least now (inaudible) have come down, even the mutual fund and a liquid and all, there has been a lot of upheaval. So we have started keeping a lot of that in what we call treasury assets. So our overnight liquidity what we needed only about INR 1,000 crores, but we still keep about [INR 60,000] crores of overnight liquidity. And a lot of that, we have moved into things like arbitrage, things like (inaudible), things like other -- even the low (inaudible) Shares book, which can be liquidated in 30 to 60 days. So we are using this opportunity to ensure that our cash is slightly more efficiently used, rather than just kept idle in liquid funds, but our revenues were high enough, I think liquid funds and (inaudible) were okay. Now we are trying to be slightly more efficient. So -- because overnight liquidity appears to keep about INR 4,000 crores to INR 5,000 crores. Now you don't need that much money because our balance sheet and other (inaudible) See, most importantly, our high overnight liquidity was -- we had a lot of short-term commercial paper and other short-term repayments due. A lot of our short-term requirements have gone away. We have hardly any commercial paper. So as the commercial paper has gone away, the need to keep overnight liquidity has also come down. And it is then in addition to keep a lot of money just in liquid funds or (inaudible) we would rather keep it in (inaudible) sets, especially at times like this when interest rates are coming down. So we can earn a higher yield on that. So what we internally monitor is, how our liquidity available in 120 days. And we obviously, internally have overnight bucket, 1-day bucket, 7-day bucket, 30-day bucket and all that. Then we look at our obligations and keep on calibrating accordingly.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited - VP of Fixed Income [55]

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Okay, okay. And second is your overall issuance provision from Q4 to current as like increased from INR 815 crores to INR 836 crores. But what you said is like you've taken a material write-off about INR 250 crores. So that is actually to cover a part of write-offs or provisions? Because here, it's not showing up in a material way.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [56]

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It has largely come from mark-downs and write-offs that impact maintenance, a lot our credit is also held in bonds and all that because some of the loans we give on in bond form. And then (inaudible) even things which are not NPA, you have an option to mark them down, even when they are not NPA. See, what has happened in the earlier NPA regime, which was the Indian gap -- regime, In the NPA regime, you were call something NPA and only then you can provide (inaudible). In the new Ind AS regime, you can mark down even a non-NPA, either a bond or a loan. So we have, as we said, very proactively started marking down and taking the impairments because now we move away from provisioning approach to a more impairment and credit costs -- expected credit cost approach. So that is what we have done in this quarter. So you may never see the provision going up from an NPA and categorization point of view. But ECL has gone up or total credit cost has gone up because we have taken impairment. If you see our P&L accounts, there is financial instrument environment that we call it. So that -- that is actually a more prudent way of doing it because you don't want to wait for somebody to become an NPA and then provide for it. You to want to sometimes provide even before it becomes an NPA, if you think this is a sticky account. And it's accounting the word. So I expect with NPAs, slowly and steadily in a year or 2 the NPA terminology will go away. Unfortunately, because banks aren't move to NPAs (inaudible) only NPAs (inaudible) all of us are targeting between NPA and expected credit cost. But I think the more elegant way, the more prudent way to look at it is look at it from the expected credit cost point of view, which is not related to NPAs. An overdue account after 30 days, even if it's SMA 1, you may want to now start providing against it. Because you are now saying that is an expected credit loss (inaudible). So I think in Ind AS, now the region is going to change, and we are following that.

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Anitha Rangan, Hsbc Asset Management (India) Private Limited - VP of Fixed Income [57]

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Okay, okay. Just a couple of more questions. In your liquidity analysis of (inaudible) borrowing of almost INR 2,000 crore each in Q3 and Q4. So what would your -- I mean, what is your thought process again, like, what sources of borrowing will you access in Q3, Q4 liability banks or market or retail borrowing. Can you throw some light there?

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [58]

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So it will the largely banks and retail, and then maybe a little bit of entities with mutual funds and insurance companies. So if you go back until last year, we were borrowing about INR 4,000 crores of -- what we call the long-term money every quarter. So even if you see the last year's second half, which is October, November, December, Jan, Feb, March, which is a very sticky and very prime quarter -- half year, we raised about INR 8,000 crores, INR 7,800 crores in the second half of last year. So our average has been about INR 4,000 crores a quarter. For the last 3, 4 years, we have been conservative, and now we have brought it down to INR 2,000 crores a quarter, which includes bank lines as well as retail (inaudible) and all that. And that even in the first quarter, we've been able to keep up with that. So we think INR 2,000 crores is a very conservative number in this market environment, and that is what we are currently projecting. Our idea is to be conservative. If you are able to rate more, we'll obviously step up on disbursements and scaling up a bit. But as I said, I think our current approach is that from now to March 2020, will be more consolidation, liquidity management, asset quality management, take the pain in P&L kind of an environment, and you become ready to grow post 2020 onwards. And we don't want to grow in a hurry, unless we clearly see that environment has stabilized.

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Operator [59]

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The next question is from the line of Aditya Jain from Citigroup.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [60]

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Sir on the Stage 3 loans. Sir it's a good, as I understand, is all of the increase in Stage 3 loans related to loans, which are now 90 days past due? Or is there also some conservative tagging of Stage 3 based on stress that you're seeing in the particular account?

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

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I would guess Stage 3 is higher than NPAs, so asking that question that Stage 3 is not equal to NPA, it will end up becoming higher than NPA in the new ECL rating that we are following. So to answer the question, yes. Stage 3 has accounts, which are non-NPA also, but we classified them as Stage 3.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [62]

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Okay. And since you mentioned coverage. So if you see Stage 3 coverage now at 47%. So is there a target level of coverage that you would see going forward? Or is this a stable level? And related to this, is the guidance of the full year credit cost. So that basically assumes an increase in Stage 3 loans? Or does it include the -- assume an increase in coverage on Stage 3?

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

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I think it will be -- it will be not be increased in coverage because our approach has been that, if you calculate the real loss given deposit, it's not the formula loss given deposit. If you calculate the real loss given deposit on stressed accounts. Usually on collateralized, even wholesale credit or even retail credit, it has been between 10% to 20% has been your real loss given (inaudible) on collateralized credit. So we estimate (inaudible) to do home loans and all your actuals all giving deposit about 10% to 15% on (inaudible) accounts. So our approach has been done, if you can target about 50% for the collateralized wholesale loans that is conservative enough because it is actually in our estimate price or what the actual experience has been for the industry as a whole. So if the industry thinks our experience about 25%, and real loss given deposit having a formula loss not given deposit of 45% to 50%, which is where we are is a good -- I mean, sorry, having a provision covering of 45% to 50% is a good approach to have. And same thing on home loans, I think, adding a 20%, 25% provision coverage is a good thing. Financially loans, especially unsecured, we currently write off everything on 120 days. So we take 100% as write-off on the unsecured loans. So on unsecured, I think you should take 100% write-off after 120 days in our approach. On collateralized wholesale and other [LEP] portfolio being at [40] to [50] provision coverage is a good thing. And for home loans and all being at 20% -- 10% to 20% is a good conservative provision coverage ratio.

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Aditya Jain, Citigroup Inc, Research Division - Assistant VP & Senior Research Associate [64]

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Got it. And that's helpful. Then just one clarification. So there is -- in the [notes] account there is a INR 35 crore favorable net gain on farewell change due a high court judgment. So what does this refer to?

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

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If you're talking about old investment we had made, which we had written off. This was a 10-year-old investment, but about 5 years ago, we had written it off completely. And we have filed a case for recovery on that. The court case has gone in our favor. So it is interested that (inaudible) recovery is high, we should take it into the regular P&L.

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Operator [66]

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The next question is from the line of (inaudible) from IDFC.

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Unidentified Analyst, [67]

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How much of your residential real estate loans would be under moratorium?

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

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So we have no interest on moratorium at all in most of the cases, because what happens on our study payment is not on the moratorium, it is linked to cash flow payments of the project as we expect the project sales and further flow to come about, sometimes we have an escrow account, where you get 10%, 20% of that. So where we expect that there is going to be a cash flow related stress is what I was saying earlier, we have started to classify them (inaudible) Stage 3 before they become NPA and start to provide for that. We are also proactively in at least a few cases where we expect it that the project will not be able to throw out the cash flows as contracted. We are proactively 3 months, 6 months ago, gone and got an additional investor or some last minute funding on that project to make sure that cash flows are -- because what you see is the only reason cash flows are getting impacted in a project if the project gets stuck. So we have not allowed any project, except for a couple of projects, which are stuck as of now. We have made sure that all projects which are in our portfolio continue to move forward. And as long as they continue to move forward. The moratorium doesn't become a big issue for us. And we look at 180 days out. In the next 180 days, whereas the repayments [are going to be due] and how they will come. And if you see any problem in that, either we (inaudible) for funding. And ensure that we don't have an issue on that or we provide. And even after the little bit of NPA that we still have to provide. So either it becomes Stage 3 or it becomes NPA after that. But we try to proactively avoid that. We have not done too many structures, where there is a onetime (inaudible) payment at the end of 3 years and all. Because it is not just an (inaudible) issue. It's also a very big risk issue. So we make sure that our repayments are linked to project cash flows. And stress test very, very aggressively.

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Unidentified Analyst, [69]

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Okay. And just on the ERC business. I mean, anyway resolutions are very slow and they've slowed down even further. So how does one cope with that? Because that's eventually going to have an impact on ERC valuations.

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

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See -- when you say resolutions are slow. It's partly true and partly not as everything else in India because we are looking at only NCLT. I would say that almost 2/3 of the evolution in (inaudible) happen outside of NCLT, because NCLT's only [1 more 2] of dissolving accounts. A lot of accounts already dissolved outside of NCLT, either through asset sales or through a new strategy partner or an OTS, a onetime settlement and all that. So actually, the one to look at it is recoveries. So last year, we did total recoveries about INR 7,000 crores. This year's first quarter, we already done about INR 1,000 crores plus. Quarter 2 will also be like that. And the big (inaudible) Which another [INR 8,000] crores, [INR 10,000], which definitely will happen in this year. So this year, we are expecting about INR 12,000 to INR 20,000 crores of recovery. So if you look at our AUM, which is about INR 40,000 crores odd last -- a year before that, we did INR 3,000 crores of recovery, year before that was INR 1,000 crores of recovery. Last year was about INR 7,000 crores of recovery. This year, we are looking at INR 12,000 crores to INR 20,000 crores of recovery, which means in 4 years, you would have recovered almost about INR 25,000 crores on a INR 40,000-odd crores AUM. So I think recoveries are looking fairly good. So don't look at only NCLT, of course, as far as still is the headline case has (inaudible) has truly got (inaudible) by at least 3, 4 quarters are going to be. But outside of that, we have a quite a few other resolutions last week, our textile has got cleared also. So there are resolutions happening, unfortunately because (inaudible), we think they are slow. So there are -- I think it is slow, but they are a lot of non-NCLT things which are also getting resolved.

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Operator [71]

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

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Subramanian Iyer, Morgan Stanley, Research Division - Equity Analyst [72]

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So a couple of housekeeping questions on the transaction. So one is that -- I believe your fully diluted stake in the ARC business was anyway supposed to go to about 60% in a couple of years, given that CDPQ's [stakeholders] about to go to 25%. So now post this transaction, does your residual stake in ECL go down to, say, around 45% odd -- 40%, 45% odd? So that was one. And the other question was that given that there's a capital inclusion in the [ARC] business. And my assumption is that most of that business doesn't require cash as such. So how do you plan to use that cash?

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

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So a couple of things. I think the first one, in the ARC business, we already have a 60% beneficial interest as of now. So the way ARC holding is currently structured, 60% is with Edelweiss, 20% is with CDPQ on a fully diluted basis and 20% odd other old investors who are there because as you remember, when we started ARC, we had only 49% holding as per our earlier rules. So we are outside (inaudible) investors who want the remaining 51%. So a few of those are still at 20%. So 20% is with all (inaudible) investors. 20% is CDPQ. 60% is Edelweiss. (inaudible) ARC will become part of the Edelweiss Global Investment Advisors and physical subsidiary of that. And you see dilute, say, about 15% to 20% of that, the question you're asking is very important that our ARC holding, which is currently 60% can also get diluted by say about 18%, which has come down to 15%. Our (inaudible) is to keep it at the beneficial eventually at [60%] because where you could do that if we can buy out some of the other investors and buy 10% of that, so go from 60% to 70% and then effectively get diluted back to 60%. We want to remain between 55% and 60% ARC on a beneficial bases also. So we will do because this, as I said, this will take about 5, 6 months for the transaction to close. So as on currently, our beneficial interest, which is 60% will get diluted down to the extent of the dilutionary (inaudible). But we will hopefully try and rebalance it by buying on some more stake in ARC and helping our stake to come back to 60% in the next year. It's more an intention. So it's not something that we are sure that we will do it, but we will intend to do this. And we will use this capital, see, currently in the wealth management business, we did some more the working capital for the wealth management business as well as for the margin funding business that has been there. Currently, the margin funding book of the wealth management is housed in our credit business, finance, we would have seen that if INR 4,000 crore ESOP financing book. We're the leader in ESOP financing, we see the market as fairly large. And even today, there is an appetite for another INR 3,000 crores, INR 4,000 crores in the market from our customers who have the need for that. So once we raise this capital and this equity, this equity will also allow us to build some amount of ESOP financing in this business also. And on a long-term on a 3- to 5-year basis, we would like to do what is related to wealth from a credit point of view, which is mainly ESOP funding, margin funding inside the wealth business. So we will slowly transition it out in the next 3 to 4 years. But even today, this additional capital will allow us to scale up the ESOP financing business, which is in huge demand. And we have almost 70%, 75% market share out there. And you would want to maintain that market share.

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Subramanian Iyer, Morgan Stanley, Research Division - Equity Analyst [74]

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And if I may slip in 2 more questions actually. So one was on the overnight announcement, the final guidelines that came out on the partial trade guarantee scheme by the government. So any early thoughts on that? And if you -- and if you -- it would wise to be keen to, say, participate in that? That was one. And the other question is that what are your expectations from the (inaudible) lending arrangement that you have with some of the banks? And how do you expect it to scale up over the next couple of years?

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

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See, you see the retail book the SME as well as the retail margins book, which is currently almost about INR 14,000 crores, INR 15,000 crores. So we would like to use this scheme that was announced to actually recirculates some of that. Because we have a stronger origination engine. Our capacity is much higher than what we are currently, given the liquidity situation and all. So is there really some capital and [replug] into originating more? I think that will become a model. The good thing is, in the last 9 months, we have not used asset (inaudible) of securitization in a big way. So our -- the portfolio is very available from that point of view, because a lot of the -- if you had sort of and a lot of your eligible portfolio that you would want -- you wouldn't find it as easy to use this scheme that is there. In the last 8, 9 months, we have not done more than INR 500 crores of retail securitizations, so our book is fairly intact from the utilization point of view for securitization. So we would definitely use it for a couple of thousand crores and use that couple of thousand crore to scale up the retail business. And the same, I think, going forward, NBFC going to be a great opportunity, (inaudible) usually [80], [20], we don't think that structurally, most NBFCs will now become capital-efficient and not just scale up your book by 20%, 30%, 40% of the year, I think you will have to pretty increase the flow business, get more fee income and use things like core origination. So your ROA should go up, but your gearing should come down for NBFC as a whole to maintain the same ROE. The part of the ROA going up should come from higher fee-based or churn-based activities, and that is the new model that we think will come up in to play. And I think core innovation is going to be an important part of that. We also see core innovation opportunities on the wholesale side. So we're seeing a lot of global players coming to us and say, wholesale is also very good risk reward business, has its own pros and cons. But wholesale on average it gets you about 4% to 5% higher yield, with a 2% to 3% higher credit cost. So from that point of view, wholesale is still a good risk-reward business. But given the environment and all, NBFC should not do a lot of wholesale business. But can you do it also under core innovation? So I think core innovation will become a very capital-efficient strategy and will improve the fee and other income to improve your ROA without using the balance sheet (inaudible) .

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Operator [76]

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

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Ramya Rajagopalan, Edelweiss Financial Services Limited - EVP of Corporate Development [77]

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Thank you, everyone, for making the time to listen to our call, especially ahead of this almost long weekend. Happy Independency Day. And speak to you in the next quarter. Thank you very much.

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Rashesh Chandrakant Shah, Edelweiss Financial Services Limited - Chairman, MD & CEO [78]

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Thank you, everybody. Thank you, bye-bye.

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Operator [79]

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Ladies and gentlemen, on behalf of Edelweiss Financial Services that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.