FY19 - An Overview
India is full of opportunities. A 7% GDP growth rate for the sixthbiggest economy in the world is no small feat. We have all the key ingredients needed forsustained growth compounding - significant size strong growth rate and importantly aprolonged period of time during which this growth will sustain driven by our youngdemographics. These factors have been in action for some time now. As we map out ourjourney since Independence our GDP touched its first trillion (in US dollar terms) onlyin 2007-60 years after independence. The next trillion took eight years and we achievedthe landmark in 2015. We are now expected to touch US$3 trillion by 2020-in a matter ofjust five years! At this rate we are well on our way to touching US$5 trillion by 2025!The power of compounding is truly immense.
Great Movie Bad Snapshot
The mistake we often make is to see India not only as large but also asa constant and linear opportunity. So while we see an ocean of possibilities we oftenforget that this ocean will have its fair share of storms typhoons and hurricanes. Oftenthese are very transitory while sometimes they may last for a long time. Howevereventually calm will prevail. The same holds true for India as well. In fact ourhypothesis with India has been that a dislocation that lasts about four to five quartershappens every four to five years. And we have seen that play out as well. An analysis ofthe last 90-odd quarters showed around 10-12 significant 'crises' in the market. Despitethese dislocations the long-term growth trajectory for India continues to hold steady. Sowhile at any point of time India might not be a good picture to watch in the long-termit is definitely a great movie to see!
The second half of FY19 and the ensuing market dislocation must be seenin a similar context. Eight months on while borrowing costs continue to be higher thannormal the borrowing tap is coming back to normalcy. We do expect the marginal slowdownand elevated borrowing costs to continue for a quarter or two consistent with ourhypothesis of four to five quarters of slowdown. In such a backdrop our focus in thesecond half of the year was on further strengthening the core of our organisation as weeschewed growth in favour of building strength and stability.
FY19 was a year of two halves. While the first half was business asusual the market dislocation meant that the second half was moderate quantitatively.However qualitatively it was an important year as we used the disruption to furtherstrengthen and stabilise the organisation true to one of our internal mottos - 'Neverwaste a good crisis!'
For us the important highlights of FY19 include -
1. Equity Capital - One of the defining characteristic of our journeyover the years has been the prioritisation of equity over growth. Our mantra has beensimple - Equity precedes Growth! At every point in our journey we have closely trackedour Debt-to-Equity (DE) ratios raising equity whenever we have neared even 5.5x. Weraised US$250 million of equity capital from Caisse de depot et placement du Quebec (CDPQ)in ECL Finance in FY19 of which we have already received the first tranche of US$150million. Not only is this equity capital infusion a validation of the quality of our bookit also provides us with enough growth capital as we go ahead.
2. Resolution & Recoveries - Our Distressed Credit business had agood year with some big-ticket resolutions. Recoveries for the year were over '70 billion.Our journey in this business has been unique and highly fulfilling. Not only does it helpus re-integrate temporarily non-productive assets back into the economy it also helps usprotect thousands of jobs across sectors. A sample size of nine portfolio companies thatwe analysed accounted for nearly 22000 jobs protected! The total number of jobs we saveand assets we revive over the years will be multi-fold.
Typically the assets that we encounter in this business are of twokinds - they can be either operationally strong EBIDTA positive good quality assets orthey can be bad quality assets where the business model itself is broken. It is the firstcategory of assets that we focus on. Even within this it might be a case of having astrong promoter or a weak promoter. While we do consider both kind of assets maximumvalue creation will usually happen in a good asset weak promoter kind of scenario.
At the same time we understand only too well the blood and sweat thatgoes into building an organisation from scratch. So in cases where we encounter a goodpromoter whose company has fallen into distress primarily due to market environment and astretched balance sheet we endeavour to work together and create viable solutions whichare long-term positive for the entrepreneur and the business Edelweiss and society atlarge.
3. Insuring India - We completed our business roster with the launch ofthe General Insurance business in February 2018. Being the best avenue to translatelong-term savings into long-term investible capital the impact of insurance in nationbuilding cannot be underscored enough.
The General Insurance business has had a strong start - in its firstfull year of operations the business has already crossed ?1 billion of premium! Even inlife insurance Edelweiss Tokio Life Insurance (ETLI) continues to be amongst fastestgrowing life insurance companies in the industry. More importantly the quality of thebusiness we are building in ETLI is what defines Edelweiss. Our Insurance business isreflective of the kind of franchise we are trying to build - long-term and steady. Whilethe gestation period might be long a well-run insurance business has the potential toprovide stability of income in the long-term.
Customer Perspective Core to strategy building
The foray into insurance is also a reflection of our increasingretailisation. As we have become increasingly retail be it in Credit Wealth Managementor in Insurance we have ramped up our focus even more on putting the customer at thecentre of our strategy. Across businesses we have innovated and endeavoured to enhancecustomer experience. Be it our mobile trading application loan approval system orportfolio management services each product has been crafted after taking concertedfeedback on the pain points and needs of the customer.
A key tenet to this is our consistent focus on putting ourselves in thecustomer's shoes and seeing things from his perspective. We strongly believe that thiscustomer-centric approach is the only winning strategy in financial services of thefuture. This unique focus towards the customer has helped us fulfil the home dreams ofmore than 34000 clients insure more than 300000 individuals provide asset managementservices to more than 350000 clients and help build more than 100000 houses. Our clientbase today stands at around 1.2 million and as always we will continue to work towardsfulfilling their dreams and aspirations.
Never waste a good Crisis!
We have always believed in using every crisis as a stepping stone. Likeone of the characters in the popular TV series Game of Thrones says Chaos isn t apit.Chaos is a ladder .
Petyr Baelish Game of Thrones
Similarly every market disruption is an opportunity to strengthen fromwithin. In this backdrop we focused on enhancing capabilities which could create an evenmore solid foundation for future growth.
1. Liquidity Management
In addition to equity capital over the last few years we have been ona journey towards strengthening our liabilities side of the balance sheet as well.Long-term liabilities now stand at 61% of our total borrowings up from 34% in FY15.Reliance on Commercial Papers (CPs) is now a meagre 2% of our borrowings. In thelong-term we do not expect CPs to constitute more than 10% of our total borrowings at anypoint of time. Even more importantly 93% of our borrowings today constitute bank loansand Non Convertible Debentures (NCDs). One more vector we have focused on is enhancing theshare of retail borrowings which now stands at 23%. In fact in FY19 we raised more than'66 billion of retail borrowings. It is truly a reflection of the faith and trust that thepublic has reposed in us that despite the challenging times we have been able to raisesuch a significant sum from retail investors.
2. Simplification for Scale
Over the last couple of years we have been on a path to simplicity. Wehave closed and/or merged several entities - this journey will continue till FY22 when weexpect to be at around 32 entities down from 74 a couple of years ago.
At the same time we have simplified our business structures andre-aligned businesses into three distinct Business Groups (BGs) viz. Credit Advisory andInsurance. Each of these BGs will be self-sufficient and independent business units. Thismeans that they will each have their own strategic investors to provide growth capital forthe next 3-4 years. Additionally each of the BGs will have an Independent Board withcompositions similar to the Edelweiss Financial Services Limited Board where we have amajority of Independent Directors.
3. Transformation through Technology
The sheer pace at which technology is changing the world is astounding.At Edelweiss we have always believed in the power of technology and have mouldedourselves into a tech-enabled company. We believe that the time has come to embark on anew journey - from a tech-enabled organisation to a tech-led one. Increasingly technologywill occupy a similar presence on the table as business strategy does and we are startingto get ready for this long-term disruption. This elevation in technology will help uscreate a compelling offering for our clients - be it in terms of variety of service costefficiencies safety and security turnaround time customisation and specialisationamong others. With this in mind the technology function is now reporting directly to me.I am very excited by this new digital journey we are undertaking and feel confident thatthis new direction will open up several new vectors for Edelweiss going forward.
Learnings from FICCI
Yet /am ieeurning
Michelangelo at the age of 87
The beauty of life is that it never stops teaching us lessons. What weabsorb and take in is our prerogative. Personally for me last year was especially richin this regard since the dual role at Edelweiss and FICCI (as President from Dec 2017 toDec 2018) accorded me an opportunity to look at things in an entirely new light. Some ofthese learnings were a reinforcement of things I have seen in action over the years whilesome of them provided me with a completely fresh perspective.
The Indian Decision Making Conundrum
The FICCI tenure was an eye-opener for me in more than one way. Thenuances involved in nation building particularly the need to balance all sides of anissue is a difficult skill to master. It was the first time I was able to experience inclose quarters how the Government thinks and how policymaking works. For us in Mumbaiwhat might seem a no-brainer because of the economic value attached could have severesocial and political repercussions attached something we are not attuned to thinkingabout. A bank re-capitalisation of '300-400 billion might seem like an obvious choice butthe trade-offs one makes say for instance in underallocating to another sector likeeducation must be taken into cognizance.
Earlier the default thinking whenever we heard of some decision beingstuck or some action not happening was to blame it on the ineffectuality of theGovernment. Today the thinking is much more nuanced and it is much easier to understandthat there would be multiple objectives that would have been under consideration on anygiven decision. It is a tough balancing act and one which I have learnt to understand andrespect over the last year.
The Difficult Trinity
Economists often allude to the problem of the impossible trinity - afixed foreign exchange rate free capital movement and an independent monetary policy.However there is another important trinity which is difficult to balance but necessaryfor long-term growth and stability - an insight again gleaned from the FICCI tenure.
World over countries have unsuccessfully tried to achieve an optimumlevel for each of the above all at the same time. However only a few have attained somedegree of success. So while USA is a functioning democracy and the biggest economicsuperpower in the world the stark economic inequalities (reflected in its high Ginicoefficient of 41.5) is a reminder of the major income re-distribution it still needs toundertake. In comparison countries like Germany and France have done better. While not aseconomically big as the USA they have a lower Gini co-efficient indicating a betterhandling of economic inequality.
As the biggest democracy in the world India's political processdespite whatever flaws it might have is a benchmark in itself. We are now starting torealise our economic potential as well. Wealth creation is happening at a rapid pace andthe power of compounding is expected to further push the growth agenda. However thegrowing wealth has also brought in growing inequalities.
|Segment of Population by Wealth Share ||2000 ||2016 |
|Top 1% ||37% ||58% |
|Bottom 10% ||0.1% ||-0.7% |
Source: Credit Suisse
A -0.7% share suggests that this segment of the society has lowerassets than liabilities and is increasingly sinking into more and more debt. The next twodeciles held just 0.2% and 0.5% of the total wealth. Taken together this effectivelymeans that the bottom 30% of the Indian population owns next to nothing!
This wealth inequality can be a strong deterrent to holistic economicdevelopment of the nation and must be urgently addressed. Inability to provide a largepart of the population the benefits of a rapidly growing economy can further deepeninequalities creating social unrest and a deep sense of mistrust in the powers that be.Only when India can optimally balance the three sides of the triangle can it hope tobecome a global economic superpower.
The global economy today is going through volatile times. Even thedomestic market seems to be facing its own troubles. It might seem like a doom and gloomscenario. However we actually think that this could be the onset of a strong growth phasefor the economy. There are a few key reasons behind this thinking
1. Disruption-Adjustment Phase is over
The last two years were more of a disruption and subsequent adjustmentphase for the economy. A variety of economic reforms were introduced at regular intervals.While each of them has a clearly defined long-term structural benefit it was expectedthat there would be teething troubles as well. Most of these reforms are nowwell-entrenched and we are even starting to see the benefits coming in which will onlyaccelerate going forward.
2. NPA Endgame
Gross NPA for banks has now peaked and started showing a downward trendas per the latest Financial Stability Report. While the absolute amount is stillsignificant the effectiveness and efficacy of the IBC is now firmly established. Not onlyare stressed assets geffi'ng resolved faster than earlier the value realisation has alsojumped substantially. As it is the system has already provided for nearly'5-5.5 trillionof the total system NPAs of'13 trillion. Total loss on this portfolio would be around '6trillion - so effectively we have only about Rs1.5 trillion of provisioning left toachieve. Even on a normal provisioning run-rate this should be achievable in the nextthree years without any of the excessive pain that we have seen over the last two-threeyears. So the NPA endgame is truly approaching its logical conclusion.
3. Credit growth coming back
Credit growth has started picking up especially on the corporate side.This has been due to a multitude of factors - bank re-capitalisation has lifted some banksout of Prompt Corrective Action (PCA) resolution of stressed assets has freed up capitaland Government investments on infrastructure continue more so with the renewed majorityof the Government. However discretionary consumption has taken a hit due to the recentliquidity squeeze on NBFCs and must be monitored closely. A quick resolution will helptake consumption trends back to normal levels but a prolonged slowdown could drasticallyimpact the economic growth.
4. Strong Fll inflows
Fll inflows have seen strong traction after the deluge of outflows lastyear. Typically this has been the observed trend over the last two decades. Marketreturns are typically fantastic in the year following one with increased outflows asforeign investors come back in even larger numbers which is what we expect in the currentyear as well.
5. Dual expansionary environment
At any given point of time it is rare to see an expansionary mandatefor both monetary and fiscal policy in India. However with inflation easing out the RBIhas been earnestly cuffing interest rates in order to arrest the growth tempering. At thesame time the overall push by the Government has been towards investment particularly ininfrastructure and the rural economy. As a result we are in a unique economic environmentwhere we are seeing loosening on both fiscal and the monetary side. This bodes well forthe growth prospects of the economy.
However there are some areas which can impact the economy and need tobe closely monitored. The slowdown in global trade could have an effect on the oileconomy which continues to have a significant say in the larger macro-economics of thecountry. Domestic consumption also needs to pick up for the growth momentum to accelerate.For this the liquidity situation needs to start easing out. With elections out of the wayand a stable and strong Government in the saddle we do not see the squeeze lasting fortoo long now.
The current slowdown is nowhere a reflection of India's long-termpotential which continues to be very optimistic. The greatest challenge during such aslow phase is not just figuring out ways to ease the pain of the slowdown but also havingthe faith and gumption to trust in the long-term.
In our journey as a country we are in the one of the highlightedtroughs. It seems that things seem to be going downhill and there is no end to the pain.However we must remember - ft is the darkest hoar before the dawn
- Thomas Fuller
There will be many troughs like the one we are seeing now but the goodthing about India is that there will be more crests than troughs and typically thesecrests will last much longer than the troughs. India is a self-correchng country. As andwhen a disruption happens the normal is impacted but sooner rather than later wesuccessfully evolve and adjust to this new normal.
In the long-term we continue to be highly optimistic of the path andthe direction that the Indian economy is taking. The renewed majority of thereforms-oriented Government is a highly positive development. We now eagerly await thesecond wave of reforms. While global headwinds may continue the domestic tailwinds arepowerful enough to ensure that we make strong progress over the next few years. Like Irelentlessly say India is full of opportunity. The progressive Government and regulatorypolicies in recent years have only added to this opportunity size. It is a new India thatis now rising - an India which can hold its own in the global arena.
|Yours Sincerely |
|Rashesh Shah |
|Chairman & CEO |