Rashesh Shah always recalls how as a youngster in college he was loathe to join his father’s business, wanting instead to be a high-flying executive at an HSBC or a Philips wearing a pinstripe suit and a tie. Thirty years down the road, Shah’s certainly flying high and his firm Edelweiss Financial Services boasts a suite of services that’s probably unparalleled among non-bank financial companies. While he might be disappointed Edelweiss hasn’t won a banking licence, he must be more than happy that it has a finger in every possible pie. Indeed, in the last seven years, Edelweiss has ventured out into areas such as insurance and asset reconstruction leaving virtually no space untapped. More important, it has transformed itself into a retail financial services outfit from a wholesale one.
That’s probably why the company has survived the severe downturn which has seen NBFCs go under and others selling out; Shah realises the importance of consolidation and plans to focus on just that.
“At a time when things looked bad in India, we stuck to our plan, invested in people, businesses, technology, and processes,” says the chairman and CEO of Edelweiss Financial Services, adding, “never under-estimating the importance of these in building an organisation”.
Shah also knows the values of de-risking a business model and it’s the continuous diversification that has helped make Edelweiss’ business model a robust one. Even in the early years, Shah and his partner Venkat Ramaswamy realised that relying on the capital markets business alone could be a risky proposition since the earnings flow could be erratic and the space was highly competitive. More important, it was not a business that could be scaled up since the profit pool was a tiny fraction of that in the credit market and the margins wafer-thin. Which is why they took a conscious decision to foray into other areas. In 2013-14, the credit or the lending business accounted for 44% of the consolidated topline compared to 15% in FY2008. Over the same time, the reliance on the financial market and asset management operations has come down with the segment‘s share coming down from 44% to 21%; the share of commodity financing operations has risen from 7% to 16%.
Shah is happy that despite the turbulence in the economy and particularly in the financial services space, he didn’t hesitate to persist with the diversification. And although the decision to diversify may have been his, he credits his team with having scaled up their respective businesses.
“We are in a sweet spot because we selected all these businesses but the reason we are able to manage this portfolio is because our senior management operates like a set of partners,” he observes.
Between FY08 and FY14, the firm’s topline and operating profit have clocked in compounded annual growth rate (CAGR) of 15% and 10% respectively; in FY14, the net profit grew 24% to R220.2 crore and for the first nine months of FY15, the bottomline has grown 50% year-on-year to R240.3 crore.
And the momentum isn’t about to ease since Shah and his team believe a secular growth of 18-20% for the next few years is par for the course.
“We are reasonably small in the segment and that offers us headroom to grow,” he explains. Although Edelweiss isn’t taking its eye off the corporate book, the reality is that the retail finance portfolio is growing faster on a smaller base.
And the book itself at the end of December 2014, was an impressive Rs11,178 crore with corporate finance accounting for nearly 69%.
Shah’s equally bullish on the capital markets piece—broking, investment banking, institutional equities and wealth management operations—that he believes can grow at 20-25% over the next four to five years. While yields could come down since consumers will be able to access the markets directly with improved IT, new technologies will also help bring down costs.
Shah has never doubted the India story—India will become a $5 trillion GDP country by 2025 he says—and given the stock markets haven’t done as well as they could have in the last six years, he believes there’s money to be made.
“India’s market cap is about $1.6 trillion and should grow to $3.5-5 trillion. That will throw up growth opportunities in segments like broking and asset management,” he says. For Edelweiss specifically, the retail space could turn out to be big business since the firm’s market share is a modest 1.5% compared with 5% in the wholesale market. With a turnaround in the equity market, the investment banking operations have also picked up; according to the Bloomberg league table Edelweiss managed 11 equity and rights issues last year.
With a book of R18,000 crore, Edelweiss is today among the largest ARCs (asset reconstruction company) and Shah’s confident the return on
equity (RoE) for the credit business can be driven up to15% from the current 13-14%. That should help push up the combined RoE to around 17%; in FY14 the firm notched up an RoE of 12.3% excluding the insurance business which Shah expects will break even in FY20; Edelweiss’s partner in the life insurance business, Tokio Marine Holdings is expected to up its stake to 49% in the joint venture now that the law is in place.
Meanwhile, Shah hasn’t given up on the bank licence since he’s convinced that becoming a universal bank is the way forward. At 51, time is
on his side.
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